Professional Documents
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Card Krueger AER 1994
Card Krueger AER 1994
Card Krueger AER 1994
and Pennsylvania
Author(s): David Card and Alan B. Krueger
Source: The American Economic Review, Vol. 84, No. 4, (Sep., 1994), pp. 772-793
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2118030
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MinimumWages and Employment:
A Case Study of the Fast-Food Industry
in New Jersey and Pennsylvania
On April 1, 1992, New Jersey's minimum wage rose from $4.25 to $5.05 per
hour. To evaluate the impact of the law we surveyed 410 fast-food restaurantsin
New Jersey and eastern Pennsylvania before and after the rise. Comparisons of
employment growth at stores in New Jersey and Pennsylvania (where the
minimum wage was constant) provide simple estimates of the effect of the higher
minimum wage. We also compare employment changes at stores in New Jersey
that were initially paying high wages (above $5) to the changes at lower-wage
stores. We find no indication that the rise in the minimum wage reduced
employment. (JEL J30, J23)
the New Jersey law and our data set are and 1991 to measures of the relative mini-
also significant.First, the rise in the mini- mum wage in each state.
mumwage occurredduringa recession.The
increase had been legislated two years ear- I. TheNewJerseyLaw
lier when the state economy was relatively
healthy. By the time of the actual increase, A bill signed into law in November 1989
the unemploymentrate in New Jersey had raisedthe federalminimumwage from$3.35
risen substantiallyand last-minutepolitical per hour to $3.80 effective April 1, 1990,
action almost succeeded in reducing the with a furtherincreaseto $4.25 per hour on
minimum-wageincrease. It is unlikely that April 1, 1991. In early 1990 the New Jersey
the effects of the higher minimum wage legislaturewent one step further, enacting
were obscured by a rising tide of general parallelincreasesin the state minimumwage
economicconditions. for 1990 and 1991 and an increase to $5.05
Second, New Jersey is a relativelysmall per hour effectiveApril 1, 1992. The sched-
state with an economythat is closely linked uled 1992 increase gave New Jersey the
to nearby states. We believe that a control highest state minimumwage in the country
groupof fast-foodstores in easternPennsyl- and was stronglyopposed by business lead-
vania forms a naturalbasis for comparison ers in the state (see Bureau of National
with the experiencesof restaurantsin New Affairs, Daily Labor Report, 5 May 1990).
Jersey.Wage variationacross stores in New In the two years between passage of the
Jersey, however, allows us to compare the $5.05 minimumwage and its effective date,
experiences of high-wage and low-wage New Jersey's economy slipped into reces-
stores within New Jersey and to test the sion. Concerned with the potentially ad-
validity of the Pennsylvaniacontrol group. verse impactof a higherminimumwage, the
Moreover, since seasonal patterns of em- state legislature voted in March 1992 to
ployment are similar in New Jersey and phase in the 80-centincreaseover two years.
eastern Pennsylvania, as well as across The vote fell just short of the margin re-
high- and low-wagestores within New Jer- quiredto overridea gubernatorialveto, and
sey, our comparative methodology effec- the Governorallowed the $5.05 rate to go
tively "differences out" any seasonal em- into effect on April 1 before vetoing the
ploymenteffects. two-steplegislation.Facedwith the prospect
Third,we successfullyfollowednearly100 of havingto roll back wages for minimum-
percent of stores from a first wave of inter- wage earners, the legislature dropped the
views conductedjust before the rise in the issue. Despite a strong last-minute chal-
minimum wage (in February and March lenge, the $5.05 minimumrate took effect
1992) to a second wave conducted 7-8 as originallyplanned.
months after (in November and December
1992). We have complete information on II. SampleDesignand Evaluation
store closings and take account of employ-
ment changes at the closed stores in our Early in 1992 we decided to evaluate the
analyses.We therefore measure the overall impendingincreasein the New Jerseymini-
effect of the minimum wage on average mum wage by surveying fast-food restau-
employment, and not simply its effect on rants in New Jersey and eastern Pennsylva-
survivingestablishments. nia.2 Our choice of the fast-food industry
- Our analysis of employment trends at was drivenby severalfactors.First,fast-food
stores that were open for business before stores are a leading employer of low-wage
the increase in the minimumwage ignores workers:in 1987,franchisedrestaurantsem-
any potential effect of minimumwages on
the rate of new store openings. To assess
the likely magnitudeof this effect we relate
state-specificgrowthrates in the numberof 2At the time we were uncertain whether the $5.05
McDonald'sfast-food outlets between 1986 rate would go into effect or be overridden.
