Minimal Evidence

So Neumark and Wascher reviewed the payroll employment data gathered by EPI. When they applied the payroll data to the same econometric model used by Card and Krueger, they got completely different results. The variation in employment changes declined markedly, and analysis of the new data yields an estimated 4.8-percent decline in New Jersey employment relative to the Pennsylvania sample as a result of the higher minimum wage. Where payroll data could be compared with survey data for specific restaurants, Neumark and Wascher also found numerous errors in the Card/Krueger data.

Looking just at Burger King restaurants, for instance, the Card/Krueger survey data show employment declines in two of three Pennsylvania zip codes, while the payroll data show employment increases in all three zip codes. Neumark and Wascher conclude that the questions used by Card and Krueger were too vague to generate precise information. For example, the survey asked how many "full-time" and "part-time" employees a restaurant had. But it didn't define either those terms (40 hours a week? 30?) or the relevant time period (within the last week? month? year?), leaving different restaurant managers to define the question differently. In short, using the actual payroll data instead of the survey "guesstimates" effectively refutes the Card/Krueger findings yielded by the New Jersey/Pennsylvania "natural experiment."

* The Card State-Group Study. In another study, Card uses the April 1990 increase in the federal minimum wage (from $3.35 to $3.80 per hour) to produce another "natural experiment." He reasons that the increase ought to have affected various states differently. The new minimum would make a big difference in states where relatively few low-skilled workers earned $3.80 an hour before the increase; it would not matter as much in states where many low-skilled workers were already earning at least $3.80.

Card notes that in 1989 the proportion of teenage workers earning between $3.35 and $3.79 an hour varied from less than 10 percent in the New England states and California to more than 50 percent in many southern states. Accordingly, he divides the states into "high-wage," "low-wage," and "medium-wage" groupings.

The central issue is what happened to employment across the state groupings. In the crude group comparisons, Card finds a larger fall in teenage employment in the high-wage states than in the low-wage states, an outcome inconsistent with the traditional view of the minimum wage. Indeed, he finds an increase in teenage employment in the low-wage states, with no effect in the medium-wage group.

But of course, the minimum wage isn't the only factor affecting employment. The state's general economic climate and growth rate are also important. Card recognizes that differences in economic conditions and other factors might account for his findings. After controlling for them econometrically, he concludes that such differences in labor market conditions might in fact explain all of the variation in teenage employment growth. But he says also that "there is no indication of an adverse employment effect [caused by the increased minimum wage] in the low-wage states...."

That latter finding is quite weak: It would be one thing to find that an increase in the minimum wage yielded an increase in low-skilled employment, other things being equal. But to say that no negative effect can be found in the data means next to nothing. It says little more than the data are so imprecise or there is so much measurement error that the predicted effect is difficult to discern. The effect of the minimum wage gets lost in the noise--a weak basis indeed for fundamental change in the traditional view of the minimum wage.

And employers don't necessarily wait for the minimum wage to rise to cut jobs. They may have sufficient advance notice to make gradual adjustments accordingly. The Card paper ignores this. Neither does it look at reductions in fringe benefits or, even more important, changes in manhours hired--the more relevant parameter--as opposed to numbers of teenagers working.

Most important, the Card analysis examines employment changes over a one-year period; but it is very easy to believe that the demand for low-skilled labor over so short an adjustment period is highly
inflexible ("inelastic"). Looking over a longer adjustment period might very well show stronger employment effects. After all, wages on average rose by only 6 percent in the low-wage states; if businesses adjust gradually to wage increases--for instance, by reducing employment through attrition--the resulting employment effect might be real but too small to discern in the data over a short period.

* The Card California Study. California raised its minimum wage from $3.35 an hour to $4.25 an hour in July 1988; the federal minimum wage remained unchanged at $3.35. In this third paper, Card tries to test the effect of the minimum wage by comparing changes in low-skilled employment in California with changes in a group of "comparison states." Looking at the 1987-89 period, he concludes that the data suggest "a gain in [California] employment following the rise in the minimum wage." He also argues that "groups with a higher fraction of low-wage workers do not appear to have suffered any relative losses in employment" as contrasted with trends in the comparison states.

Card argues in this paper that his control areas--Arizona, Florida, Georgia, New Mexico, and the Dallas-Fort Worth area--were "a legitimate control group" for California over the 1987-1989 period in terms of economic growth and other important parameters. But that premise is highly debatable, as the data in Table 1 show. Real growth in California was substantially greater than the weighted average for the comparison group, with the exception of 1988; that anomaly is due largely to strong growth in Texas (included as a proxy for growth in the Dallas-Fort Worth area) that year. It is hardly surprising, then, that California produced more jobs for low-skilled workers.

More fundamentally, Lowell Taylor of Carnegie-Mellon has examined employment growth (or losses) across California counties and across California retail sectors when the minimum wage went up. In counties and retail sectors in which the increased minimum had the greatest wage impact, Taylor finds the greatest adverse employment effects as well, a refutation of the Card findings.

* The Katz/Krueger Study of Texas. Princeton's Krueger and Harvard's Lawrence Katz surveyed well over 100 fast-food restaurants in metropolitan areas of Texas (from the Burger King, Wendy's, and Kentucky Fried Chicken chains) in December 1990 and in July and August 1991. These surveys followed the increases in the federal minimum wage in April 1990 and April 1991. With complete data for 100 restaurants, the authors' statistical analysis finds greater employment growth in the restaurants most affected by the increase in the minimum wage. In other words, the increases in the minimum wage yielded increases in fast-food employment, or, at a minimum, no effects upon that employment.

First, the Katz/Krueger sample is limited to restaurants operating both before and after the increases in the minimum wage. If the increases forced some out of business, or reduced the rate at which new restaurants were opened, the analysis, as Katz and Krueger recognize, would fail to pick up that change. It would therefore underestimate the adverse employment effect of the higher minimum wage.

More important, the Katz/Krueger analysis emphasizes wage differences across fast-food restaurants in Texas. Logically, the increase in the minimum wage ought to have affected low-wage establishments the most, but Katz and Krueger find greater employment growth in those restaurants. This is less meaningful than it may appear.