The Minimum Wage
• Historical change in the minimum wage
– Nominal federal minimum wage changes only by act of Congress,
remains the same the rest of the time
Years Nominal federal minimum wage
1980 $3.10
1981-89 $3.35
1990 $3.80
1991-1995 $4.25
1996 $4.75
1997-date $5.15
Source: BLS
The Minimum Wage
• Historical change in the minimum wage
– Nominal minimum wage not changed to account for inflation
– Real federal minimum wage decreases as price increases when
nominal minimum wage remains the same
Year Nom. federal CPI (base yr. Real federal minimum (1982-84 $)
minimum 1982-84) = Nom. minimum x 100 / CPI
1997 $5.15 160.5 $3.21
1998 $5.15 163.0 $3.16
1999 $5.15 166.6 $3.09
2000 $5.15 172.2 $2.99
Source: BLS
The Minimum Wage
• Time series of
nominal & real
federal min.
wages different
• Nominal min.
wage highest at
present
• Real minimum
wage highest in
1968 (almost
$8 in hour in
2000 dollars!)
The Minimum Wage
• State minimum wages Minimum States
– States can have $5.65 Alaska
minimum wages higher
$5.75 Hawaii, Maine
than the federal
minimum wage if they $6.15 Rhode Island, Delaware
wish; 11 states currently $6.25 Vermont
have minimum wages $6.50 Oregon
above federal minimum
$6.70 Connecticut
– All but Delaware in
New England or on $6.75 California, Massachusetts
Pacific coast $6.90 Washington
Source: BLS
‘90s Minimum Wage Research
• New Jersey Minimum Wage Increase
– April 1, 1992: New Jersey raises its minimum wage from the
federal minimum of $4.25/hr. to $5.05/hr.
– David Card and Alan Krueger (both Princeton) surveyed 321 fast-
food restaurants in New Jersey and 78 in eastern Pennsylvania,
once in Feb.-March 1992 and again in Nov.-Dec. 1992
– New Jersey-only minimum wage increase is ―natural experiment‖:
New Jersey, in which the minimum wage increased, is the
―experimental‖ group; eastern Pennsylvania, in which the
minimum wage remains the same, is the ―control‖ group
‘90s Minimum Wage Research
• Card and Krueger‘s findings
– Starting fast-food wages in New Jersey and Pennsylvania suggest
that the minimum wage increase was binding in New Jersey and
would have been binding in Pennsylvania:
Minimum wage Avg. starting fast-food wage
Feb-Mar Nov-Dec Feb-Mar Nov-Dec Change
State 1992 1992 1992 1992
N.J. $4.25 $5.05 $4.61 $5.08 +$0.47
Penn. $4.25 $4.25 $4.63 $4.62 -$0.01
‘90s Minimum Wage Research
• Card and Krueger‘s findings
– CK, using data from their surveys, found that, despite the
minimum wage increase, average fast-food employment increased
in New Jersey relative to fast-food employment in Pennsylvania:
Minimum wage Avg. FTE fast-food employment
per restaurant
Feb-Mar Nov-Dec Feb-Mar Nov-Dec Change
State 1992 1992 1992 1992
N.J. $4.25 $5.05 20.4 21.0 +0.6
Penn. $4.25 $4.25 23.3 21.2 -2.1
*FTE = full time equivalent
‘90s Minimum Wage Research
• Card and Krueger‘s findings
– Card and Krueger found another ―natural experiment‖ out of the
New Jersey minimum wage increase
– Some 73 New Jersey fast-food restaurants in the CK survey paid
its starting workers an hourly wage greater than $5
– The new $5.05 minimum wage would not bind for most of these
73 restaurants, making them another ―control‖ group of restaurants
unaffected by the minimum wage increase
– The other 241 restaurants paid its starting workers less than $5 an
hour and would be affected by the new minimum wage, making
them the ―experimental‖ group affected by the minimum wage
increase
‘90s Minimum Wage Research
• Card and Krueger‘s findings
– But CK‘s survey data showed that average employment increased
in the restaurants affected by the minimum wage hike relative to
employment in restaurants unaffected by the minimum wage hike:
Avg. FTE fast-food
employment per restaurant
Feb-Mar Nov-Dec Change
Restaurant type 1992 1992
NJ restaurants that start at $5/hr 23.3 21.2 -2.1
*FTE = full time equivalent
‘90s Minimum Wage Research
• Card and Krueger‘s findings
– Card and Krueger summarized:
―…our empirical findings on the effects of the New Jersey
minimum wage are inconsistent with the predictions of a
conventional competitive model…‖
―Contrary to the central prediction of the textbook model of the
minimum wage..we find no evidence that the rise in New
Jersey‘s minimum wage reduced employment at fast-food
restaurants in the state.‖
- D. Card and A. Krueger, ―Minimum Wages and Employment:
A Case Study of the Fast Food Industry in New Jersey and
Pennsylvania, American Economic Review 84:4 (Sept. 1994)
‘90s Minimum Wage Research
• Response to Card and Krueger
– CK‘s work, which contradicted 100+ years of economic theory,
was controversial, exciting and elicited much response
– Ronald Ehrenberg (Cornell):
―If the authors‘ analyses are correct, they have, perhaps
unintentionally, presented a devastating critique both of
economic theory and of empirical research methods in
economics. Taken at face value, their findings suggest that
simple competitive demand and supply models do not provide
an adequate description of low-wage labor markets…‖
- R. Ehrenberg, Ind. and Labor Relations Rev. 48:4 (July 1995)
‘90s Minimum Wage Research
• Response to Card and Krueger
– Other authors were more skeptical.
