Where conducting an actual experiment was nearly impossible, David Card smartly used a “natural experiment” for his research which has procured for him the prestigious Nobel prize in economics. His research showed that an increase in minimum wage does not lead to less hiring and immigrants do not lower pay for native-born workers, challenging commonly held ideas. In 1992, after examining a “natural experiment”, Card and colleague Alan Krueger showed that an increase in the minimum wage does not necessarily lead to a drop in hiring, challenging the conventional wisdom
“Increasing minimum wages would cost jobs.”
This has been a neo-classical axiom. It means that the employers wouldn’t have the money to keep on as many staffs leading to unemployment. As noted by the Economist magazine, in 1992 a survey of the American Economic Association’s members found that 79% agreed that a minimum wage law increased unemployment among younger and lower-skilled workers. Twist: when the survey was conducted again in 2000, only 46% agreed to it. If you raise the price of something, you get less of it – a traditional economic view of supply and demand which apparently is changing with time.
How then can one agree to Card’s work?
One conclusion of Card’s work was that companies are able to pass on the cost of higher wages to customers by raising prices. Second, one huge company could hire all the workers with low wages so that it could afford to keep a higher minimum wage – leading to higher employment.
According to a research paper on employment effects of minimum wages, the arguments ranged from “it is now well-established that higher minimum wages do not reduce employment,” to “the evidence is very mixed with effects centred on zero so there is no basis for a strong conclusion one way or the other,” to “most evidence points to adverse employment effects.”
The paper shows about 78% of studies show a negative effect on employment. Interesting that the highlighted work of Card might have been followed by a majority of studies with opposite findings. The more important variation in job losses stemmed from differences across studies in the set of workers for whom employment effects are estimated. There is strong and consistent evidence of negative employment effects for teens, young adults, the less-educated and low-wage workers, with the estimated elasticities generally larger for the less-educated than for teens and young adults, and larger still for directly-affected workers. This is due to the cause-and-effect relationship. This analysis showed clearly that most of the evidence indicates the opposite – those minimum wages reduced low-skilled employment.
But the research Card and Krueger undertook was different.
In the early 1990s, they studied the effects of employment in the fast-food restaurants of two neighbouring areas – New Jersey and neighbouring Pennsylvania – which have similar labour markets. On the increase of the minimum wage on only one side of the border, there was no effect on employment on either side. The important point to note here is that there was no other factor apart from the minimum wage that could possibly affect employment. Summaries of different research papers show that there is a 50-50 chance of having negative employment effects due to minimum price raises. However, most of the research has only led to debate than any consensus.
The literature analysing these historical minimum wages changes has generated much debate and little consensus. – Clemens and Strain