Until recently, most economists thought that raising the minimum wage forces employers to tighten their belts by cutting jobs. Recent research indicates that the truth is more complicated than this, and that the current minimum wage can be safely raised.

The economists were essentially correct; if the minimum wage were raised to $100 an hour, for example, jobs would not only be lost, but most businesses would fold. But now consider the other extreme; suppose the minimum wage were only 2 cents an hour. This wage could be safely tripled with no fear whatsoever that jobs would be lost. So it's all a matter of degree; the critical question is how high the minimum wage can be raised before it starts costing jobs.

Recent research indicates that the U.S. is far below that point. A Princeton study led by David Card and Alan Krueger compared those states that have raised their minimum wage above the federal minimum to those that haven't. And they found that teenage unemployment rates actually dropped slightly after the minimum wage hike!1 However, their study has been challenged for its supposed methodological shortcomings. We will review both sides of the debate. First, here are the results of the Card/Krueger study:

In 1988, California significantly hiked its minimum wage, from $3.25 to $4.25, a full three years before the rest of the nation. While overall unemployment in California closely followed the nation's, teenage unemployment in the state actually dipped. And teenage unemployment fell in California relative to comparable areas (Arizona, Florida, Georgia, New Mexico, and Dallas-Fort Worth) that did not increase the minimum wage.

The same thing happened in New Jersey in 1992, when it raised the minimum wage from $4.25 to $5.05. The unemployment rate for low wage workers fell faster in New Jersey than it did in neighboring Pennsylvania, where there was no boost.

The same thing happened in Texas after the federal minimum wage was raised from $3.80 to $4.25. They found job growth was faster at restaurants which were affected by the wage hike than those that weren't (because they already paid more than $4.25).

These are surprising results, for which Card and Krueger attempt several possible explanations. One is that higher pay may compel workers to take their jobs more seriously, to identify more closely with company objectives, to show up on time and work harder. This may not only increase productivity and profits, but it may also reduce employee turnover. High employee turnover is destructive to a company because it means that the company workforce lacks experience and continuity; it means that experienced workers have to spend much of their time training new hires; it means that managers have to spend both time and money finding replacements. Lower turnover also means that there are less people temporarily unemployed as they move between jobs, which could account for the slight dip in low wage unemployment rates. A higher minimum wage may also compel a manager to make the company's operations more efficient and profitable. Finally, employers might be considering hiring new workers at $5 an hour, but do not wish to offend and demoralize those who are already working at $4.25 an hour. If the minimum wage is then raised to $5 an hour, the employer can then hire the extra workers without worrying about it.

The Princeton study poured a bucket of cold water over the heads of minimum wage opponents. Naturally, they have attacked its conclusions, alleging the study used poor methodology. The following is an excerpt from The Economist (dated April 8, 1995):


Defenders of the faith

Now the heresy [that raising the minimum wage doesn't cost jobs] is under attack. The New Jersey study by Messrs Card and Krueger is a case in point. Carlos Bonilla of the Employment Policies Institute (EPI), which is financed by retailers, restaurateurs and manufacturers, says the data used in it are wrong. The Princeton pair got their data from a telephone survey; the questions, he says, were vague, and errors crept into the numbers. A study financed by the EPI and conducted by David Neumark of Michigan State University and William Wascher of the Federal Reserve used firms' payrolls instead. It found that New Jersey fared worse than Pennsylvania after the minimum wage rose.

Mr. Card retorts that, although telephone data are less reliable than payroll records, there is no reason why they should be biased. Moreover, he points out that the EPI sample includes only 71 restaurants, compared with 410 in the original research. And neither study suggests that minimum wages have a significant effect on employment.

Daniel Hamermesh of the University of Texas also has his doubts. The minimum-wage increase was passed long before it took effect. Thus, he says, firms may have cut jobs before the study began. He also doubts that the study isolated the effect of the minimum-wage increase from other differences between Pennsylvania's economy and New Jersey's. Messrs Card and Krueger disagree. The fate of the New Jersey law, they say, was uncertain until the last minute. In any case, fast food restaurants can cut staff at short notice. And interstate differences do not alter their finding that New Jersey's low- and high-wage restaurants reacted differently to the rise.

The study of the federal minimum-wage increases of 1990 and 1991 has also come under fire. Donald Deere and Finis Welch of Texas A&M University and Kevin Murphy of the University of Chicago agree that low-wage states did better than high-wage ones after the changes.** But they put this down to regional variations in economic growth, not the minimum wage. Moreover, they find evidence for the conventional theory. Because younger workers are likelier than older ones to be poorly paid, their jobs should be more at risk when minimum wages go up. The same is true for blacks and Hispanics (compared with whites) and less-educated workers (compared with better-educated ones). Sure enough, these groups all suffered when the minimum wage rose.

Some say that a higher minimum wage also has more subtle costs. In another new study*** Messrs Neumark and Wascher argue that it makes American 16-19-year-olds more likely to leave school. And youngsters who have already left school, whether or not they had jobs before minimum wages rose, are more likely to become unemployed.

No doubt there is more to come from both sides. However, politicians who support the minimum wage should be cautious. Its advocates, says Mr Card, "overreacted to the New Jersey study." The revisionist work suggests only that when minimum wages are low they make little difference to employment. Few doubt that at higher levels, such as still prevail in much of continental Europe, they destroy jobs--especially those of young workers.

At what level do minimum wages start to cost jobs? That will vary from industry to industry--even from firm to firm. For that reason, governments may be right to let minimum wages wither. Yet the argument over whether to do so will run and run-- among professors as well as politicians.


Some economists may object, but many others have concluded that the $4.25 minimum wage is so low that raising it will have a negligible effect on jobs. Recently, a group of 101 economists, including three Nobel prize winners and seven past presidents of the American Economic Association, called on Congress to support President Clinton's proposal to raise the minimum wage to $5.15.

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1 David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton University Press, March 1995).