– Daniel Hamermesh (U. of Texas):
―The authors challenge economic notions that make logical sense
with new evidence; but they never offer a convincing
theoretical explanation for why the old logic fails. Lacking
that, readers should examine their evidence very carefully.
That examination yields the inescapable conclusion that, even
on its own grounds, [Card and Krueger‘s] strongest evidence is
fatally flawed.‖
- D. Hamermesh, ILRR 48:4 (July 1995)
‘90s Minimum Wage Research
• Response to Card and Krueger
– Why the ruckus? Econ papers are like lab reports. When you get a
result that contradicts a basic theory, you figure your method of
testing the theory is wrong, not that the theory itself is wrong. But
CK argued that the theory, not their methods, were wrong.
– Paul Osterman (MIT):
―Although they are too polite to say so, in effect they charge that
some investigators have pushed the limits of acceptable
practice to produce results consistent with theory…this book
raises some very sharp questions about the practice of labor
economics.‖
- P. Osterman, ILRR 48:4 (July 1995)
‘90s Minimum Wage Research
• Neumark and Wascher
– David Neumark (Michigan State) and William Wascher (Fed
Reserve Board) noted some unusual observations in CK‘s data:
―…there are some extremely large employment changes in [Card
and Krueger‘s] data. The largest employment decline is 41.5
FTE‘s, the largest increase is 34 FTE‘s, and the standard
deviation of employment change is 8.4 in New Jersey and 10.8
in Pennsylvania. Given that the mean level of employment
was 21.1 in the first survey and 21.3 in the second, the
variability in [Card and Krueger‘s] data is surprising…‖
‘90s Minimum Wage Research
• Neumark and Wascher
– NW suspected that the problem was with CK‘s survey techniques:
―[Card and Krueger‘s] interviewer first verified that they were
speaking with a manager…They then asked ‗How many full-
time and part-time workers are employed in your restaurant,
excluding managers…?‘ Survey respondents were not given
any time period over which to define employment, and their
answers may well have ranged from employment on the shift
during which the telephone survey took place to employment
over an entire payroll period. Moreover, because different
managers may have been interviewed in the first two waves of
the survey, there is no reason to believe that the responses in
the first and second waves are based on the same ‗definition‘
of employment…‖
‘90s Minimum Wage Research
• Neumark and Wascher
– NW, with help from the Employment Policies Institute (EPI),
acquired payroll data from 230 fast-food restaurants in select zip
codes in which Card and Krueger surveyed:
―…the payroll data provide total hours worked for a well-defined
period…on a consistent basis for the two survey periods, and
should therefore be more reliable…‖
―The standard deviation of employment change is 9.6 in [Card
and Krueger‘s] data, versus 3.2 in the payroll data.‖
D. Neumark and W. Wascher, ―The Effect of New Jersey‘s
Minimum Wage Increase on Fast-Food Employment: A Re-
Evaluation Using Payroll Records, NBER WP5224, Aug. 1995
‘90s Minimum Wage Research
• Neumark and Wascher‘s findings
– NW‘s payroll data showed that average employment decreased in
New Jersey fast-food restaurants relative to Pennsylvania
restaurants after the New Jersey minimum wage increase
Minimum wage Avg. change in fast-food
employment per restaurant
Feb-Mar Nov-Dec Card/Krueger Neumark/Wascher
State 1992 1992 survey data payroll datda
N.J. $4.25 $5.05 +0.8 +0.1
Penn. $4.25 $4.25 -3.0 +1.0
‘90s Minimum Wage Research
• Neumark and Wascher‘s findings
– Neumark and Wascher concluded:
―In contrast to [Card and Krueger‘s] claim, the payroll data from
the New Jersey-Pennsylvania minimum wage experiment are
consistent with the prediction of the standard competitive
model that minimum wage increases reduce employment of
low-wage workers.‖
D. Neumark and W. Wascher, ―The Effect of New Jersey‘s
Minimum Wage Increase on Fast-Food Employment: A Re-
Evaluation Using Payroll Records, NBER Working Paper
#5224, Aug. 1995
‘90s Minimum Wage Research
• Neumark and Wascher‘s findings
– Some of the payroll data was collected by NW themselves, while
some was collected by the Employment Policies Institute, a
conservative thinktank that NW admit ―has a stake in the outcome
of the debate.‖ Might this have affected NW‘s results?
