In theory, a rise in the minimum wage should lead employers to cut their work rolls. But as a recent study by David Card and Alan Krueger of Princeton University shows, the real world often defies theoretical expectations.
In early 1992, when New Jersey was still suffering from recessionary woes, it raised the minimum wage from $4.25 to $5.05 per hour--80 more than in neighboring Pennsylvania. To assess the impact, the two economists surveyed 410 fast-food restaurants in New Jersey and Pennsylvania in the month before the increase and eight months later.
The results turn the conventional wisdom upside down. Instead of widespread layoffs, Card and Krueger found that stores located in New Jersey actually increased employment by about 13% on average, or 2.5 workers per store, relative to stores in nearby eastern Pennsylvania. What's more, the effect was entirely concentrated in the stores in New Jersey that had been paying wages less than $5 per hour before the increase went into effect. New Jersey fast-food outlets that had originally been paying $5 or more per hour showed essentially the same employment growth as their Pennsylvania counterparts.
Why the rise in employment after the minimum-wage hike? Noting the wide range of pay rates even among neighboring fast-food outlets, Card points out that stores choosing to pay low wages are often plagued by high turnover and job-vacancy rates. A higher minimum wage, he speculates, may have ameliorated such problems, and this may have led to a rise in employment.