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Summary

  • Economic theory is clear: higher minimum wage leads to higher unemployment.
  • San Jose provides an interesting piece of counter-evidence.
  • Card and Krueger's work found the same in NJ and PA.

There are three types of economists, the old saw goes: those who can add and those who can't. In practice, there does seem to be two general approaches. One reaches its conclusions through deduction from first principles and the other through induction drawn from actual experience.

Deduced from the law of supply and demand, raising the price of a good reduces the demand. Therefore, it follows like night follows day that a higher minimum wage will reduce the demand for labor. Q.E.D. The Congressional Budget office reported a couple of months ago that hiking the minimum wage to $10.10 from $7.25 an hour would reduce employment by 500k while lifting 900k out of poverty.

The inductive process requires gathering some case studies. San Jose's experience is interesting and offers counter-evidence to the conclusion of the deductive method. As this Great Graphic from Eric Morath at The Wall Street Journal shows, San Jose approved a 25% hike in the November 2012, which went into effect in March 2013. In between the approval and implementation, hiring in the fast food industry, which has a high proportion (almost half) of minimum wage workers fell, as the critics warned.

It subsequently recovered, and fast food hiring in San Jose has generally done better than the neighboring cities that have a lower minimum wage. No case study is ever conclusive and there are some studies that are based on national level data and state variation over time (and assumes the changes are all a function of the minimum wage level), that disagree. Nevertheless, the San Jose experience is essentially the same as Card and Krueger found in their 1994 study of Pennsylvania and New Jersey fast-food industry. These economists looked at a 1992 minimum wage hike to $5.05 from $4.25 an hour in New Jersey, and reviewed the employment records of over 400 fast-good restaurants in western New Jersey and eastern Pennsylvania. They found no evidence that the minimum wage hike adversely impacted fast food employment in New Jersey.

Source: Great Graphic - Case Study: San Jose Hiked Minimum Wage