Pages

 

On David Card and Minimum Wages

0 comments
Introductory economics classes often teach students an application of an incorrect model of labor markets governed by supply and demand. In this application, minimum wages cause unemployment. Those who accept this model were surprised a decade ago by Card and Krueger's results. They found little evidence for decreased employment from increases in minimum wages.

Their results had two major components: a meta-analysis (Card and Krueger 1995) and statistical analysis of data gathered in a natural experiment (Card and Krueger 1994). In their meta-analysis, they quantitatively examine over 30 time series studies of the minimum wage. They find that as more data becomes available, the statistical significance of the employment effect of minimum wages declines. That is, additional data results in finding that it is less and less likely that increased minimum wages decrease employment.

The most famous natural experiment Card and Krueger analyzed arose when New Jersey raised its minimum wage at a time when Pennsylvania kept its minimum wage unchanged. Card and Krueger "surveyed 410 fast-food restaurants in New Jersey and eastern Pennsylvania before and after the rise". They found no evidence that rises in minimum wages reduce employment.

Card is well-regarded by economists, as evidenced by his receipt of the John Bates Clark medal (Freeman 1997). Card and Krueger's book, Myth and Measurement, which repeats these results received a lengthly review in the Journal of Economic Literature. Kennan (1995) concludes: "Myth and Measurement is a serious, well-written book, well worth reading..." Kennan also calls for more resources to be devoted to data collection.

Naturally, this work generated controversy. Neumark and Wascher (2000) is probably the most well-known rexamination of the New Jersey case (Card and Krueger 2000 is a response). As far as I know, their meta-analysis has received no extended criticism. Given this work, I don't see how one can conclude that politically-feasible increases in the minimum wage will have large employment-decreasing effects.

Recently, Card (2005) has done some empirical work on immigration. You may sometimes encounter the claim that these recent results are inconsistent with his earlier work on minimum wages. This claim of inconsistency makes sense if you interpret Card's results to be about the elasticity of demand and supply in labor markets. These empirical results, however, are consistent if you think labor markets are not described by a model of supply and demand.

References
  • Card, David (2005). "Is the New Immigration Really So Bad?", working paper(?)

  • Card, David and Alan B. Krueger (1994). "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania", American Economic Review, V. 84, N. 4 (Sep.): 772-793.

  • Card, David and Alan B. Krueger (1995). "Time-Series Minimum-Wage Studies: A Meta-Analysis", American Economic Review, V. 85, N. 2 (May): 238-243.

  • Card, David and Alan B. Krueger (2000). "Minimum Wages and Employment: A Case Study of the Fast-Food Industry and Pennsylvania: Reply", American Economic Review, V. 90, N. 5 (Dec.): 1397-1420.

  • Freeman, Richard B. (1997). "In Honor of David Card: Winner of the John Bates Clark Medal", Journal of Economic Perspectives, V. 11, N. 2 (Spr.): 161-178.

  • Kennan, John (1995). "The Elusive Effects of Minimum Wages, Journal of Economic Literature, V. 33, N. 4 (Dec.): 1950-1965.

  • Neumark, David and William Wascher (2000). "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment", American Economic Review, V. 90, N. 5 (Dec.): 1362-1396.

0 comments:

Post a Comment

  • Greenspan's Cult of Personality... Review topics and articles of economics: Alan Greenspan was a legend in his time and there was no shortage of praise for him back then. For example, who can forget Bob Woodow's 2000 book Maestro: Greenspan's...
  • Yes Tyler, Low Interest Rates Matte... Tyler Cowen is wondering whether the Fed's low interest rates in the early-to-mid 2000s really were that important to the credit and housing boom of the early-to-mid...
  • The Eurozone Crisis: Deja Vu... Review topics and articles of economics: Randal Forsyth sees similarities between the current unfolding of the Eurozone crisis and that of the U.S. financial crisis a few years back:Just as the problem on this...
  • Charles Plosser and the Burden of F... The Economist's Free Exchange blog is shocked to hear this from Federal Reserve Bank of Philadelphia President Charles Plosser:"Since expectations play an important role...
  • Arnold Kling and Expected Inflation... Review topics and articles of economics: What do we know about expected inflation? According to Arnold Kling not much if we look to financial markets:I'm also not convinced that we can read expected inflation...
  • A Paper on Stabilizing Nominal Spen... Given the recent discussion on stabilizing nominal spending as a policy goal I found this article by Evan F. Koenig of the Dallas Fed to be interesting: The article...
  • Why The Low Interest Rates Mattered... Review topics and articles of economics: This is the second of two posts detailing why the Fed's low interest rate policies in the early-to-mid 2000s was one of the more important contributors to the credit and...
  • Why The Low Interest Rates Mattered... This is the first of a two-part follow up to my previous post, where I argued that the Fed's low interest rate policy was a key contributor to the credit and housing...
  • The Stance of Monetary Policy Via t... Review topics and articles of economics: There has been some interesting conversations on the stance of monetary policy in the past few days between Arnold Kling, Scott Sumner, and Josh Hendrickson. Part of...
  • Scott Sumner's New Best Friend:... Joseph Gagnon is calling for $6 trillion more in global monetary easing. This should not be too hard to implement since the Fed is a monetary superpower.Update: The...
 
Review topics and articles of economics © 2011 On David Card and Minimum Wages