Card and Krueger Study

• This paper analyzes the impact of the April 1, 1992, increase in New Jersey's minimum wage from $4.25 to $5.05 per hour.
• The study surveyed 410 fast-food restaurants in New Jersey and eastern Pennsylvania before and after the wage increase.
• It compares employment growth at stores in New Jersey and Pennsylvania, where the minimum wage remained constant.
• The study also compares employment changes at high-wage (above $5) versus low-wage stores in New Jersey.
• The findings indicate that the minimum wage increase did not reduce employment.

Background and Theory

• Conventional economic theory predicts that a minimum wage increase leads competitive employers to reduce employment.
• Some studies in the 1970s, based on aggregate teenage employment rates, confirmed this prediction.
• Earlier studies comparing employment at affected and unaffected establishments did not find such effects.
• Recent studies on the 1990-1991 federal minimum wage increases and California's minimum wage increase found no adverse employment impact.

Methodology and Data

• The research examines 410 fast-food restaurants in New Jersey and Pennsylvania after New Jersey's minimum wage increased from $4.25 to $5.05 per hour.
• The analysis focuses on employment, wages, and prices at stores in both states before and after the change.
• It also compares initially high-wage stores within New Jersey to lower-wage stores.
• This approach assesses the effect of minimum wages on establishment-level employment.
• Significance lies in the minimum wage increase happening during a recession.
• The increase was legislated when the state's economy was healthier.
• By the time of the increase, New Jersey's unemployment rate rose significantly, and there was a last-minute political attempt to reduce it.
• Being a small state with a closely linked economy to nearby states is relevant.
• Using fast-food stores in eastern Pennsylvania as a control group is a natural comparison for New Jersey restaurants.
• Wage variations across New Jersey stores allow comparison between high- and low-wage store experiences.
• Seasonal employment patterns are similar in New Jersey and eastern Pennsylvania, effectively filtering out any seasonal effects.
• Nearly 100% of stores were successfully followed from the initial interviews before the minimum wage increase to a second wave 7-8 months later.
• Complete information on store closings is available, and employment changes at closed stores are considered.
• The overall effect of the minimum wage on average employment, not just its effect on surviving establishments, is measured.
• The analysis of employment trends does not consider the effect of minimum wages on new store openings.
• State-specific growth rates of McDonald's fast-food outlets between 1986 and 1991 were analyzed relative to minimum wage measures in each state.

The New Jersey Law

• A law signed in November 1989 raised the minimum wage from $3.35 to $3.80 per hour on April 1, 1990, and further to $4.25 per hour on April 1, 1991.
• The New Jersey legislature enacted parallel increases in the state minimum wage for 1990 and 1991, with an increase to $5.05 per hour on April 1, 1992.
• This increase made New Jersey's minimum wage the highest in the country and was opposed by business leaders.
• Economic recession in New Jersey in the two years between passage and implementation created concerns about the possible negative impacts of the wage increase.
• In March 1992, the state legislature voted to phase in the 80-cent increase over two years.
• The vote failed to override a gubernatorial veto, and the $5.05 rate took effect on April 1.

Sample Design and Evaluation

• In early 1992, a survey of fast-food restaurants in New Jersey and eastern Pennsylvania was conducted to evaluate the minimum wage increase.
• Fast-food restaurants were chosen because they are leading low-wage employers, comply with minimum wage laws, and their job requirements and products are relatively homogeneous.
• Fast-food restaurants also have high response rates to telephone surveys.
• A sample frame of franchised restaurants in New Jersey and eastern Pennsylvania was created from Burger King, KFC, Wendy's, and Roy Rogers chains.
• The first survey wave, in late February and early March 1992, included questions on employment, starting wages, prices, and other store characteristics.
• Of 473 stores in the sample frame with working telephone numbers, 410 completed interviews were obtained after multiple calls, resulting in an 87% response rate.
• The response rate was higher in New Jersey (91%) than in Pennsylvania (72.5%).
• The second survey took place in November and December 1992, about eight months after the minimum wage increase.
• The 410 stores that had responded in the first wave were re-contacted, and 371 (90%) were interviewed by phone.
• The status of non-responding restaurants was checked in person.
• Six restaurants were permanently closed, two were temporarily closed, and two were under renovation.
• Follow-up interviews were conducted with 28 of the 29 open restaurants that had not responded.
• Second-wave interview data were obtained for 99.8% of the restaurants that had responded in the first wave.
• Table 2 presents the means for key variables in the data set.
• In calculating means, employment in wave 2 is set to 0 for permanently closed stores and as missing for temporarily closed stores.
• Distribution of establishments by ownership status and chain is provided.
• The Burger King, Roy Rogers, and Wendy's stores included have similar average food prices, hours of operation, and employee levels.
• In wave 1, average employment was 23.3 full-time equivalents in Pennsylvania vs. 20.4 in New Jersey.
• Starting wages were similar bilaterally, but the average price was higher in New Jersey.
• Average hours, fraction of full-time workers, and recruiting bonus usage did not differ statistically.
• The average starting wage at fast-food restaurants in New Jersey increased by 10% after the rise in the minimum wage.

Distribution of Starting Wages

• Almost all restaurants that had been paying less than $5.05 per hour started their employees at the new rate.
• There was no apparent effect of the minimum-wage increase on higher-wage restaurants; the base line percentage change for these stores was -3.1%.
• FTW employment increased in New Jersey in contrast to that of Pennsylvania
• New Jersey stores were initially smaller, but employment gains and losses coupled with decreasingly insignificant interstate changes.

Verifying Survey Reliability

• Assessment of survey questionnaire reliability compared responses of 11 stores inadvertently interviewed twice in the first wave.
• Correlation between responses estimates the reliability ratio (signal variance to total variance).
• The estimates vary between (0.70) for FTE to (0.98) for the price of a mean
• Comparison of missing data to responses found that missing sources were similar to stores with complete data
• The six stores closed after wave 1 were smaller than the other stores, with an average of 12.4 FTW employees

Explore the Card and Krueger study. Understand the methodology, limitations, and data sources used. Analyze the effect of minimum wage increases on the labor market.