New Jersey study leads to Nobel prize

In a study published in 1994, David Card of the University of California, Berkeley, looked at what happened to jobs at Burger King, KFC, Wendy’s and Roy Rogers when New Jersey raised its minimum wage from $4.25 to $5.05, using restaurants in bordering eastern Pennsylvania as the control — or comparison — group.

Contrary to previous studies, he and his research partner Alan Krueger, who died in 2019, found that an increase in the minimum wage had no effect on the number of employees and as a reward, the Canadian-born professor was awarded half of the Nobel prize in economics for his pioneering research that transformed widely held ideas about the labor force,

By showing that an increase in the minimum wage doesn’t hinder hiring and immigrants do not lower pay for native-born workers Card’s minimum wage research fundamentally altered economists’ views of such policies.

As noted by the Economist magazine, in 1992 a survey of the American Economic Association’s members found that 79% agreed that a minimum wage law increased unemployment among younger and lower-skilled workers. Those views were largely based on traditional economic views of supply and demand: If you raise the price of something, you get less of it.

By 2000, however, just 46% of the AEA’s members said minimum wage laws increase unemployment, largely because of Card and Krueger’s research. Their findings sparked interest in further research into why a higher minimum wouldn’t reduce employment. One conclusion was that companies are able to pass on the cost of higher wages to customers by raising prices. In other cases, if a company was a major employer in a particular area, it may have been able to keep wages particularly low, so that it could afford to pay a higher minimum without cutting jobs. The higher pay would also attract more applicants, boosting labor supply.

Card also found that incomes of those who are native born workers can benefit from new immigrants, while immigrants who arrived earlier are the ones at risk of being negatively affected. To study the effect of immigration on jobs, Card compared the labor market in Miami in the wake of Cuba’s sudden decision to let people emigrate in 1980, leading 125,000 people to leave in what became known as the Mariel Boatlift. It resulted in a 7% increase in the city’s workforce.

By comparing the evolution of wages and employment in four other cities, Card discovered no negative effects for Miami residents with low levels of education. Follow-up work showed that increased immigration can have a positive impact on income for people born in the country.

Card’s work on minimum wage was an example of a “natural experiment,” or a study based on observation of real-world data. The problem with such experiments is that it can sometimes be difficult to isolate cause and effect.

For example, if you want to figure out whether an extra year of education will increase a person’s income, you can simply compare the incomes of adults with one more year of schooling to those without.

Yet there are many other factors that may determine whether those who got an extra year of schooling are able to make more money. Perhaps they are harder workers or more diligent and would have made more money than those without the extra year even if they did not stay in school.

These kinds of issues cause economists and other social science researchers to say “correlation doesn’t prove causation.”

%d bloggers like this: