Minimum Effect: A Critique of Card and Krueger’s “Minimum Wages and Employment”

Card and Krueger’s case study gives a relatively clear picture of the state of employment in fast-food franchises in New Jersey and Pennsylvania both before and after the $0.80 minimum wage increase in 1992. Their simple longitudinal study used an effective empirical methodology to gather quantifiable data, translating the gathered data into an analysis of the effect of minimum wage on employment, prices, and wages.

Card and Krueger’s comparative study surveyed 410 fast-food restaurants in New Jersey and Pennsylvania. They conducted two “waves” of identical surveys; the first one was conducted a month before the minimum wage increase, and the second wave was conducted about six to eight months after the hike. The surveys asked franchise managers questions about employment rates (how many employees and at what wages), wages (minimum or higher) and prices (as a point of comparison).

In addition to surveying New Jersey restaurants, Card and Krueger used Pennsylvania restaurants (of the same franchises) as a control group, to account for regional and economic variables. This isolated the New Jersey restaurant results, in an economy that is largely dependent on surrounding states. Ultimately, the survey was designed to compare employment growth in the two state economies.

Card and Krueger give several reasons for using this particular methodology for their study. First, the fast-food industry was chosen both because it employs almost exclusively low-wage workers, the working poor, and has similar job requirements and products across the board. This made the comparison of employment, wages, and product prices easier (774). This aspect was, in fact, effective, as Card and Krueger gathered data in the second wave on 98.8% of the restaurants surveyed in the first wave. Second, conducting a longitudinal rather than cross-sectional study provided a fuller picture of the effect of the wage hike. In their words, this “measures overall effect of the minimum wage on average employment” because it covered all of the stores both before and after the minimum wage increase (773).

While their methodology was effective for showing the relative impact of the minimum wage hike, the paper nevertheless left important questions unanswered. A longitudinal comparative survey seems to be the best option for this subject because it is both quantitative and gives a full picture of the “before and after.” However, there are still gaps in the research. The fact that fast-food restaurants are homogeneous makes the comparison uncomplicated, but it is a highly selective form of employment compared to that of the entire state economy.

In a phrase, it is possible that fast-food franchises accounted for wage differences in a way unique to their type of business. Small businesses, for example, would hypothetically have a much harder time simply raising their prices to account for the change. They are less able to make demands on their consumers, and therefore their options are more limited. A more effective methodology would have accounted for other groups of companies, taking the necessary steps to control for the differences. Another option would be to conduct a similar longitudinal study with Pennsylvanian restaurants, instead of just using them as a control group. Using either one of these methods would, conceivably, give a fuller picture of the extent of the changes induced by the minimum wage increase.

Despite some small gaps and questions, Card and Krueger’s work concludes with some valid and applicable deductions. There were two particularly salient conclusions. First, the increase in the minimum wage had no real effect on employment. In other words, “empirical findings on the effects of the New Jersey minimum wage are inconsistent with the predictions of a conventional competitive model of the fast-food industry” (788). What Card and Krueger found in their study is that the expectation of competitive businesses to respond to wage hikes by cutting employment did not hold true in New Jersey’s case (or in other contemporary cases, for that matter). Card and Krueger used their two waves of surveys to back up this conclusion, in addition to using past publications on the issue that also found no effect of the minimum wage increase on employment (as in the federal minimum wage increase a few years earlier).

This is closely related to the second major finding. That is, that instead of cutting employment, the franchises passed on the differentiation in wages to consumers by raising product prices. The prices in New Jersey restaurants rose 4% more than those in Pennsylvania. In their own words, they found that “prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage increase was passed on to consumers.” This not only accounts for the lack of change in employment but holds important implications for businesses themselves.

These conclusions have a very significant application for businesses. They essentially tell businesses that they can maintain productivity and organization by simply passing on the wage differentiation to consumers. While this may not apply to all businesses, and not in every economy, it would be a good response to a minimum wage increase. The change in product price would not have to be more than 5%. Passing on the difference to your product (and therefore consumers) rather than your employers would be a lot less noticeable to consumers than restructuring or relying on less productive employees.

While their choice of limiting their subject leaves some information to be desired, Card and Krueger’s empirical study was an effective use of survey and longitudinal research to make some viable claims regarding the effect of the minimum wage increase on individual businesses and the economy as a whole. The critique is only in part, while the application is in full.

Reference

Card, D. & Krueger, A. (Sep 1994). Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. The American Economic Review, 84 (4).