The Minimum Wage Myth

August 8, 2013

President Obama recently proposed an increase in the minimum wage to $10.10. How does the administration justify it, asks D.W. Mackenzie, an assistant professor of economics at Carroll College in Helena, Montana.

  • A little over 20 years ago Alan Krueger and David Card published a study that appeared to justify minimum wage laws.
  • According to the Krueger-Card theory, raising the minimum wage will not cause significant job losses, and may actually lead to increased employment of low productivity workers.
  • Krueger and Card supposedly invalidated the laws of economics, particularly the Law of Demand.

How did they perform this miracle? New Jersey raised its minimum wage over 20 years ago. Pennsylvania did not change its minimum wage law at that time. Krueger and Card carried out a phone survey of fast food places and found that the number of fast food workers in the Princeton, New Jersey, area went up relative to the Philadelphia area.

  • Politicians, unsurprisingly, embraced the study immediately, both for political and ideological reasons.
  • It received significant media attention when it was published, and supporters of minimum wage laws considered the study a definitive refutation of the old professional consensus against minimum wages.

Subsequent review of the 20-year-old study suggests caution doesn't go nearly far enough. Indeed, careful analysis has overturned the conclusions of the Krueger-Card survey, suggesting that the entire episode was a mistake.

Decades of separate empirical research indicate that minimum wages increase unemployment, especially among teenagers. While it is technically possible for one study to be right and many others to be wrong, this is highly unlikely.

The Krueger-Card study in particular has serious defects. Krueger and Card counted the number of employees, not the total hours worked by employees. David Neumark and William Wascher examined written records of the number of hours worked in the New Jersey and Pennsylvania restaurants and found that the New Jersey minimum wage increase reduced labor demand by 4 percent.

Source: D.W. Mackenzie, "Breaking the Law of Demand," Foundation for Economic Education, August 5, 2013.

 

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