There's often a wide and uncomfortable gap between economic theory and economic developments in the real world that lies outside the sheltered precincts of academe. Take the argument against the hike in the minimum wage passed a few years ago. According to many economists, such a hike--which raised the minimum from $3.35 to $3.80 per hour last year and to $4.25 this April--could hurt low-wage earners by pricing them out of the market.
To test such predictions, economists Lawrence F. Katz of Harvard University and Alan B. Krueger of Princeton recently surveyed some 167 fast-food restaurants in Texas after last year's minimum wage hike went into effect. Although 73% of the restaurants had paid starting workers less than the new minimum wage, most reported that they had not attempted to offset their mandated wage increase by cutting employment or fringe benefits. Many restaurants, in fact, indicated that they had increased wages more than the law required, while only 2% made use of a provision permitting employers to pay teenagers a subminimum wage.
Princeton University economist David Card also studied a similar situation in California. In mid-1988, the state's minimum wage was raised from $3.35 to $4.25 an hour. Previously, 11% of California workers and half of its teenage workers earned less than the minimum.
Using labor-market trends in other states to infer what would have happened in California if the law hadn't changed, Card found that the law increased the pay of teenagers and other low-wage workers by 5% to 10%. But "contrary to conventional predictions, the employment rate of teenage workers actually rose, while their school enrollment rate fell." Overall retail employment was also unaffected by the law.