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White Castle Wars?

Food fights and the science of the minimum wage.

When New Jersey decided to hike its minimum wage by some 20 percent in 1991, David Card and Alan Krueger recognized a tremendous opportunity to test how the minimum wage affects employment. You see, the neighboring state of Pennsylvania—which was experiencing the same economic problems as New Jersey—had not voted to raise its own minimum wage. That meant that Card and Krueger could use Pennsylvania as a control group in what economists call a natural experiment. Since the two states were so similar, Card and Krueger reasoned, they should be able to assess how New Jersey’s minimum wage law affects employment, by finding out whether New Jersey’s employment rates dropped more than Pennsylvania’s.

But what particular piece of New Jersey’s economy should they target to find out how the minimum wage law would affect employment? Where, in other words, could they find an industry relying on minimum wage employees, and one, moreover, that would look the same across both sides of the New Jersey/Pennsylvania border?

Card and Krueger realized it was time to shop for fast food joints.

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Fast food restaurants like McDonald’s, KFC and White Castle are practically rights of passage for teenagers gaining experience in the workplace. Fast food restaurants are also well-known for following minimum wage laws. Better yet, the fast food chains in New Jersey are pretty much the same ones that occur across the border in Pennsylvania—Arby’s, …check; Mickey D’s, …check.

So Card and Krueger began calling up a random sample of fast food places in New Jersey and eastern Pennsylvania, and asking the managers how many employees they had and what they paid them in hourly wages. (Another advantage in studying fast food restaurants, as Card and Krueger recognized, was that such establishments don’t allow customers to tip employees, meaning that when an employee earns the minimum wage, that is the only money they make on the job.)

Then, after collecting these employment data, Card and Krueger waited for the New Jersey law to come into effect. Finally, after allowing time for restaurants to adapt to the new minimum wage, they resurveyed restaurants in both states, and repeated their previous questions.

If the standard economic theory was correct, then when Card and Krueger began conducting their follow-up calls, they should have discovered that New Jersey restaurants were reducing their workforce. More specifically, they should have found a relative decline in the New Jersey fast food workforce, compared to that of neighboring Pennsylvania. (That is to say, with both economies shrinking, New Jersey’s fast food employment should be shrinking more than Pennsylvania’s.)

But that is not what their follow-up survey showed. In fact, according to Card and Krueger’s data, fast food employment in New Jersey grew as compared with that in Pennsylvania. Despite experiencing both a recession and a hike in the minimum wage, New Jersey fast food restaurants reported adding an average of 1/2 an employee—only a small increase, admittedly, but given the doom and gloom predicted by opponents of the minimum wage, an impressive increase nonetheless. Moreover, at the same time, fast food restaurants in Pennsylvania—still able to pay their employees the old wage of $4.25 per hour—actually reduced their work force by more than 2 employees per restaurant. Summarizing their results, Card and Krueger concluded that “the increase in the minimum wage increased employment.”         

Open Mindedness and Scientific Falsification

In his now infamous roast of President George W. Bush at the White House Correspondent’s Dinner, comedian Stephen Colbert mock-praised the President for his steadfastness: “He believes the same thing Wednesday that he believed on Monday, no matter what happened Tuesday,” Colbert proclaimed. “Events can change; this man’s beliefs never will.”

This line is funny, of course, at least in part because it feels so true about so many politicians—W. merely being one of the more pronounced examples. Wedded as they are to ideology, beholden as they are to special interests, politicians rarely seem to change their opinion about the world, even when the facts belie their beliefs. And in at least one respect, who can blame them? When they do change their beliefs, they are defamed as flip-floppers! Scientists, on the other hand, aren’t expected to hold onto their beliefs from Monday to Wednesday, much less from year to year. Instead, they are expected to go wherever the truth lies. They are encouraged to abandon their beliefs once new data show their beliefs to have been false.

This is not to suggest that scientists are expected to abandon their theories at the first whiff of trouble.

When Card and Krueger published their fast food data, they were challenging a core part of neoclassical economic theory. Economics has probably gained more prestige than other social science disciplines because its practitioners have been more likely to come to consensus about their theories than other sorts of social scientists. The joke among psychologists, for example, is that their theories are like toothbrushes—everyone wants one of their own, and is disgusted at the thought of using someone else’s.

Given the strong consensus among economists that an increase in the minimum wage should, in fact, reduce fast food employment, Card and Krueger’s results threatened the core of that noble discipline. What happens when disciplines are challenged in such a way? How did the economic community respond when Card and Krueger challenged their theories about the harms New Jersey was supposed to have bestowed upon these teens?

