Questions: Minimum Wage Economics

Question 1

Card and Krueger's 1994 study compared fast-food employment in New Jersey (which raised its minimum wage) to Pennsylvania (which did not). Their finding was...

• A. A large decrease in New Jersey employment, confirming the competitive model
• B. No significant decrease in New Jersey employment, and possibly a small increase — inconsistent with the competitive prediction but consistent with monopsony
• C. A large increase in New Jersey employment, proving that minimum wages always help
• D. No change in either state's employment

Answer: (B)

Card and Krueger found that fast-food employment in New Jersey did not fall relative to Pennsylvania after the minimum wage increase — and point estimates suggested a small increase. This was explosive because it contradicted the competitive model's unambiguous prediction of employment loss. The study sparked decades of debate about methodology, replication, and interpretation. The finding is consistent with monopsony power in low-wage labor markets, where moderate wage floors can increase employment by reducing firms' exploitation of wage-setting power.

Question 2

The minimum wage debate has been completely settled by empirical research, with economists agreeing on the magnitude of employment effects.

• T. True
• F. False

Answer: False

While the consensus has shifted toward smaller employment effects than previously believed, significant disagreement persists. Meta-analyses by Dube (2019) and others find small or zero average employment effects for moderate increases, but Neumark and Wascher's meta-analyses find more negative effects, particularly for teenagers and less-skilled workers. The debate partly reflects methodological differences (comparison group selection, time horizons, industry vs. geographic variation). There is broader agreement that moderate increases have small employment effects while very large increases (to levels far above the current median) could have larger effects.

Question 3

Through what channels can firms adjust to minimum wage increases besides reducing employment?

Model answer: Firms can adjust through: (1) reduced hours (cutting hours per worker rather than headcount), (2) higher prices (passing costs to consumers), (3) reduced non-wage benefits (less generous health insurance, fewer perks), (4) reduced profits (absorbing the cost from margins), (5) increased productivity (motivating higher effort or attracting better workers through efficiency wage effects), (6) reduced turnover (lower recruitment and training costs when workers earn more), and (7) automation investment over longer time horizons.

The employment margin is only one of many adjustment channels, which is why focusing exclusively on headcount changes misses much of the response. Studies find evidence for most of these channels: modest price increases (particularly in restaurants), reduced turnover, and some compression of hours and non-wage benefits. The relative importance of each channel varies by industry, the size of the increase, and the time horizon. This multi-channel adjustment explains why employment effects can be small even when the wage increase is substantial.