Reality Contradicts

Minimum wage increase on employment – fairy tale or fact?

By Xenia Radu

Ironically or not, it is in our human nature to study paradoxes. And economic theory is an appealing topic to debate. Each time we are provided with sounding theories announced years ago, we wonder: Do they apply? Today or even in the past? Some of them not. Take the example of increasing minimum wage. Ever since Stigler formulated his already conventional theory in 1946 that by raising the minimum wage the employment falls, advocates of this economic law get grumpy about such news. Why am I saying this is a case where reality contradicts? We do have outstanding econometric proofs that this economic theory does not apply in real life.
“Some” years ago, in 1992, New Jersey faced an increase in minimum wage, from $4.25 to $5.05. Even though all odds were in favour of this law to fail and the theory to win – since the state was bumped by recession and the law by many opponents – it still got the desired outcome; no major changes and, more important, no negative impacts occurred on employment after the increase took place.
David Card and Alan Krueger (1994) are the authors of one of the most iconic and famous study on the impact of minimum wages. They have analysed the effects of this law by comparing numbers in fast food industry in New Jersey and Pennsylvania, as a treatment group. Why fast food? Because this industry is leading in employing low-wage workers and have to comply with minimum wage
requirements. Why Pennsylvania? Its proximity to New Jersey provides similar economic conditions The study was conducted on Burger King, KFC, Wendy’s and Roy Rogers chains, being interviewed a total of 371 stores.

burger-king-7

In simple lines, what the authors did is the following: they measured the change in employment between February-March 1992 and November-December 19921, considering the effect of increasing minimum wage.
The analysis also covers differences between the fast food chains and between regions of the two states. These variables are used for controlling the impact of such additional factors. For example, are there obtained different results if we look at Burger King or Wendy’s? Or are there differences among regions? The tests show they are not.
At the bottom of the line, this study, as many others before and after, shows there is no impact on employment.
For discussing this issue in more depth, we find some additional interesting factors to consider in the article. How did the employers offset the increase in minimum wage?
Well, authors have looked at the number of hours the restaurants were open and how many cash registers were in operation and they have seen no change between the two periods.
One may also want to check for changes in nonwage benefits offered to employees. There were some alterations in the fringe benefits. The fast food chains offered less reduced meals but more free ones to their workers. Surprisingly, not? However, employers worked out the

macdonalds-7

issue by reducing the on-the-job training. Who needs it anyway? Learning by costly and time-consuming. They also decided there was no point in raising wages for those that it was the time to. The increase was already coming, so it was not necessary anymore.
Card and Krueger also wanted to see how the wage change affected the meal price, how us, consumers, are affected.

And it is true, we are priced more, not by much though and only when compared to price changes in Pennsylvania, as illustrated in the table below:

Screen Shot 2013-01-18 at 15.59.43

wimpy

Moreover, the increase in minimum wage seems to have positively affected the number of opening stores, since McDonald’s did not bother to increase their presence in the neighbourhood.
Summing up, according to Card and Krueger the increase in minimum wage slightly increased employment and, even better, full time low-wage workers fraction was raised a little bit, though not highly significant. As demonstrated below:

Screen Shot 2013-01-18 at 15.59.15

Wendys

So, consumers bear part of the cost, employees are paid more and receive less training, and the Government receives more money. Everybody is happy, except those that still believe in the 50s’ theory. It seems that reality contradicts.

Screen Shot 2013-01-18 at 16.02.31

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