774 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
Stores in:
All NJ PA
Wave 1, February 15-March 4, 1992:
aStores with working phone numbers only; 29 stores in original sample frame had
disconnected phone numbers.
bIncludes one store closed because of highway construction and one store closed
because of a fire.
CIncludes 371 phone interviews and 28 personal interviews of stores that refused an
initial request for a phone interview.
ployed 25 percent of all workers in the rants in New Jersey and eastern Pennsylva-
restaurantindustry(see U.S. Departmentof nia from the Burger King, KFC, Wendy's,
Commerce,1990table 13). Second,fast-food and Roy Rogers chains.4The first wave of
restaurantscomplywith minimum-wagereg- the survey was conducted by telephone in
ulations and would be expected to raise late Februaryand early March1992, a little
wages in response to a rise in the minimum over a month before the scheduledincrease
wage. Third, the job requirements and in New Jersey'sminimumwage. The survey
products of fast-food restaurantsare rela- included questionson employment,starting
tively homogeneous,makingit easier to ob- wages, prices, and other store characteris-
tain reliable measures of employment, tics.5
wages, and product prices. The absence of Table 1 shows that 473 stores in our sam-
tips greatly simplifies the measurementof ple frame had workingtelephone numbers
wages in the industry.Fourth,it is relatively when we tried to reach them in February-
easy to construct a sample frame of fran- March 1992. Restaurants were called as
chised restaurants.Finally, past experience many as nine times to elicit a response.We
(Katz and Krueger, 1992) suggested that obtained completed interviews(with some
fast-food restaurants have high response item nonresponse)from 410 of the restau-
rates to telephone surveys.3 rants, for an overall response rate of 87
Based on these considerationswe con- percent. The response rate was higher in
structeda sample frame of fast-foodrestau- New Jersey (91 percent) than in Pennsylva-
nia (72.5 percent) because our interviewer nentlyclosed stores but is treated as missing
made fewer call-backsto nonrespondentsin for the temporarily closed stores. (Full-
Pennsylvania.6In the analysisbelow we in- time-equivalent[FTE] employmentwas cal-
vestigate possible biases associatedwith the culated as the numberof full-time workers
degree of difficultyin obtaining the first- [including managers] plus 0.5 times the
wave interview. number of part-timeworkers.)8Means are
The second wave of the surveywas con- presented separatelyfor stores in New Jer-
ducted in November and December 1992, sey and Pennsylvania,along with t statistics
about eight monthsafter the minimum-wage for the null hypothesisthat the means are
increase. Only the 410 stores that re- equal in the two states.
sponded in the first wave were contactedin Rows la-e show the distributionof stores
the second roundof interviews.We success- by chain and ownership status (company-
fully interviewed371 (90 percent) of these owned versus franchisee-owned). The
stores by phone in November1992. Because Burger King, Roy Rogers, and Wendy's
of a concernthat nonrespondingrestaurants stores in our sample have similar average
might have closed, we hired an interviewer food prices, store hours, and employment
to drive to each of the 39 nonrespondents levels. The KFC stores are smaller and are
and determine whether the store was still open for fewer hours. They also offer a
open, and to conducta personalinterviewif more expensivemain course than stores in
possible.The interviewerdiscoveredthat six the other chains (chickenvs. hamburgers).
restaurantswere permanentlyclosed, two In wave 1, averageemploymentwas 23.3
were temporarilyclosed (one because of a full-time equivalent workers per store in
fire, one because of road construction),and Pennsylvania,comparedwith an averageof
two were underrenovation.7Of the 29 stores 20.4 in New Jersey. Starting wages were
open for business, all but one granted a very similaramong stores in the two states,
request for a personal interview.As a re- althoughthe averageprice of a "full meal"
sult, we have second-wave interview data (medium soda, small fries, and an entree)
for 99.8 percent of the restaurantsthat re- was significantlyhigherin New Jersey.There
sponded in the first wave of the survey,and were no significantcross-statedifferencesin
informationon closure status for 100 per- average hours of operation, the fraction of
cent of the sample. full-timeworkers,or the prevalenceof bonus
Table 2 presents the means for several programsto recruitnew workers.9
key variablesin our data set, averagedover The average starting wage at fast-food
the subset of nonmissingresponsesfor each restaurantsin New Jersey increased by 10
variable.In constructingthe means, employ- percent following the rise in the minimum
ment in wave 2 is set to 0 for the perma- wage. Further insight into this change is
providedin Figure 1, which shows the dis-
tributionsof startingwages in the two states
before and after the rise. In wave 1, the
distributionsin New Jersey and Pennsylva-
6Responserates per call-backwere almostidentical nia were very similar.By wave 2 virtuallyall
in the two states. Among New Jersey stores, 44.5
percent respondedon the first call, and 72.0 percent
respondedafter at most two call-backs.Among Penn-
sylvaniastores42.2 percentrespondedon the firstcall, 8We discussthe sensitivityof our resultsto alterna-
and 71.6 percent responded after at most two call- tive assumptionson the measurementof employment
backs. in Section III-C.
