Does Raising The Minimum Wage Kill Jobs?
President Obama has called for increasing the minimum wage, saying it will help some of the poorest Americans. Opponents argue that a higher minimum wage will lead employers to cut jobs.
Figuring out the effect of raising the minimum wage is tough. Ideally you'd like to compare one universe where the minimum was raised against an alternate universe where it remained fixed.
Economist David Card found the next best thing. In 1992, New Jersey was about to raise its minimum wage. Right next door, there was a parallel universe: Pennsylvania, which was not raising its minimum wage.
Card and a colleague decided to study what had happened to jobs at fast-food restaurants in both states. They surveyed restaurants and found that the number of jobs actually went up in New Jersey, which increased its minimum wage, compared to the number of jobs in Pennsylvania, which didn't.
Card theorized that employers were making less money. The prices of hamburgers had gone up. But as far as he could tell, raising the minimum wage did not end up costing jobs.
The study and subsequent book, Myth and Measurement: The New Economics of the Minimum Wage, bugged economist David Neumark. He explains:
"It was presented as, 'Economics has it all wrong.' And I think that coupled with the evidence that the data looked kind of strange, just really prompted us to say, 'Let's go back and get what we think will be better data, and do the whole thing over again.' "
Neumark and a colleague got actual payroll data from fast-food restaurants in New Jersey and Pennsylvania. They came to the opposite conclusion: Raising the minimum wage slightly reduced the number of jobs.
But this was not the end of things. The authors of the original paper then went back and redid the experiment using government data. And they came to the same conclusion as from the first study: Raising the minimum wage did not cost jobs.
Findings like these are the reason the debate over the minimum wage goes on and on — not just among politicians, but also among economists.
The newest study, which the Congressional Budget Office published in February, says raising the minimum wage could cost 500,000 jobs. But it would also increase hourly wages for more than 16 million people.
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This week, President Obama has been out talking up his proposal to increase the minimum wage, saying it will help some of the poorest Americans. The usual opponents have been out making their case, as well. They argue that raising the minimum wage will result in fewer jobs for the poor. So our Planet Money team decided to take a look at the research.
Here's NPR's David Kestenbaum.
DAVID KESTENBAUM, BYLINE: Does raising the minimum wage cost jobs? That turns out to be a tough question to answer. Ideally you'd like one universe where the minimum got raised and an alternate universe where it did not. That way you could compare the two.
David Card found the next best thing. In 1992, New Jersey was about to raise its minimum wage. And right next door, was his parallel universe: Pennsylvania, which was not raising its minimum wage. Card and a colleague decided to study the effects on fast-food restaurants. They had a grad student go through phone books in the library, looking up at the numbers for Burger Kings and Wendy's. Card figured they'd just call them up and survey them. That didn't go too well. The conversations he says went like this.
DAVID CARD: I said we're calling to try and do a study about employment wages in the fast food industry. Would you like to participate?
KESTENBAUM: What would they say?
CARD: They would say no, we don't want to participate.
KESTENBAUM: The economist eventually hired a professional phone surveyor who was the right combination of charming and persistent.
CARD: She did a few surveys. She got every single one to complete. They were willing to talk to her and they were, you know, and they were just dying to get off the phone with us.
KESTENBAUM: The study is famous in the economic literature now, in part because of its clever design. But also because of what it found at those fast-food places.
CARD: There was a kind of the opposite pattern of what people might have predicted. Employment went up a little bit in New Jersey relative to Pennsylvania.
KESTENBAUM: So the state where the minimum wage had been raised, they actually started hiring more people.
CARD: Yeah, employment went up.
KESTENBAUM: Card, who is now at UC Berkeley, says this did not mean raising the minimum wage would be painless. Employers were probably making less money. The prices of hamburgers had gone up. But as far as he could tell, raising the minimum wage did not end up costing jobs. Card and his co-author, Alan Krueger, who until recently chaired Obama's Council of Economic Advisers, wrote a book about their findings called "Myth and measurement: The New Economics of the Minimum Wage."
That book, published in 1995, kind of bugged another economist, David Neumark. He's at UC Irvine.
DAVID NEUMARK: It was presented as economics has it all wrong. And I think that coupled with the evidence that the data looked kind of strange just really prompted us to want to go back and just say let's try to get what we think will be better data, and do the exact same thing over again.
KESTENBAUM: Neumark and a colleague managed to get actual payroll data from fast-food restaurants in New Jersey and Pennsylvania. And they came to the opposite conclusion: Raising the minimum wage slightly reduced the number of jobs. This was not the end of things though. The authors of the original paper then went back and redid the experiment a third time, now using government data. And they found basically what they'd found before: Raising the minimum wage did not cost jobs.
The economics field has been going back and forth over this issue ever since. I asked David Neumark, what should we make of the fact that smart people keep getting different?
NEUMARK: Maybe I'm not the best person to answer because I've written a lot of papers on it, and they all tend to find pretty similar estimates.
KESTENBAUM: Couldn't I find people on the other side who would say the same thing?
NEUMARK: Yes, you probably could.
KESTENBAUM: As a result, politicians pro and con each have their own evidence to cite, which they do year after year. Dan Hamermesh, an economist at UT Austin, finds the political debate a little exhausting.
DAN HAMERMESH: I get sick to my stomach. It just keeps on going on so I'm bored and in the white.
KESTENBAUM: The minimum wage he says generates more heat relative to its importance than practically any other economic policy. According to the Congressional Budget Office, raising the minimum wage could cost 500,000 jobs. But it would also increase hourly wages for more than 16 million. Dan Hamermesh says inequality is a major problem in this country, but raising the wage won't really make a dent.
HAMERMESH: Because it's not a very important policy, it doesn't affect very many people. There's so many things that we should be worrying about.
KESTENBAUM: Hamermesh's advice to Congress: Raise the minimum wage, index it so it will automatically increase with inflation and move on.
David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.