Card and Krueger\'s Minimum Wage Paper

Many thanks to Greg Mankiw for pointing out this. Within is a working paper by Neumark and Wascher summarizing the recent work on employment effects of increasing a minimum wage. Among other things, Neumark and Wascher point out that the (in)famous Card and Krueger paper on the effect of minimum wage in fast food restaurants in New Jersey takes too narrow a look on one industry for it to be useful for policy. I would suggest it might be useful for policy in that it buttresses the theoretical prediction of employment and minimum wage.

Card and Krueger interviewed managers at a bunch of fast food restaurants in two similar towns, one in New Jersey and one in Pennsylvania. It was a great natural experiment, and I can find nothing significantly wrong with their analysis - employment in the fast food industry increased with the higher minimum wage.

"Hah!" say the progressives, "Minimum wage isn't the bugaboo you libertarians and conservatives claim!"

Not so fast.

Price theory says that if the price for a good rises, then the demand for that good must fall. One of the ways in which employers would cut back on labor is to substitute capital goods for labor - i.e. layoff some workers and buy machines to further automate those jobs. Economic theory doesn't specify whether this is done in one business or across the entire marketplace. All economic theory says is that there will be an overall increase in the use of capital goods and a decrease in labor as production inputs. Mom's Diner could go out of business because they can no longer afford to pay the help, McDonalds would see an increased demand for lunches and hire more people to handle that demand. Since McDonalds already has a much higher capital goods to labor ratio (much of the food prep is done in massive factories, and the kitchen equipment at McDonalds is highly specialized for moving huge quantities of burgers and fries very quickly) than Mom's Diner, then increased employment at McDonalds and decreased employment at Mom's Diner is consistent with the theoretical prediction that capital goods substitute for labor when the labor price increases.

Card and Krueger's research demonstrates one half of the theory quite well. McDonalds did increase their hiring and amount of business. But what happened to the local non-chain "Mom's Diner"? Card and Krueger are silent. Other studies indicate that there is a small decrease in employment overall. If employment at fast food restaurants increased and there is a small overall decrease in employment, then Mom's Diner probably took the hit.

If that type of process holds in practice, then minimum wage laws benefit McDonalds and Wal-Mart to the detriment of the local mom&pop stores. Perhaps this is why Wal-Mart is in favor of a higher minimum wage. How ironic.

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