7Asof April 1993 the store closed because of road 9These programsoffer current employees a cash
constructionand one of the stores closed for renova- "bounty"for recruitingany new employee who stays
tion had reopened.The store closed by fire was open on the job for a minimumperiod of time. Typical
when our telephone interviewercalled in November bountiesare $50-$75. Recruitingprogramsthat award
1992 but refused the interview.By the time of the the recruiterwith an "employeeof the month"desig-
follow-uppersonalinterviewa mall fire had closed the nationor other noncashbonusesare excludedfromour
store. tabulations.
776 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
TABLE2-MEANS OFKEYVARIABLES
Stores in:
Variable NJ PA ta
2. Means in Wave 1:
3. Means in Wave 2:
Notes: See text for definitions. Standard errors are given in parentheses.
aTest of equality of means in New Jersey and Pennsylvania.
restaurants in New Jersey that had been Despite the increase in wages, full-time-
paying less than $5.05 per hour reported a equivalent employment increased in New
startingwage equal to the new rate. Inter- Jersey relative to Pennsylvania.Whereas
estingly,the minimum-wageincreasehad no New Jersey stores were initially smaller,
apparent"spillover"on higher-wagerestau- employment gains in New Jersey coupled
rantsin the state:the mean percentagewage with losses in Pennsylvanialed to a small
change for these stores was -3.1 percent. and statistically insignificant interstate
VOL. 84 NO. 4 CARD AND KRUEGER: MINIMUM WAGEAND EMPLOYMENT 777
February 1992
35-
30-
25 -
15-
0.
10
5-
0 . 6L.
4.25 4.35 4.45 4.55 4.65 4.75 4.85 4.95 5.05 5.15 5.25 5.35 5.45 5.55
Wage Range
November 19 P9y2
80- -
90
70
30-
0-
10
4.2 5 4.3 5 4.4 5 4.5 5 4.6 5 4.7 5 4.8 5 4.9 5 5.0 5 5.1 5 5.2 5 5.3 5 5.4 5 5.5 5
Wage Range
-
New Jersey Pennsylvania
FIGURE 1. DISTRIBUTIONOF STARTINGWAGE RATES
778 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
difference in wave 2. Only two other vari- our survey. We present data by state in
ables show a relativechange between waves columns (i) and (ii), and for stores in New
1 and 2: the fractionof full-time employees Jersey classified by whether the starting
and the price of a meal. Both variables wage in wave 1 was exactly $4.25 per hour
increasedin New Jerseyrelativeto Pennsyl- [column (iv)] between $4.26 and $4.99 per
vania. hour [column(v)] or $5.00 or more per hour
We can assess the reliabilityof our survey [column(vi)]. We also show the differences
questionnaire by comparingthe responses in averageemploymentbetween New Jersey
of 11 stores that were inadvertentlyinter- and Pennsylvaniastores [column (iii)] and
viewed twice in the firstwave of the survey.10 between stores in the various wage ranges
Assuming that measurementerrors in the in New Jersey[columns(vii)-(viii)].
two interviews are independent of each Row 3 of the table presents the changes
other and independentof the true variable, in average employment between waves 1
the correlationbetween responses gives an and 2. These entries are simply the differ-
estimate of the "reliabilityratio" (the ratio ences between the averages for the two
of the variance of the signal to the com- waves (i.e., row 2 minus row 1). An alterna-
bined varianceof the signal and noise). The tive estimate of the change is presented in
estimated reliability ratios are fairly high, row 4: here we have computed the change
ranging from 0.70 for full-time equivalent in employmentover the subsampleof stores
employmentto 0.98 for the priceof a meal.1" that reportedvalid employmentdata in both
We have also checkedwhetherstoreswith waves. We refer to this group of stores as
missing data for any key variables are dif- the balancedsubsample.Finally,row 5 pre-
ferent from restaurantswith complete re- sents the averagechange in employmentin
sponses. We find that stores with missing the balanced subsample, treating wave-2
data on employment,wages, or prices are employmentat the four temporarilyclosed
similarin other respectsto stores with com- stores as zero, ratherthan as missing.