Minimum wage Avg. change in fast-food
employment per restaurant
Feb-Mar Nov-Dec Data collected Data collected by
State 1992 1992 by NW EPI
N.J. $4.25 $5.05 -1.0 +2.1
Penn. $4.25 $4.25 -1.0 +3.0
‘90s Minimum Wage Research
• Neumark and Wascher‘s findings
– Neumark and Wascher discuss the EPI problem:
―…this comparison..might be read as consistent with the EPI
having somehow selected a set of observations in which the
results were most discordant with [CK‘s] results.‖
―Even in the data we collected, however, the standard deviation is
well below that in [CK‘s] data, and the point estimates of the
minimum wage effect are negative.‖
―…because we supplemented the EPI data by attempting to
collect data on the remainder of franchisees…only the full
sample is representative of the universe of fast-food
restaurants…Thus, the proper response…[is] to base the
analysis on the full payroll sample—including those
observations collected by the EPI.‖
‘90s Minimum Wage Research
• Neumark and Wascher‘s findings
– And stick by their results:
―[Card and Krueger] stated that they found ‗no evidence that the
rise in New Jersey‘s minimum wage reduced employment at
fast food restaurants in the state,‘ that ‗the increase in the
minimum wage increased employment,‘ and that their findings
‗are difficult to explain with the standard competitive model.‘
We regard the payroll data as most consistent with the three
opposite conclusions.‖
D. Neumark and W. Wascher, ―Minimum Wages and
Employment: A Case Study of the Fast-Food Industry in New
Jersey and Pennsylvania: Comment,‖ American Economic
Review 90:5 (December 2000)
‘90s Minimum Wage Research
• Card and Krueger strike back
– Card and Krueger acquired payroll data about fast-food restaurants
in New Jersey and eastern Pennsylvania from the Bureau of Labor
Statistics‘ ES-202 database, which consists of employment records
reported quarterly by employers to their state employment security
agencies for unemployment insurance tax purposes.
―…because the ES-202 data include information for every
covered employer, there is no reason to doubt the
representativeness of the BLS sample
D. Card and A. Krueger, ―Minimum Wages and Employment: A
Case Study of the Fast-Food Industry in New Jersey and
Pennsylvania: A Reply,‖ American Economic Review 90:5
(December 2000)
‘90s Minimum Wage Research
• Card and Krueger strike back
– Card and Krueger‘s ―representative‖ payroll data supports their
original conclusion: that the New Jersey minimum wage hike
increased employment in New Jersey relative to Pennsylvania.
Minimum wage Average fast-food employment
per restaurant
Feb-Mar Nov-Dec Feb-Mar Nov-Dec Change
State 1992 1992 1992 1992
N.J. $4.25 $5.05 37.2 37.6 +0.4
Penn. $4.25 $4.25 42.5 42.4 -0.1
‘90s Minimum Wage Research
• Card and Krueger strike back
– …but the relative increase in employment in New Jersey shown in
Card and Krueger‘s payroll data is less than in their survey data,
and actually slightly closer to Newmark and Wascher‘s results.
Minimum wage Avg. change in fast-food
employment per restaurant
State Feb-Mar Nov-Dec Card/Krueger Card/Krueger Neumark/Wascher
1992 1992 survey data payroll data payroll data
N.J. $4.25 $5.05 +0.2 +0.4 +0.1
Penn. $4.25 $4.25 -2.2 -0.1 +1.0
Difference $0.00 +$0.80 +2.4 +0.5 -0.9
‘90s Minimum Wage Research
• Card and Krueger strike back
– Card and Krueger conclude:
―Based on all the evidence now available, including the BLS ES-
202 sample, we conclude that the increase in the New Jersey
minimum wage in April 1992 had little or no systematic effect
on total fast-food employment in that state, although there may
have been individual restaurants where employment rose or fell
in response to the higher minimum wage.‖
D. Card and A. Krueger, ―Minimum Wages and Employment: A
Case Study of the Fast-Food Industry in New Jersey and
Pennsylvania: A Reply,‖ American Economic Review 90:5
(December 2000)