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Krueger and the Minimum Wage

e21 | August 31, 2011

Since President Obama has chosen Alan Krueger as Chairman of the Council of Economic Advisors, attention is focusing on his academic career. Jonathan Chait for instance highlights one of his seminal papers written with David Card, which argued that hiking the minimum wage did not lower employment:

On April 1, 1992, New Jersey's minimum wage rose from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast-food restaurants in New Jersey and eastern Pennsylvania before and after the rise. Comparisons of employment growth at stores in New Jersey and Pennsylvania (where the minimum wage was constant) provide simple estimates of the effect of the higher minimum wage. We also compare employment changes at stores in New Jersey that were initially paying high wages (above $5) to the changes at lower-wage stores. We find no indication that the rise in the minimum wage reduced Employment. (Emphasis added)

Krueger and Card’s study relied on an experiment in which one state (New Jersey) hiked its minimum wage, while a neighboring state (Pennsylvania) kept its constant. Their surprising result — which was echoed widely, and is now being emphasized by supporters of Krueger as evidence of his technical skills — was that the minimum wage hike in New Jersey did not appear to reduce employment there.

However, what Krueger supporters have failed to account for is the fact that the original research finding is now regarded as disputed. The Krueger and Card study relied on self-reported employment data provided over the telephone by firms. Other researchers, David Neumark and William Wascher, went back and used actual payroll data from those firms to arrive at a different conclusion:

We re-evaluate the evidence from Card and Krueger's (1994) New Jersey-Pennsylvania minimum wage experiment, using new data based on actual payroll records from 230 Burger King, KFC, Wendy's, and Roy Rogers restaurants in New Jersey and Pennsylvania. We compare results using these payroll data to those using CK's data, which were collected by telephone surveys… estimates of the employment effect of the New Jersey minimum wage increase from the payroll data lead to the opposite conclusion from that reached by CK. (Emphasis added)

In fact, their results suggest that every 1% increase in the minimum wage results in a .24% decrease in employment.

Krueger is a talented researcher, and many other economists have had famous results altered by future discoveries. However, this is one academic debate worth following. Krueger’s original finding was an important piece of evidence in favor of federal minimum wage laws. If the original finding was flawed, than much of the support for minimum wage laws is not warranted. Card and Krueger argue that their interpretation of actual payroll data support their initial conclusion, while Neumark and Wascher counter that the payroll evidence confirms a negative link between the minimum wage and employment. [Edited to add.]

Neumark’s other research has emphasized other important negative consequences of minimum wage laws, based on more detailed analysis. Minimum wage laws discourage some teenagers from getting more education, while pushing many workers out of the workforce entirely. Even if minimum wage laws had no effect on employment (and there are a range of studies besides those of Krueger arguing otherwise); it’s important to keep the composition of labor in mind as well. Minimum wage laws encourage employers to discriminate against low-skilled workers; who subsequently face fewer opportunities to build skills, and see lower wages for a lifetime.

This is an essential topic given the recent hike in the federal minimum wage. Researchers like Casey Mulligan have emphasized how that hike may have hurt employment, especially teenage employment, during a severe recession. Using Krueger’s own proposed experiment, but with correct data, one would estimate that this recent minimum wage hike reduced national employment by 5.7%. Neumark has argued that evidence from the 90s minimum wage hikes would suggest that this hike may cost 300,000 jobs. This effect might be greater if the negative effects of minimum wages are higher in weak employment markets.

Meanwhile, as a WSJ editorial notes, some of Krueger’s other research confirms the negative impact of labor market distortions like unemployment insurance. For instance, one study found that higher unemployment insurance resulted in longer spells away from work; while another paper found that higher unemployment benefits was associated with individuals spending less time looking for a job.

Pressing to lower the minimum wage might prove politically impossible; but it may well be a policy with the potential to lower unemployment rates. More broadly, labor market distortions are an important source of today’s high unemployment. One hopes that Krueger will prove a nimble enough academic to recognize how his own work has been superseded by additional research, and will become an advocate of removing those barriers.