plete data. There is a significantsize differ- As noted in Table 2, New Jersey stores
ential associatedwith the likelihood of the were initiallysmaller than their Pennsylva-
store closing after wave 1. The six stores nia counterpartsbut grew relativeto Penn-
that closed were smaller than other stores sylvania stores after the rise in the mini-
(with an average employmentof only 12.4 mum wage. The relative gain (the "dif-
full-time-equivalentemployees in wave 1).12 ference in differences" of the changes in
employment)is 2.76 FTE employees (or 13
III. Employment Effects of the percent), with a t statistic of 2.03. Inspec-
Minimum-Wage Increase tion of the averagesin rows 4 and 5 shows
that the relative change between New Jer-
A. Differences in Differences sey and Pennsylvaniastores is virtuallyiden-
tical when the analysis is restricted to the
Table 3 summarizes the levels and balanced subsample,and it is only slightly
changes in averageemploymentper store in smaller when wave-2 employment at the
temporarilyclosed stores is treated as zero.
Within New Jersey, employment ex-
10These restaurants were interviewed twice because panded at the low-wagestores (those paying
their phone numbers appeared in more than one phone $4.25 per hour in wave 1) and contractedat
book, and neither the interviewer nor the respondent
noticed that they were previously interviewed. the high-wagestores (those paying $5.00 or
"Similar reliability ratios for very similar questions more per hour). Indeed, the averagechange
were obtained by Katz and Krueger (1992). in employment at the high-wage stores
12A probit analysis of the probability of closure (- 2.16 FTE employees) is almost identical
shows that the initial size of the store is a significant
predictor of closure. The level of starting wages has a
to the change among Pennsylvaniastores
numerically small and statistically insignificant coeffi- (- 2.28 FTE employees). Since high-wage
cient in the probit model. stores in New Jersey should have been
VOL. 84 NO. 4 CARD AND KRUEGER: MINIMUM WAGEAND EMPLOYMENT 779
Model
Independent variable (i) (ii) (iii) (iv) (v)
Notes: Standard errors are given in parentheses. The sample consists of 357 stores
with available data on employment and starting wages in waves 1 and 2. The
dependent variable in all models is change in FTE employment. The mean and
standard deviation of the dependent variable are -0.237 and 8.825, respectively. All
models include an unrestricted constant (not reported).
aProportional increase in starting wage necessary to raise starting wage to new
minimum rate. For stores in Pennsylvania the wage gap is 0.
bThree dummy variables for chain type and whether or not the store is company-
owned are included.
CDummy variables for two regions of New Jersey and two regions of eastern
Pennsylvania are included.
dProbability value of joint F test for exclusion of all control variables.
VOL. 84 NO. 4 CARD AND KRUEGER: MINIMUM WAGEAND EMPLOYMENT 781
ties similarto the elasticitiesimpliedby the little effect on the models for the level of
estimatesin Table 4 (see below). employmentbut yield slightlysmaller point
estimates in the proportional-employment-
C. Specification Tests change models.
In row 6 we present estimates obtained
The results in Tables 3 and 4 seem to from a subsamplethat excludes35 stores in
contradict the standard prediction that a towns along the New Jersey shore. The ex-
rise in the minimumwage will reduce em- clusion of these stores, which may have a
ployment.Table 5 presentssome alternative differentseasonal pattern than other stores
specificationsthat probe the robustnessof in our sample, leads to slightlylargermini-
this conclusion. For completeness, we re- mum-wageeffects.A similarfindingemerges
port estimates of models for the change in in row 7 when we add a set of dummy
employment[columns(i) and (ii)] and esti- variables that indicate the week of the
mates of models for the proportionalchange wave-2 interview.20
in employment[columns(iii) and (iv)].'8The As noted earlier,we made an extraeffort
first row of the table reproducesthe "base to obtain responsesfrom New Jersey stores
specification"from columns (ii) and (iv) of in the firstwave of our survey.The fraction
Table 4. (Note that these models include of stores called three or more times to ob-
chain dummiesand a dummyfor company- tain an interviewwas higher in New Jersey
owned stores). Row 2 presents an alterna- than in Pennsylvania.To check the sensitiv-
tive set of estimates when we set wave-2 ity of our results to this samplingfeature,
employmentat the temporarilyclosed stores we reestimatedour models on a subsample
to 0 (expandingour sample size by 4). This that excludes any stores that were called
change has a small attenuatingeffect on the back more than twice. The results,in row 8,
coefficientof the New Jersey dummy(since are very similarto the base specification.
