Tag Archives: Krueger

MINIMUM WAGES AND EMPLOYMENT

MINIMUM WAGES AND EMPLOYMENT: A CASE STUDY OF THE FAST-FOOD INDUSTRY IN NEW JERSEY AND PENNSYLVANIA

D. Card & A. B. Krueger

The American Economic Review, Vol 84, No.4 (Sept., 1994)

A Summary

 

Principal Research Question Do rises in the minimum wage reduce employment?
Theory In a competitive labour market, if the government sets a minimum wage that is higher than the equilibrium wage the supply of labour will exceed demand at the higher minimum wage. The increased supply will be complimented by contracted demand and therefore employment levels will fall.
Motivation To be right, and everyone else wrong!!!The rise of minimum wage from $4.25 to $5.05 in NJ provided a good quasi-experiment in that they could do a difference in difference estimation using PN as a control group. They are geographically proximate, and starting wages, meal price, and employment indicators were substantially similar in the pre-treatment survey responses. Additionally, employment in restaurants in the band that paid starting salaries above the (new) minimum wage in both periods fell by an equivalent amount in both NJ and PN. This is significant, as they were paying above the equilibrium price already and so should not have been affected by the wage hike in NJ. Thus they were affected by general economic conditions which appear to have been the same in both states. The distribution of starting wages in the stores was very similar before.

Additionally, as both states were in a recessionary environment with rising unemployment, it is doubtful that any rise in employment found after the wage hike could be attributable to general economic conditions.

Data Data on Fast Food restaurants – they are leading employer of low-wage workers; they comply with regulations; the job requirements are homogenous across restaurants so particular characteristics not an issue; no tips means income levels are easily measurable.They only consider the big chains, 410 of them, in two rounds of survey.
Method Difference in difference with PN as control.
Results Full time employment increased in NJ after the rise. Employment expanded most at low wage stores, and contracted at high wage (those already paying above the minimum).
Robustness
  • Set employment at 0 for temporarily closed stores.
  • Exclude 35 stores on jersey shore
  • Redefined full time work
  • Exclude stores they called more than twice  – none had major effect
  • They test subgroups to see if demand shocks are making up the rise in employment but they find it is not.
  • They test opening hours, number of cash registers with no significant effect.
  • They see no evidence that non-wage compensation decreased, indeed in NJ the amount of free and subsidized meals given to employees actually rose.
  • They look at macro employment data which showed that NJ employment actually was worse in the period than elsewhere in the US, but teenage employment did better.

 

Interpretation The results are not compatible with standard theory. This indicates that although firms are price takers in the product market, they have some power in the factor market. If they are facing an upward sloping labour supply curve a rise in wage can mean a rise in emplyment.Ambiguous as to whether the age increase increased full time employment. It would potentially do so because employers want to substitute low wage earners for full-time employees who are probably older and more skilled. Additionally they may be more productive as they have more time to learn by doing.

There is mixed evidence that the wage increase was passed on to customers through product prices. Prices did rise around 3% which would cover the wage increase, but it did so even at stores already paying more than the minimum wage, and they did not rise faster at the stores most affected by the minimum wage. This could be because the market is very competitive.

Problems Reliability of the data is only 0.7 for employment (based on accidentally doing the same interviews twice).They only consider the big chains, who are most likely to be able to pass on prices, and otherwise squeeze suppliers, engage in advertising to boost sales etc. The story could be different at small, independent outfits.

There are external validity issues in other words.  

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