Impact of Minimum Wage on Employment

Some time ago the boys over at Poison Your Mind commented on the fact that Obama nominated Alan Krueger for Chairman of the Council of Economic Advisors.  When Obama made the nomination I didn’t think much of it, but then as I read the commentary I noticed that Krueger is the gentleman that has provided me some small amount of consternation.  See, it turns out that Krueger is none other than the author of the report that showed a rise in the minimum wage did not negatively impact employment.  He did this by studying the impact of a rising minimum wage in New Jersey compared to a static minimum wage in Pennsylvania.  Specifically he focused on fast food restaurants.

See, I’ve long been a proponent of abolishing the minimum wage in order to give people the opportunity to work.  The idea being that the minimum wage unfairly discriminates against low skilled and low educated individuals.  When the price of labor rises, some labor will be idled.  It has long been a thorn in my side that this study showed a rise in the minim wage did not cause labor markets to react as I thought they would.

Poison Your Mind’s post gave me reason to study.

I downloaded the study and read it, fascinating stuff.  The team interviewed fast food joints in close proximity to each other to identify the employment characteristics before New Jersey’s law went into effect and then again, months after.  They tabulated their data and found that the new law did not negatively impact employment.

However, as I read I was struck by a number of details:

  1. The study defined anyone working part-time as .5 FTE.
  2. The price of meals went up.
  3. They measured store hours.  Interesting.
  4. They counted the number of cash registers.
  5. They counted the number of cash registers open at 11:00
  6. They did not count the number of any other type of employee.

My initial thought was that the study was flawed on a couple of levels.  The first being that they counted part-time help incorrectly and the second being that the obvious response to higher wage costs would NOT be to reduce the number of revenue generating positions.

However, even with those flaws, I could not convince myself that employment suffered.  I could only muster the tangential “win” that prices rose.

Then, however, I continued my research and found a study conducted by David Neumark and William Wascher that attempted to refute the earlier work of Krueger.

It seemed to succeed:

The main difference in the two studies is that Krueger relied on phone interviews with individuals who represented that they were managers while Neumark used actual payroll data.  With this new method of data collection, the critique of the Krueger study shows that the minimum wage increase in New Jersey actually had a negative impact on employment.

I’m not sure what this means.  I certainly don’t think it means that Mr. Krueger isn’t qualified for the position.  Nor do I think that s single study being found to be incorrect is that uncommon; we all get a batting average.

No, my take away is this:

  1. Krueger should have been astonished at his findings and worked through his study again.
  2. Krueger should have realized that his data collection methods were severely flawed.
  3. I find much satisfaction that one of the strongest arguments FOR minimum wage has been debunked.

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