all four stores are in New Jersey) but less Row 9 presents weighted estimation re-
effect on the GAP coefficient(since the size sults for the proportional-employment-
of GAP is uncorrelatedwith the probability change models, using as weights the initial
of a temporaryclosure within New Jersey). levels of employmentin each store. Since
Rows 3-5 present estimation results us- the proportionalchange in averageemploy-
ing alternativemeasures of full-time-equiv- ment is an employment-weightedaverageof
alent employment.In row 3, employmentis the proportionalchanges at each store, a
redefined to exclude managementemploy- weightedversionof the proportional-change
ees. This change has no effect relative to model should give rise to elasticities that
the base specification.In rows 4 and 5, we are similarto the implied elasticitiesarising
include managers in FTE employmentbut from the levels models. Consistentwith this
reweightpart-timeworkersas either 40 per- expectation, the weighted estimates are
cent or 60 percent of full-timeworkers(in- larger than the unweighted estimates, and
stead of 50 percent).'9These changes have significantlydifferentfrom 0 at conventional
levels. The weighted estimate of the New
Jersey dummy (0.13) implies a 13-percent
relativeincreasein New Jerseyemployment
18The proportionalchange in employmentis de- -the same proportionalemploymenteffect
fined as the change in employmentdivided by the implied by the simple difference-in-dif-
averagelevel of employmentin waves 1 and 2. This ferences in Table 3. Similarly,the weighted
resultsin very similarcoefficientsbut smallerstandard estimate of the GAP
errors than the alternativeof dividingby wave-1 em- coefficient in the
ployment. For closed stores we set the proportional proportional-change model (0.81) is close to
changein employmentto -1.
1Analysis of the 1991 CurrentPopulationSurvey
revealsthat part-timeworkersin the restaurantindus-
try work about 46 percent as many hours as full-time
workers.Katz and Krueger(1992)reportthat the ratio 20We also added dummiesfor the interviewdates
of part-timeworkers'hoursto full-timeworkers'hours for the wave-1survey,but these were insignificantand
in the fast-foodindustryis 0.57. did not changethe estimatedminimum-wage effects.
VOL. 84 NO. 4 CARD AND KRUEGER: MINIMUM WAGEAND EMPLOYMENT 783
Proportional change
Change in employment in employment
NJ dummy Gap measure NJ dummy Gap measure
Specification (i) (ii) (iii) (iv)
Notes: Standard errors are given in parentheses. Entries represent estimated coefficient of New Jersey dummy
[columns (i) and (iii)] or initial wage gap [columns (ii) and (iv)] in regression models for the change in employment
or the percentage change in employment. All models also include chain dummies and an indicator for company-
owned stores.
aWave-2 employment at four temporarily closed stores is set to 0 (rather than missing).
bFull-time equivalent employment excludes managers and assistant managers.
CFull-time equivalent employment equals number of managers, assistant managers, and full-time nonmanage-
ment workers, plus 0.4 times the number of part-time nonmanagement workers.
dFull-time equivalent employment equals number of managers, assistant managers, and full-time nonmanage-
ment workers, plus 0.6 times the number of part-time nonmanagement workers.
eSample excludes 35 stores located in towns along the New Jersey shore.
fModels include three dummy variables identifying week of wave-2 interview in November-December 1992.
gSample excludes 70 stores (69 in New Jersey) that were contacted three or more times before obtaining the
wave-1 interview.
hRegression model is estimated by weighted least squares, using employment in wave 1 as a weight.
'Subsample of 51 stores in towns around Newark.
J Subsample of 54 stores in town around Camden.
k Subsample of Pennsylvania stores only. Wage gap is defined as percentage increase in starting wage necessary
to raise starting wage to $5.05.
