Along the Minimum-Wage Battle Front

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By Nancy Folbre
New York Times Economix, Nov 1 2010

There’s no actual swordplay, but you can see flashes of steel along with sparks when economists wield their weapon of choice — statistical analysis.

One of the most dramatic running battles concerns the effect of minimum-wage laws. Do they increase incomes for low-wage workers, or are higher wages counterbalanced by increased unemployment?

Those opposed to government intervention once dominated this battlefield. In 1990, for instance, a survey of members of the American Economic Association showed that 60 percent agreed that minimum wages increase unemployment among young and unskilled workers.

In 1994, however, a now-famous case study by the economists David Card and Alan Krueger compared employment trends in fast-food establishments in New Jersey affected by an increase in the state minimum wage in 1992 with trends in nearby counties of Pennsylvania, where no legislative change had taken place.

Professors Card and Krueger reported the surprising result that employment trends in the two areas did not significantly differ. In subsequent research, including a book, “Myth and Measurement,” they provided additional support for their assertion that minimum wage laws have benefited low-wage workers.

Rallying under this banner, many economists pushed back against the conventional wisdom with some success. By 2000, only 46 percent of members of the American Economic Association agreed that minimum wages increase unemployment among young and unskilled workers. Another study published in 2006 showed that slightly less than half of all economists surveyed thought the minimum wage should be eliminated, while more than a third favored increasing it.

This shifting alignment intensified the conflict. Critics of the Card-Krueger studies point to a number of methodological limitations, including their focus on relatively small geographic areas. The economists David Neumark and William Wascher, among others, argue that minimum wages do more harm than good for low-wage workers.

Different conclusions reflect, in part, differences in research design. As can be seen from the map above, state minimum wages vary considerably by region and are lower (or nonexistent) in the South. These state-level differences complicate analysis of national trends, but also provide the opportunity to extend the case-study approach that Professors Card and Krueger developed to a larger number of counties over a longer period of time.

An important new study exploiting this opportunity will appear this month in The Review of Economics and Statistics. The economists Arindrajit Dube of the University of Massachusetts Amherst, T. William Lester of the University of North Carolina at Chapel Hill, and Michael Reich of the University of California, Berkeley, closely analyze employment trends for several categories of low-wage workers over a 16-year period in all counties sharing a common border with a county in another state where minimum wage increases followed a different trajectory.

They report that increases in minimum wages had no negative effects on low-wage employment and successfully increased the income of workers in food services and retail employment, as well as the narrower category of workers in restaurants.

The study successfully addresses a number of criticisms previously leveled at the case-study approach and points to flaws in all previous studies that have found negative employment effects.

The level of technical discussion is daunting, but if you don’t want to grapple with concepts like “spatially correlated fictitious placebo minimum wages” you can watch a video instead — Arindrajit Dube clearly explains the issues in a 12-minute interview. He emphasizes that higher minimum wages tend to reduce worker turnover, benefiting both workers and employers. 

I’m sure this battle will rage on. My fellow blogger Casey Mulligan insists that increased minimum wages have reduced employment among teenagers. I plan a small skirmish on this point in a future post.

Meanwhile, consider the simple, stark reality that lies behind this educational clash of ideas. Once adjusted for inflation, the federal minimum wage in the United States today is lower than it was in 1967.

Wage earners seem increasingly unable to capture any of the gains from technological change and productivity growth. Whatever policies we cross swords over, we should count low-wage workers among the walking wounded.

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.