Tuesday, August 30, 2011

Krueger to the CEA! Does this mean the minimum wage will be going up?

There’s been a big talent outflow from the Obama administration as various economists head back to their academic appointments. This included Christina Romer, Larry Summers, and now Austin Goolsbee. So, it’s great news that Goolsbee will be replaced as the chair of the Council of Economic Advisers by Princeton labor economics Alan Krueger.

Herb Stein, who chaired he council under Presidents Nixon and Ford, described the job as being one of articulating the president’s economic policies to the rest of the world, and to advocate on behalf of markets within the administration. Krueger is an exceptionally lucid writer and speaker on economic issues.

Krueger’s research has breadth, but he is known as one of the best applied labor economists in the field today. His work has been heavily involved with policy applications and also education.

Krueger’s most famous research was his 1994 American Economic Review paper with David Card on “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” It had not flashy theory or econometrics, but it was great, nevertheless. Early in 1992 Card and Krueger noted that the minimum wage in New Jersey was set to rise from $4.25 to $5.05, while across the river in Pennsylvania, the minimum wage would stay the same. They realized that this would create a wonderful “natural experiment”, where Pennsylvania would serve as a control group and New Jersey would be the treatment group. They surveyed fast food restaurants on both sides of the New Jersey-Pennsylvania border before and after the New Jersey minimum wage change, with some hope of estimating an elasticity of labor demand for the change of the minimum wage, but found that instead of the higher New Jersey minimum wage reducing employment, fast food jobs on that side of the border actually rose relative to what happened in Pennsylvania.

This was a fun result for many reasons. One, it’s a simple paper to understand, with a surprising result. Two, it was a fun question to ask, since it was something that almost everyone thought they were sure they knew they answer to. The workhorse model in almost every microeconomics textbook about messing with prices is that a higher minimum wage decreases employment! But here was a great example of where empirical work can challenge even the most widely accepted theoretical results.

Their result should not be interpreted to say that higher minimum wages would never have the predicted bad effects on employment, or even that there weren’t confounding effects or errors in measurement that might affect their results. Further, the mechanism by which increased costs of low wage labor lead to increased fast food employment aren’t particularly developed. However, this was strong evidence that increasing a low minimum wage by a bit wouldn’t have obvious terrible effects.

Short, accessible examples of some of Krueger’s writings can be found in his columns for the New York Times Economix blog and his Economic Scene columns. These make for nice class readings or discussion pieces.

1 comment:

Daniel said...

While I certainly enjoy reading research that appears to challenge existing paradigms, I'm deeply skeptical of Krueger's research on the minimum wage -- in particular the claim that employment in fast foods restaurants actually increased. See the Carpe Diem blog for several studies that challenged Krueger's findings. http://mjperry.blogspot.com/2011/08/obamas-chief-economic-advisor-made.html