Wage and Unemployment Essay

In the seminal paper titled ‘Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania’, David Card and Alan B. Krueger examine the effect of an increase in minimum wage on the labor market. The paper explores the employment outcomes after the minimum wage in New Jersey was increased from $4.25 to $5.05 per hour in April 1992. In order to make a comparative analysis, the authors employ a matched study design whereby they compare the labor market in New Jersey to the Pennsylvania labor market, which had not changed the minimum wage. The objective of the study was to identify variations in the employment of fast food restaurants that could be attributable to the minimum wage increase.

To meet the study objective, the authors examine similar restaurants in Pennsylvania, which is adjacent to New Jersey and assumed to have a comparable economic environment. Consequently, a key assumption in the study is that both states have a similar temporal effect when there is no change in the minimum wage. The study effectively deferred to the Pennsylvania fast food labor market as a control group to establish a baseline against which they would be able to identify deviations in the New Jersey fast food labor market that directly resulted from changes to the minimum wage. The minimum wage increment was the treatment while the New Jersey fast food labor market was the treated group.

The study collected wage and employment data through phone interviews as well as face-to-face interviews from restaurants in both states, two months before the policy change as well as eight months after the policy implementation. To determine the impact of the minimum wage increment, the study examines the difference in employment between the treated group (NJ) and the control group (PA), as well as the difference in employment in NJ before and after the change in minimum wage. The study then applies regression analysis to identify the difference-in-differences estimator for the difference between the average change in NJ employment and the average change in PA employment.

The results of the study indicated that full time employment (FTE) decreased by 2.16 in and increased marginally by 0.59 in NJ, which is counterintuitive against the standard labor-demand model. The authors therefore conclude that the evidence presented by the study suggests that an increase in the minimum wage in NJ does not reduce employment when compared to PA. However, there are a few areas in the study’s methodology that may have resulted in potential bias.

First, the study design applied did not utilize random selection in the sampling process and therefore the study did not control for extraneous variables that may have also had an impact on the labor market in either states. There was also a difference in the response rate since some of the sampled restaurants that responded before the policy change failed to respond after the policy change. This implies that the study may have been predisposed to sampling disparities and inadequacies that may have potentially skewed the findings. The sampling disparity may also have led to potential bias through unobservable heterogeneity, with the policy changes also having endogenous effects. Finally, considering that the employment data was collected through telephone interviews, it is likely that it contained measurement errors, such as inaccurate employment estimations.

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