Illustration by Kelsey Dake
About 20 years ago, in the midst of a recession, New Jersey decided to boost its minimum wage to $5.05 an hour from $4.25. Its neighbor to the west, Pennsylvania, chose not to tinker with its wage floor. Two bright young economists at Princeton, David Card and Alan B. Krueger, recognized in that dull occurrence a promising natural experiment.
Deep thoughts this week:
1. Raising the minimum wage doesn't lower employment.
2. It lowers turnover.
3. Which doesn't help the jobless.
4. Cynicism to the rescue!
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The two found fast-food joints along the New Jersey-Pennsylvania border, and surveyed them twice over the course of 11 months about how many people they employed. They figured that when New Jersey's minimum wage went up, Garden State burger joints would hire fewer workers. The ones on the Pennsylvania side, acting as a kind of control, would see no change.
They were wrong. To everyone's surprise, there was actually no change in employment in the New Jersey restaurants, relative to the Pennsylvania ones. The price of low-wage work had gone up, and somehow, demand had remained the same.
That paper completely upended prevailing economic thought on the issue of minimum wages, leading to a flurry of studies and counterstudies, editorials and countereditorials. (It even got personal, Card said, describing the debate among economists as a "very, very nasty spat.") Since those days, the economy has grown about 63 percent in real terms, not that anyone working at a McDonald's in Trenton would have noticed. Their 1992 raise brought their wage to about $8.40 an hour, adjusted for inflation. Today, they earn $7.25 an hour, the federal minimum.
Recently, New Jersey voted by public referendum to raise its baseline wage by a dollar and peg it to inflation. On a national level, stagnant wages and a generally crummy economy for millions of workers have spurred politicians to push for a $10 federal minimum wage. Fast-food workers are organizing and lobbying for $15. But even given Krueger and Card's work, economists wonder how much an increase can really help the economy, considering how many Americans are out of work right now.
What Krueger and Card did was undermine the once-dominant rationale against raising the minimum wage: that it might lead to fewer workers being employed. The IGM forum at the University of Chicago acts as a barometer of opinion within the field. It recently asked its panel of experts — all top economists, from various backgrounds, disciplines and political tendencies – — whether raising the federal minimum wage to $9 an hour would make it noticeably harder for low-skilled workers to find employment. About a third said yes, a third said no and a quarter said they were not sure. As always in economics, nobody seems to agree on anything.
Some academics argue that Card and Krueger's conclusion is wrong, and that one relatively small-scale study does not prove anything. Among them is David Neumark of the University of California, Irvine, who described the study as "flawed," questioning how the data was collected and whether it made sense to extrapolate lessons about the whole economy from a relatively small number of KFCs, Burger Kings and the like. Other studies he has conducted have shown the expected, conventional-wisdom result: Wage increases mean less employment.
But other, larger studies have since confirmed Krueger and Card's results, and there are signs that the prevailing wisdom in labor economics has shifted over time, too — away from treating labor as a commodity like any other.
"If you go to the supermarket and the price of beef goes up, people buy less beef and more fish," said Michael Reich, a professor of economics at the University of California, Berkeley, who contributed to one such study. But labor markets are much more complicated than that, he said. The types of jobs available to workers at the minimum wage — meatpacking, box-stuffing, burger-flipping — tend to be hard, unpleasant, dull work. Employees rarely stick around for long, and their productivity is typically low. "Companies like Walmart can have turnover rates of 100 percent a year," Reich said. According to Reich's reasoning, when New Jersey raised its minimum wage, businesses ended up having less trouble filling vacancies and workers stuck around for longer.
Annie Lowrey is an economics reporter for The Times.
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