The “Card-Krueger” Study Debunked

The audio is the later part of Larry Elder commenting on Jane Fonda going to Detroit to advocate a $12.00 minimum wage (DETROIT FREE PRESS). I have already posted quite a bit on this (see the section titled “Minimum Wage,” on my “ECON 101” Page). While sitting many other studies… I wanted to zero in on Larry discussing the David Card and Alan Krueger study. I have had it cited to me in discussion, so I wanted to have a post to link to to refute the study.

I wish to have the reader view what is working against the “Card-Krueger” study:

  • A majority of professional economists surveyed in Britain, Germany, Canada, Switzerland, and the United States agreed that minimum wage laws increase unemployment among low-skilled workers. Economists in France and Austria did not. However, the majority among Canadian economists was 85 percent and among American economists was 90 percent. Dozens of studies of the effects of minimum wages in the United States and dozens more studies of the effects of minimum wages in various countries in Europe, Latin America, the Caribbean, Indonesia, Canada, Australia, and New Zealand were reviewed in 2006 by two economists at the National Bureau of Economic Research. They concluded that, despite the various approaches and methods used in these studies, this literature as a whole was one “largely solidifying the conventional view that minimum wages reduce employment among low-skilled workers.”

Thomas Sowell, Basic Economics: A Common Sense Guide to the Economy, 4th Edition (New York, NY: Basic Books, 2011), 241. [Link to 5th edition]

  • Economists aren’t certain about many things, but on the minimum wage, nearly all of them (90 percent, according to one survey) believe that the case is open and shut. All else being equal, if you raise the price of something (for instance, labor), then the demand for it (for instance, by employers) will decline. That’s not just a theory; it’s a law.

James Glassman, “Don’t Raise the Minimum Wage,” Washington Post (Feb 24, 1998).

Here is the NEW YORK POST article the “Prince of Pico-Union” [Larry Elder] was referring to:

….Back in 1994, Princeton economists David Card and Alan Krueger claimed that they’d looked at Garden State fast-food outlets in the wake of the state’s 1992 minimum-wage hike — and found that employment increased relative to similar restaurants in next-door Pennsylvania.

But six years later, the Card & Krueger study was debunked in the same economics journal that originally published it.

The 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. The economists’ work provided for a compelling story: Telephoning restaurants in New Jersey and Pennsylvania before and after Jersey hiked its minimum wage, they reported an increase in employment.

But other economists were skeptical. After all, just over a decade earlier, a seven-volume report from Congress’ Minimum Wage Study Commission had 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 (where I’m now research director) collected actual payroll data from 25 percent of the franchised restaurant locations that Card and Krueger had telephoned — and found that the hard info had little resemblance to what the economists (actually, students working for them) had gathered via phone interviews that used an ambiguous set of questions.

The funky data gave the Princeton economists a picture of businesses making implausibly large changes in employment — from zero full-timers 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, and responsible outfits stopped relying on it. (Where media coverage of the Card-Krueger work once 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 realrestaurant payroll data, and published their findings in the same journal where the Card-Krueger study first ran.

Far from boosting employment, they found, the mandated wage increase in New Jersey decreased employment — just as economic theory would predict.

Yet Jersey advocates for a higher minimum wage still cite the study. The liberal think tank New Jersey Policy Perspective recently cited the study as “groundbreaking,” while Rob Duffey of the New Jersey Working Families Alliancewrote in an op-ed last monththat it is “the seminal report on the impact minimum-wage increases have on employment.”

Sadly, some journalists are also playing this game: In recent months, writers inBloomberg, TheChicago Tribune, TheWashington Post and TheNew York Timeshave also trotted out the study to support their points.

Perhaps this is understandable — proponents don’t have many good studies 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 after a minimum-wage hike.

[….]

Unemployment is already 27 percent among New Jersey teens, and 35.5 percent for black teens — and hiking the minimum wage, as the advocates so dishonestly propose, will only make it worse.

To be fair, Paul Krugman has changed his view (as he has gone more Left… if that were even possible) on this over the years. FORBES notes the change with an “old” Paul Krugman quote and then some later commentary after some new ones:

…So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces.

What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda–for arguing that living wages “can play an important role in reversing the 25-year decline in wages experienced by most working people in America” (as this book’s back cover has it). Clearly these advocates very much want to believe that the price of labor–unlike that of gasoline, or Manhattan apartments–can be set based on considerations of justice, not supply and demand, without unpleasant side effects.

[….]

Old Krugman said that Walmart paying higher wages might lead to less turnover, better morale and higher productivity. But only at Walmart because the operative part was “higher wages than other employers”. And that’s the one thing that a general rise in wages, for example a rise in the minimum wage, cannot accomplish.

New Krugman tells us that a rise in the minimum wage will accomplish exactly that thing that Old Krugman tells us is impossible.

Economics is, as they say, all about the incentives. And my best guess here is that the incentives that Krugman faces have changed. In the earlier period the people who patted him on the head and said that he was a good little economist (read for which “excellent economist, one of the best”) were people who were economists, people who actually understood the subject. Today the people who pat him on the head and insist he’s a great economist are the editorial team at the New York Times. Not known as a hotbed of economic knowledge but equally well known as a hotbed of liberal ideology as being rather more important than reality.

Ho hum, how the mighty are fallen and all that.

Besides Paul Kugman getting worked over by economist Pedro Schwartz, and Krugman is woefully wrong on what Keynsianism can do and not do, there are also some funny memes of him!

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