NCPA - National Center for Policy Analysis

Trying To Reconcile The Minimum Wage Debate

February 20, 2001

Economists have long contended that imposing a minimum wage above a market-established level will destroy jobs. But several years ago, economists David Card and Alan Krueger looked at the effects of a big minimum wage increase in New Jersey in 1992 and came to the conclusion that it actually increased employment in the fast-food industry there.

Then economists David Neumark and William Wascher reviewed and revised the New Jersey data and announced that -- true to expectations -- the rise in the minimum had, indeed, reduced employment.

Now the two pairs of economists have reviewed each other's work, made adjustments and come somewhat closer to agreement. Their arguments appear in the latest issue of the American Economic Review.

  • Card and Krueger no longer insist that the higher minimum pushed employment up -- now admitting that it "probably had no effect."
  • Neumark and Wascher have lightened their emphasis on falling employment, emphasizing instead their conviction that employment did not go up.

Meanwhile, economist Thomas Michl has suggested that the minimum-wage increase has left the overall number of workers employed roughly the same, but reduced their hours.

Finally, Peter Tulip, a Federal Reserve economist, joined the fray by focusing on the impact of the minimum-wage increase on the labor market as a whole. He suggests that increasing the minimum raises wage growth and hence inflation across the economy.

He contends that the gradual fall in the relative value of America's minimum wage over the past 20 years explains 1.5 percentage points of the fall in the country's equilibrium rate of unemployment over the same period.

That would explain why unemployment is so much higher in continental European countries -- where the minimum is set high -- than it is in lower-minimum countries such as the U.S. and Britain.

Source: "Debating the Minimum Wage," Economist, February 3, 2001.

 

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