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Why increasing the minimum wage does not necessarily reduce employment


A generation ago, the vast majority of economists would have said that a rise in the minimum wage inevitably costs jobs. It must, they would have said, if a basic principle of economics – that the demand for labor falls as wages rise – is correct. In the current debate over the federal minimum wage, many opponents of the increase have argued that any rise poses too great of a risk to the fragile economic recovery. However, recent research shows this truism to be over-simplified and not reflective to the realities of the labor market. Rather than automatically reducing employment, an increased minimum wage presents mixed outcomes.


Until the mid-1990s, almost all studies of the minimum supported the idea of an unwelcome trade-off between wage regulation and employment. But the cozy consensus was shattered by the research of two economists, David Card and Alan Krueger, then both at Princeton. They argued that the actual evidence linking the minimum wage to job losses was weak. More important, they offered new analyses concluding that the minimum wage – at the levels observed in the United States – had no effect on employment, and might even raise it! Their seminal study compared employment in fast-food restaurants in two adjacent states, New Jersey and Pennsylvania, after New Jersey raised its minimum wage.


It’s important to bear in mind – certainly Card and Krueger did – that there is still universal agreement that employment is sensitive to a wage floor when it reaches some level. But the two economists were equally convinced by their research that, in the American context, modest increases in the minimum had no effect on jobs.


To say the Card-Krueger research generated controversy is an understatement. Its publication coincided with a debate over raising the federal minimum wage, so the ensuing academic dispute was inextricably mixed with politics. Other academics testified to Congress that the Card-Krueger conclusion amounted to a rejection of the economist’s version of the theory of gravity – and that evidence of antimatter should be treated with great skepticism.

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