Minimal evidence - impact of minimum wage increases

Reason, June, 1995 by Benjamin Zycher

Card notes that in 1989 the proportion of teenage workers earning between $3.35 and $3.79 an hour varied from less than 10 percent in the New England states and California to more than 50 percent in many southern states. Accordingly, he divides the states into "high-wage," "low-wage," and "medium-wage" groupings.

The central issue is what happened to employment across the state groupings. In the crude group comparisons, Card finds a larger fall in teenage employment in the high-wage states than in the low-wage states, an outcome inconsistent with the traditional view of the minimum wage. Indeed, he finds an increase in teenage employment in the low-wage states, with no effect in the medium-wage group.

But of course, the minimum wage isn't the only factor affecting employment. The state's general economic climate and growth rate are also important. Card recognizes that differences in economic conditions and other factors might account for his findings. After controlling for them econometrically, he concludes that such differences in labor market conditions might in fact explain all of the variation in teenage employment growth. But he says also that "there is no indication of an adverse employment effect [caused by the increased minimum wage] in the low-wage states...."

That latter finding is quite weak: It would be one thing to find that an increase in the minimum wage yielded an increase in low-skilled employment, other things being equal. But to say that no negative effect can be found in the data means next to nothing. It says little more than the data are so imprecise or there is so much measurement error that the predicted effect is difficult to discern. The effect of the minimum wage gets lost in the noise--a weak basis indeed for fundamental change in the traditional view of the minimum wage.

And employers don't necessarily wait for the minimum wage to rise to cut jobs. They may have sufficient advance notice to make gradual adjustments accordingly. The Card paper ignores this. Neither does it look at reductions in fringe benefits or, even more important, changes in man-hours hired--the more relevant parameter--as opposed to numbers of teenagers working.

Most important, the Card analysis examines employment changes over a one-year period; but it is very easy to believe that the demand for low-skilled labor over so short an adjustment period is highly inflexible ("inelastic"). Looking over a longer adjustment period might very well show stronger employment effects. After all, wages on average rose by only 6 percent in the low-wage states; if businesses adjust gradually to wage increases--for instance, by reducing employment through attrition--the resulting employment effect might be real but too small to discern in the data over a short period.

* The Card California Study. California raised its minimum wage from $3.35 an hour to $4.25 an hour in July 1988; the federal minimum wage remained unchanged at $3.35. In this third paper, Card tries to test the effect of the minimum wage by comparing changes in low-skilled employment in California with changes in a group of "comparison states." Looking at the 1987-89 period, he concludes that the data suggest "a gain in [California] employment following the rise in the minimum wage." He also argues that "groups with a higher fraction of low-wage workers do not appear to have suffered any relative losses in employment" as contrasted with trends in the comparison states.