August 30 2011

Krueger's Faulty Minimum-Wage Study

Carrie L. Lukas

After President Obama tapped Princeton University professor Alan Krueger to chair the Council of Economic Advisors, Washington Post blogger Ezra Klein wrote that Krueger "is arguably the leading labor economist in the country" and "known for bringing a near-superhuman rigor" to the subject.

One wonders how any economist would earn a "near-superhuman" superlative for their research. One can particularly wonder in the case of Professor Krueger, who is known for his 1990s academic research that attempted to prove that employee wages were not subject to the laws of supply and demand.

In 1993, Krueger and David Card published a study that examined employment statistics of fast-food restaurants in New Jersey and Pennsylvania following the Garden State's minimum wage hike. The authors reported that employment at fast-food chains in New Jersey increased by 13 percent compared to restaurants across the Delaware River in Pennsylvania. Clinton administration Labor secretary Robert Reich, Senator Kerry, Senator Kennedy, and other luminaries of the Left pointed to the study's findings to call for raising the minimum wage.

But analysis by independent researchers revealed the Krueger-Card report, which was based on a phone survey in which fast food restaurant managers and assistant managers were asked about their staff size, to be deeply flawed. The Employment Policy Institute analyzed the phone survey results against actual payroll data from the restaurants and concluded that "the data set used in the New Jersey study bears no relation to numbers drawn from payroll records of the restaurants the New Jersey study claims to cover."

According to the Krueger-Card data set, a Burger King in New Jersey went from zero to 29 full-timeworkers after the minimum wage hike between February and November of 1992, while a Wendy's in Pennsylvania reduced its workforce from 30 to zero full-time workers during the same nine-month period. Truly radical - indeed, implausible - shifts in a business's employment strategy. When compared to actual employment records, the EPI analysis found that in one third of the restaurants surveyed, Krueger-Card even got the direction of employment change (whether staff was cut of added) wrong.

A subsequent analysis published by the National Bureau of Economic Research based on payroll records of fast-food restaurants during the same period revealed that Garden State workers experienced a 4.6 percent decrease in employment after the minimum wage hike compared to the Pennsylvania control group. In other words, they confirmed the commonsense economic principle that when something costs more, people can afford less of it. Or in the case of a minimum-wage hike, when workers cost more to employ, businesses can afford to hire fewer workers.

If we weren't suffering 9 percent unemployment, it would be easy to enjoy the irony of the leader of the "party of science" choosing a man to lead the White House's "pivot" to jobs who, based on this faulty study, could be called a "supply and demand" denier.

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