784 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
Regression of change in
Mean change in outcome outcome variable on:
NJ PA NJ - PA NJ dummy Wage gapa Wage gapb
Outcome measure (i) (ii) (iii) (iv) (v) (vi)
Store Characteristics:
1. Fraction full-time workersc (percentage) 2.64 -4.65 7.29 7.30 33.64 20.28
(1.71) (3.80) (4.17) (3.96) (20.95) (24.34)
2. Number of hours open per weekday -0.00 0.11 -0.11 -0.11 -0.24 0.04
(0.06) (0.08) (0.10) (0.12) (0.65) (0.76)
3. Number of cash registers - 0.04 0.13 -0.17 -0.18 -0.31 0.29
(0.04) (0.10) (0.11) (0.10) (0.53) (0.62)
4. Number of cash registers open -0.03 -0.20 0.17 0.17 0.15 -0.47
at 11:00 A.M. (0.05) (0.08) (0.10) (0.12) (0.62) (0.74)
5. Low-price meal program (percentage) - 4.67 - 1.28 - 3.39 - 2.01 -30.31 - 33.15
(2.65) (3.86) (4.68) (5.63) (29.80) (35.04)
6. Free meal program (percentage) 8.41 6.41 2.00 0.49 29.90 36.91
(2.17) (3.33) (3.97) (4.50) (23.75) (27.90)
7. Combination of low-price and free -4.04 -5.13 1.09 1.20 -11.87 -19.19
meals (percentage) (1.98) (3.11) (3.69) (4.32) (22.87) (26.81)
WageProfile:
8. Time to first raise (weeks) 3.77 1.26 2.51 2.21 4.02 -5.10
(0.89) (1.97) (2.16) (2.03) (10.81) (12.74)
9. Usual amount of first raise (cents) -0.01 -0.02 0.01 0.01 0.03 0.03
(0.01) (0.02) (0.02) (0.02) (0.11) (0.11)
10. Slope of wage profile (percent -0.10 -0.11 0.01 0.01 -0.09 -0.08
per week) (0.04) (0.09) (0.10) (0.10) (0.56) (0.57)
Notes: Entries in columns (i) and (ii) represent mean changes in the outcome variable indicated by the row heading
for stores with available data on the outcome in waves 1 and 2. Entries in columns (iv)-(vi) represent estimated
regression coefficients of indicated variable (NJ dummy or initial wage gap) in models for the change in the
outcome variable. Regression models include chain dummies and an indicator for company-owned stores.
aThe wage gap is the proportional increase in starting wage necessary to raise the wage to the new minimum
rate. For stores in Pennsylvania, the wage gap is zero.
bModels in column (vi) include dummies for two regions of New Jersey and two regions of eastern Pennsylvania.
CFractionof part-time employees in total full-time-equivalent employment.
workers exactly the same starting wage in workers are more productive (but equally
wave 1 of our survey.23This suggests either paid), there may be a second reason for
that full-time workershave the same skills stores to substitute full-time workers for
as part-timeworkersor that equityconcerns part-timeworkers;namely,a minimum-wage
lead restaurantsto pay equal wages for un- increaseenablesthe industryto attractmore
equally productive workers. If full-time full-time workers, and stores would natu-
rally want to hire a greater proportionof
full-time workers if they are more produc-
tive.
231n the other 19 percent of stores, full-time workers Row 1 of Table 6 presents the mean
are paid more, typically 10 percent more. changesin the proportionof full-timework-
786 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
of time before a normalwage increase and factor cost. The averagerestaurantin New
the usual amount of such raises. In rows 8 Jersey initially paid about half its workers
and 9 we report the average changes be- less than the new minimumwage. If wages
tween waves 1 and 2 for these two variables, rose by roughly15 percent for these work-
as well as regressioncoefficientsfrom mod- ers, and if labor's share of total costs is 30
els that include the wage-gapvariable.25 Al- percent, we would expect prices to rise by
though the average time to the first pay about 2.2 percent (= 0.15 x 0.5 x 0.3) due to
raise increasedby 2.5 weeks in New Jersey the minimum-wagerise.27
relative to Pennsylvania,the increase is not In each wave of our survey we asked
statisticallysignificant.Furthermore,there managersfor the prices of three standard
is only a trivial difference in the relative items: a medium soda, a small order of
change in the amountof the first pay incre- french fries, and a main course. The main
ment between New Jerseyand Pennsylvania course was a basic hamburgerat Burger
stores. King,Roy Rogers, and Wendy'srestaurants,
Finally, we examined a related variable: and two pieces of chicken at KFC stores.
the "slope" of the wage profile, which we We define "full meal" price as the after-tax
measureby the ratio of the typicalfirstraise price of a medium soda, a small order of
to the amountof time until the first raise is french fries, and a main course.
given. As shown in row 10, the slope of the Table 7 presents reduced-formestimates
wage profile flattened in both New Jersey of the effect of the minimum-wageincrease
and Pennsylvania,with no significantrela- on prices. The dependent variablein these
tive difference between states. The change models is the changein the logarithmof the
in the slope is also uncorrelatedwith the price of a full meal at each store. The key
GAP variable.In summary,we can find no independentvariableis either a dummyin-
indication that New Jersey employers dicatingwhetherthe store is located in New
changed either their fringe benefits or their Jersey or the proportionalwage increase
wage profiles to offset the rise in the mini- required to meet the minimumwage (the
mum wage.26 GAP variabledefined above).
