On Tuesday, November 5, voters will be asked to amend the state constitution to raise the minimum wage from $7.25 an hour to $8.25. This minimum level would also be tied to the price of consumer goods, ensuring automatic raises in the wage as the price of necessities increases over time.
The ballot question has its supporters and detractors, with its chief critic being Governor Chris Christie. Predictably, many business groups also oppose it. Traditionally, economists have also been critical of minimum wage laws. But since the 1990s, some academics have come to believe that the supposed negative impact of minimum wages on commerce has been greatly exaggerated.
Economists Alan Krueger and David Edward Card, wrote a book in 1994 called Myth and Measurement: The New Economics of the Minimum Wage. Krueger, a Princeton professor and former assistant secretary of the treasury for economic policy in the Obama administration, and Card, from the University of California, studied what happened when New Jersey raised the minimum wage from $4.25 to $5.05 an hour in 1992. The researchers looked at data gathered from fast food restaurants, one of the larger employers of minimum-wage workers. Classic economic theory predicted that burger flippers would lose their jobs if the minimum wage went up. However, the professors found that employment levels were stable and even increased because of the wage hike.
Among their explanations for this unexpected behavior by the labor market: The restaurants just raised their prices by a tiny amount, enough to cover the increased wages — a relatively small portion of their overall costs. Since all fast food restaurants had to do the same, they didn’t have to worry about being underpriced by the competition. The small price increase was not enough to discourage anyone from eating fast food.
Another factor, the economists said, was efficiency. Higher wages meant the businesses had less turnover and fewer job vacancies, which resulted in greater efficiency.
The findings of this study have been debated ever since, with some economists disputing its conclusions and others supporting it. What follows is an excerpt from the book’s introduction:
Nearly 50 years ago, George Stigler implored economists to be “outspoken and singularly agreed” that increases in the minimum wage reduce employment. The reasoning behind this prediction is simple and compelling. According to the model presented in nearly every introductory economics textbook, an increase in the minimum wage lowers the employment of minimum-wage workers. This logic has convinced most economists: polls show that more than 90 percent of professional economists agree with the prediction that a higher minimum wage reduces employment. Such a high degree of consensus is remarkable among a profession renowned for its bitter disagreements.
But there is one problem: the evidence is not singularly agreed that increases in the minimum wage reduce employment. This book presents a new body of evidence showing that recent minimum wage increases have not had the negative employment effects predicted by the textbook model.
Some of the new evidence points toward a positive effect of the minimum wage on employment; most shows no effect at all. Moreover, a reanalysis of previous minimum wage studies finds little support for the prediction that minimum wages reduce employment. If accepted, our findings call into question the standard model of the labor market that has dominated economists’ thinking for the past half century.
Our main empirical findings can be summarized as follows. First, the study of employment in the fast-food industry after the recent 1992 increase in the New Jersey minimum wage shows that employment was not affected adversely by the law. Our results are derived from a specially designed survey of more than 400 restaurants throughout New Jersey and eastern Pennsylvania, conducted before and after the increase in the New Jersey minimum wage. Relative to restaurants in Pennsylvania, where the minimum wage remained unchanged, we find that employment in New Jersey actually expanded with the increase in the minimum wage.
Furthermore, when we examine restaurants within New Jersey, we find that employment growth was higher at restaurants that were forced to increase their wages to comply with the law than those stores that already were paying more than the new minimum. We find similar results in studies of fast-food restaurants in Texas after the 1991 increase in the federal minimum wage, and of teenage workers after the 1988 increase in California’s minimum wage.
If a single study found anomalous evidence on the employment effect of minimum wage, it could be easily dismissed. But the broad array of evidence presented in this book is more difficult to dismiss. Taken as a whole, our findings pose a serious challenge to the simple textbook theory that economists have used to describe the effects of the minimum wage. They also provide an opportunity to develop and test alternative theories about the operation of the labor market.
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The economists’ view above was not shared by most business leaders. Robert D. Prunetti, president and CEO of the Mid-Jersey Chamber of Commerce, in a statement printed in the chamber magazine, made the following point:
“At first glance, this may seem an easy issue in which to give your support, especially in a state that has not raised the minimum wage in a number of years.
“Many voters will interpret the question that way and vote “yes” without realizing the implication of amending the state’s constitution to set minimum wage at $8.25 per hour with annual adjustments for inflation. If this passes, minimum wage would increase from $7.25 to $8.25, effective January 1, 2014. A cost-of-living increase tied to the Consumer Price Index (CPI) would be added to the minimum wage each year, beginning September 30, 2014.
“Our Chamber has not taken a position against increasing the minimum wage, but along with the New Jersey Chamber of Commerce and New Jersey Chambers United we have not supported the current effort to amend the state’s constitution. This is an extreme attempt to bind the hands of future legislatures and thereby allowing no consideration for the impact on business in differing economic climates; the issue has no place embedded in our state’s constitution and is the responsibility of our elected officials.”
