By Michael Saltsman
A ballot initiative to alter the New Jersey Constitution to increase the minimum wage has restarted a fierce debate on the topic - and pushed a 1994 study of New Jersey's fast-food industry back into the spotlight.
Looking at a 1992 increase in the state's minimum wage, Princeton economists David Card and Alan Krueger claimed that employment in Garden State restaurants had increased relative to those in Pennsylvania after the policy took effect. Today, this counterintuitive claim is still relied upon by union groups like the New Jersey Working Families Alliance to bolster their case for a new employer mandate.
But activists have conveniently left out the story's ending: Six years later, the Card-Krueger study was debunked on the pages of the same economics journal that originally published it.
The New Jersey study first gained notoriety when President Bill Clinton cited it in support of his proposal to increase the federal minimum wage in the mid-'90s. He did so because the economists' work provided a compelling story: Having telephoned restaurants in New Jersey and Pennsylvania before and after an increase in New Jersey's minimum wage, they reported an increase in employment.
Though the Clinton administration latched on to this result for its PR efforts, economists and policy groups were skeptical. Just over a decade earlier, a seven-volume report from Congress' Minimum Wage Study Commission established conclusively that each 10 percent increase in the minimum wage reduced employment for young people by as much as 3 percent.
As it turned out, there was good reason to be skeptical. A team of researchers from the Employment Policies Institute (EPI) collected actual payroll data from 25 percent of the franchised restaurant locations that Card and Krueger had telephoned, and found little resemblance in the two data sets. Students who called restaurants with an ambiguous set of questions gave the Princeton economists a picture of businesses making implausibly large changes in employment - from zero full-time staffers to 35 in less than a year, for instance, or from 60 part-time staff down to 15.
EPI presented these results in a hearing before Congress' Joint Economic Committee. The change in tone of the media coverage of the Card-Krueger study was swift: Where previously it was praised as a "most compelling study," editorials now described it as "snake oil" that had been "dropped faster than a mis-flipped burger."
Economists David Neumark (then at Michigan State University) and William Wascher (Federal Reserve Board) followed up with a detailed independent analysis of the restaurant payroll data, and published their findings in the same economic journal where the Card-Krueger study first appeared. Far from boosting employment, they found, the mandated wage increase in New Jersey decreased employment - just as economic theory would predict.
Despite its lack of credibility, advocates for a higher minimum wage continue to praise the New Jersey study with superlatives like "seminal" and "groundbreaking." It's intellectually dishonest, but it's also understandable - there aren't that many studies for proponents to hang their hats on.
The vast majority of economic research (including 85 percent of the best studies from the last two decades) points to job losses rather than job gains following a minimum-wage increase.
As the election draws closer, references to the discredited Card-Krueger study will no doubt become more frequent. But New Jersey, with a 27 percent teen unemployment rate, can scarcely afford this bad trip down memory lane.