The estimatedNew Jerseydummyin col-
V. PriceEffectsof the Minimum-Wage umn (i) shows that after-tax meal prices
Increase rose 3.2-percentfaster in New Jersey than
in Pennsylvania between February and
A final issue we examine is the effect of November 1992.28 The effect is slightly
the minimumwage on the prices of meals at larger controlling for chain and company-
fast-food restaurants.A competitivemodel ownership [see column (ii)]. Since the
of the fast-food industry implies that an New Jersey sales tax rate fell by 1 percent-
increase in the minimumwage will lead to age point between the waves of our survey,
an increase in productprices. If we assume these estimates suggest that pretax prices
constantreturnsto scale in the industry,the rose 4-percent faster as a result of the
increase in price should be proportionalto
the share of minimum-wagelabor in total
27Accordingto the McDonald'sCorporation1991
Annual Report, payrolland benefitsare 31.3 percentof
operatingcosts at company-ownedstores.This calcula-
25In wave 1, the average time to a first wage in- tion is only approximatebecauseminimum-wage work-
crease was 18.9 weeks, and the average amount of the ers make up less than half of payrolleven thoughthey
first increase was $0.21 per hour. are about half of workers,and because a rise in the
26Katz and Krueger (1992) report that a significant minimumwage causes some employersto increasethe
fraction of fast-food stores in Texas responded to an pay of other higher-wageworkersin orderto maintain
increase in the minimum wage by raising wages for relativepay differentials.
workers who were initially earning more than the new 28Theeffect is attributableto a 2.0-percentincrease
minimum rate. Our results on the slope of the tenure in prices in New Jersey and a 1.0-percentdecrease in
profile are consistent with their findings. prices in Pennsylvania.
788 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
Notes: Standard errors are given in parentheses. Entries are estimated regression
coefficients for models fit to the change in the log price of a full meal (entree, medium
soda, small fries). The sample contains 315 stores with valid data on prices, wages, and
employment for waves 1 and 2. The mean and standard deviation of the dependent
variable are 0.0173 and 0.1017, respectively.
aProportional increase in starting wage necessary to raise the wage to the new
minimum-wage rate. For stores in Pennsylvania the wage gap is 0.
bThree dummy variables for chain type and whether or not the store is company-
owned are included.
CDummy variables for two regions of New Jersey and two regions of eastern
Pennsylvania are included.
entrants.29To assess the likely size of such tive effect on either the net number of
an effect, we used nationalrestaurantdirec- restaurantsor the rate of new openings.To
tories for the McDonald'srestaurantchain the contrary,all the estimates show positive
to compare the numbers of operating effects of higher minimum wages on the
restaurants and the numbers of newly numberof operatingor newlyopened stores,
opened restaurantsin different states over although many of the point estimates are
the 1986-1991 period. Many states raised insignificantlydifferentfromzero. Whilethis
their minimumwages duringthis period. In evidence is limited, we conclude that the
addition, the federal minimum wage in- effects of minimumwages on fast-foodstore
creased in the early 1990's from $3.35 to opening rates are probablysmall.
$4.25,with differingeffectsin differentstates
depending on the level of wages in the VII. BroaderEvidenceon Employment
state. These policies create an opportunity Changesin NewJersey
to measure the impact of minimum-wage
laws on store opening rates acrossstates. Our establishment-level analysis suggests
The results of our analysisare presented that the rise in the minimumwage in New
in Table 8. We regressedthe growthrate in Jersey may have increased employmentin
the number of McDonald's stores in each the fast-foodindustry.Is thisjust an anomaly
state on two alternative measures of the associatedwith our particularsample, or a
minimum wage in the state and a set of phenomenonunique to the fast-food indus-
other control variables (population growth try? Data from the monthlyCurrentPopu-
and the change in the state unemployment lation Survey (CPS) allow us to compare
rate). The first minimum-wagemeasure is state-wide employmenttrends in New Jer-
the fraction of workersin the state's retail sey and the surroundingstates, providinga
trade industryin 1986 whose wages fell be- check on the interpretationof our findings.
