Based on the assigned article by Card, D. and Krueger, A. (1994) “Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania”, the review outlines the main issues, debates, and controversies it addresses, as well as follow-up reactions. The review summarizes the article’s main points and messages, provides empirical examples that illustrate the article’s theoretical points, and defines key implications for policy or business decision-making. Finally, personal appreciation of the article is provided.
Review
The article provides new evidence on the impact of minimum wages on the establishment of employment outcomes. To support theoretical arguments with empirical evidence, the authors empirically analyzed the experiences of 410 fast-food restaurants in
New Jersey and Pennsylvania right afterwards the minimum wage was increased in New Jersey from $4.25 to $5.05 per hour (Card and Krueger, 1994).
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The article empirically compares the data on wages, employment, and prices at New Jersey and Pennsylvania stores prior and after the minimum wage increase to come up with a simple method of evaluation of the effects assumed by the minimum wage. Further comparisons in New Jersey between high-wage stores and other stores enabled the authors to hypothesize the impact of the new economic law. The authors relate the findings of their study to Katz and Krueger (1992) to prove that their empirical findings on the effects of the New Jersey minimum wage contradict the predictions of a conventional competitive model applied by the fast-food industry (Card and Krueger, 1994).
Conversely, the employment results gained in the study comply with the alternative models, neither of which, however, can explain the obvious increase in fast-food prices. The outlined inconsistency is evident since standard competitive model assumes that establishment-level employment decreases once the wage exogenously increases. Within the food industry empirically researched by the authors in the course of the study, the overall employment rate will fall, while product price will increase in reaction to a rise in a binding minimum wage. The authors refer to the estimates from the literature on minimum wage effects as a relevant source to define the elasticity of low-wage employment to the minimum wage (Card and Krueger, 1994, p.790). In particular, the surveys by Brown et al. (1982. 1983) suggest that “a 10 percent increase in the coverage-adjusted minimum wage reduces teenage employment rates by 1-3 percent” (p.791). Considering that such effect concerns all teenagers, including those that are employed in low-wage industries, this estimate provides a lower bound on the potential of the effect on fast-food workers. For instance, 18-percent increase in the New Jersey minimum wage will “decrease employment at fast-food stores by 0.4-1.0 employees per store” (p.791). Conversely, the authors provide empirical results to reject the upper range of such estimates. Herein, the authors point out that the application of competitive model herein is possible considering the fact that certain stores in New Jersey were affected by unobserved demand shocks; in particular, the stores that initially paid wages less than $5.00 per hour. Nonetheless, the authors state that the localized demand shocks should have simultaneously affected product prices, since the competitive model assumes that product demand shocks are possible through price increases. The fact is that “lower-wage stores in New Jersey had relative employment gains, though they did not have relative price increases” (p.791).
Considering this, in their research method the authors referred to alternative models. This approach contradicts the conventional competitive model in terms that companies are price-takers in the product market though possess a certain extent of market power in the labor market. Consequently, providing that fast-food stores are bound to an upward-sloping labor-supply schedule, subsequent minimum wage rise will potentially increase employment in the companies that were affected by such alterations as well as the food industry overall. The same conclusions are drawn by the authors from investigating an equilibrium search model assuming that companies “post wages and employees search among posted offers” (as cited in Mortensen, 1988).
The alternative model forwarded by Kenneth Burdett and Mortensen (1989) assumes that the minimum wage will increase employment rate mostly at the companies that have initially applied the lowest wages. Although job-search and monopsonistic models can potentially explain the outlined employment effects of the minimum wage in New Jersey, they fail to explain the outlined price effects. The alternative models assume that industry prices should have fallen in New Jersey compared to Pennsylvania, as well as at low-wage stores compared to the high-wage stores in New Jersey. Consequently, neither of the outlined alternative predictions has been scientifically grounded and confirmed. Empirically, in New Jersey prices rose faster than in Pennsylvania, though mainly at the same rate at high and low-wage stores in New Jersey, the author conclude (p.791). Another inconsistence referred to the alternative models is explained by the absence of wage increases in the companies that initially paid their employees $5.05 or more per hour (p.791).
In sum, the authors failed to find an evidence to prove that the rise of minimum wage in New Jersey reduced employment at the state’s fast-food industry. Notwithstanding various comparisons made throughout the study (New Jersey stores affected by the $5.05 minimum to Eastern Pennsylvania stores with the minimum wage of $4.25 per hour, as well as the New Jersey stores that initially paid $5.00 per hour or more, the authors eventually came to the conclusion that “the increase in the minimum wage increased employment” (p.792).
Overall, my personal impression is that the presented outcomes of the research are rather difficult to explain through the lens of the standard competitive model, or the alternative models (monopsony and equilibrium search models) referred to by the authors.
- Card, D. Krueger, A. (1994). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania. American Economic Review, 84 (4), 772-793.