In with the Old, Out with the New?

When Card and Krueger began questioning the standard economic theory of the minimum wage, they didn’t rely solely on their New Jersey/Pennsylvania study to shake up economic dogma. They conducted several other natural experiments, all of which pointed in the same basic direction as the New Jersey study. In addition, they had plausible new theories with which to explain their results. As they discuss in their book, Myth and Measurement, the standard economic theory of the minimum wage relies on a number of assumptions: that firms have no discretion in choosing the wages that are paid to their workers, for starters; that employees are perfectly informed about wages at other firms; and that these employees will readily move to new jobs if they can thereby increase their take-home pay. The standard view also assumes that higher wages have no effect on worker productivity or turnover.

To overturn this theory, then, Card and Krueger didn’t need to develop an entirely new theory. They just needed to point out that these assumptions were all just that—assumptions, and therefore, if employers and employees didn’t behave in the perfectly rational and informed manner portrayed by standard economic theory, then the minimum wage market wouldn’t work the way that theory had predicted.

Armed with their data, and with a plausible explanation for their findings, Card and Krueger seemed poised to initiate a paradigm shift in economic thinking. But that shift has not yet occurred. Before Card and Krueger’s research, 83 percent of economists believed that minimum wage increases would reduce employment among young unskilled workers—hardly a unanimous verdict, but about as close as social science comes to a consensus on almost any issue. A half dozen years after Card and Krueger study, that 83 percent number had declined only a small amount, to 74 percent. Not exactly a paradigm shift, from anyone’s perspective.

Indeed, some of the responses to Card and Krueger’s work have been outright contemptuous. Writing in The Cato Journal, the economists Douglas Adie and Lowell Gallaway accused Card and Krueger of “hubris.” They accused Card and Krueger of sloppy research measurement. They even mocked Card and Krueger for relying on telephone surveys to measure employment, when they could have used much better measures, and accused Card and Krueger of “cherry picking” research studies to back up their own biases.

Other economists responded to Card and Krueger’s work by accusing them of focusing too narrowly on fast food employment, and therefore not capturing any fundamental truth about the minimum wage. In fact, some critics claimed that Card and Krueger had merely confirmed what is known as the “hungry teenager theory”. Teenagers, according to this theory, enjoy eating cheeseburgers. Pay them a little more money, therefore, and they will simply spend that money on fast food. “The minimum wage,” economist John Kennen writes, “takes money from people who would buy yachts and gives it to people who would buy cheeseburgers (with a bonus effect if yacht-building workers are laid off and buy more fast food to save money).” By this reasoning, increase the minimum wage, and everyone will lose out except for companies—video arcades, say, and fast food restaurants—that cater to the desires of unskilled teens.

Criticizing Card and Krueger even more aggressively was Michigan State economist David Neumark and his colleague William Wascher. Concerned about the telephone survey Card and Krueger conducted, they gathered data from actual payroll records. In other words, they didn’t call up the manager of Burger King and ask him how many people he was employing that week, but instead looked at the actual number of people who officially got paid at that restaurant.

Neumark and Wascher’s findings strongly contradicted Card and Krueger’s analyses: Where Card and Krueger had discovered an increase in employment in New Jersey relative to Pennsylvania, Neumark and Wascher found a 4 percent decrease in employment.

Are Card and Krueger acting futilely in challenging orthodox theories?

As I have posted previously in this blog, I truly believe that science, and the scientific method more specifically, hold the potential to reduce political partisanship and improve public policy. But for science to bring about these noble goals, scientists need to live up to their own ideals. Unfortunately, scientists are all too human, and often have difficulty viewing scientific evidence objectively. I expect that Card and Kreuger were too quick to believe their own results, and that their opponents were too quick to reject them.  Truth doesn’t always come nicely packaged.  Social science truths, in particular, or often quite messy. 

So where do we go from here?

How about starting with a simple dose of modesty. Maybe the effects of the minimum wage on employment aren’t as straightforward, nor as dramatic, as either opponents or proponents believe.  Maybe being humble, about our ability (or lack thereof) to know the truth will enable us to talk with each other, more open mindedly, before resorting to acrimony.

Peter Ubel, M.D., author of Critical Decisions and Free Market Madness, is a physician, behavioral scientist, and Professor of Business and Public Policy at Duke University.

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