tween the existingfederal minimumwage in Using monthlyCPS files for 1991 and 1992,
1986 ($3.35 per hour) and the effectivemin- we computedemployment-populationrates
imum wage in the state in April 1990 (the for teenagers and adults (age 25 and older)
maximumof the federal minimumwage and for New Jersey, Pennsylvania,New York,
the state minimumwages as of April 1990).30 and the entire United States. Since the New
The second is the ratio of the state's effec- Jerseyminimumwage rose on April 1, 1992,
tive minimumwage in 1990 to the average we computed the employment rates for
hourlywage of retail trade workers in the April-December of both 1991 and 1992.
state in 1986. Both of these measures are The relativechangesin employmentin New
designed to gauge the degree of upward Jersey and the surroundingstates then give
wage pressure exerted by state or federal an indicationof the effect of the new law.
minimum-wagechanges between 1986 and A comparisonof changes in adult em-
1990. ployment rates show that the New Jersey
The results provide no evidence that labor market fared slightlyworse over the
higher minimum-wagerates (relativeto the 1991-1992 period than either the U.S. labor
retail-tradewages in a state) exert a nega- market as a whole or labor markets in
Pennsylvaniaor New York (see Card and
Krueger,1993 table 9).31 Among teenagers,
however,the situationwas reversed.In New
29Directinquiriesto the chains in our sample re- Jersey,teenage employmentrates fell by 0.7
vealed that Wendy'sopened two stores in New Jersey
in 1992 and one store in Pennsylvania.The other percent from 1991 to 1992. In New York,
chains were unwillingto provideinformationon new
openings.
30We used the 1986 Current Population Survey
(mergedmonthlyfile) to constructthe minimum-wage 31The employmentrate of individualsage 25 and
variables.State minimum-wagerates in 1990were ob- older fell by 2.6 percent in New Jerseybetween 1991
tained from the Bureau of National Affairs Labor and 1992,while it rose by 0.3 percentin Pennsylvania,
Relations Reporter Wages and Hours Manual (undated). and fell by 0.2 percentin the United States as a whole.
790 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
teenagers, and not just those employed in rive the equilibriumwage distributionfor a
low-wage industries, it is surely a lower noncooperative wage-search/wage-posting
bound on the magnitude of the effect for model and show that the imposition of a
fast-food workers. The 18-percentincrease binding minimumwage can increase both
in the New Jersey minimumwage is there- wages and employmentrelativeto the initial
fore predicted to reduce employment at equilibrium.Furthermore,their model pre-
fast-food stores by 0.4-1.0 employees per dicts that the minimumwage will increase
store. Our empirical results clearly reject employmentthe most at firms that initially
the upper range of these estimates, al- paid the lowest wages.
though we cannot reject a small negative Although monopsonistic and job-search
effect in some of our specifications. models provide a potential explanationfor
A possible defense of the competitive the observedemploymenteffects of the New
model is that unobserved demand shocks Jersey minimumwage, they cannot explain
affected certain stores in New Jersey- the observedprice effects. In these models,
specifically,those stores that were initially industryprices should have fallen in New
payingwages less than $5.00 per hour.How- Jersey relative to Pennsylvania,and at low-
ever, such localized demand shocks should wage stores in New Jersey relative to high-
also affect product prices. (In fact, in a wage stores in New Jersey. Neither predic-
competitivemodel, productdemand shocks tion is confirmed:indeed, prices rose faster
work through a rise in prices.) Although in New Jersey than in Pennsylvania, al-
lower-wagestores in New Jersey had rela- though at about the same rate at high- and
tive employment gains, they did not have low-wage stores in New Jersey. Another
relative price increases. Furthermore,our puzzle for equilibriumsearch models is the
analysisof employmentchanges in two ma- absenceof wage increasesat firmsthat were
jor suburban areas (around Newark and initiallypaying$5.05 or more per hour.
Camden) reveals that, even within local The strict link between the employment
areas, employmentrose faster at the stores and price effects of a rise in the minimum
that had to increasewages the most because wage may be broken if fast-food stores can
of the new minimumwage. varythe qualityof service(e.g., the length of
the queue at peak hours, or the cleanliness
B. AltemativeModels of stores). Another possibilityis that stores
altered the relative prices of their various
An alternativeto the conventionalcom- menu items. Comparisonsof price changes
petitive model is one in which firms are for the three items in our surveyshow slight
price-takersin the productmarketbut have declines (- 1.5 percent) in the price of
some degree of market power in the labor french fries and soda in New Jerseyrelative
market.If fast-food stores face an upward- to Pennsylvania,coupled with a relative in-
sloping labor-supplyschedule, a rise in the crease (8 percent) in entree prices. These
minimumwage can potentiallyincreaseem- limited data suggesta possible role for rela-
ploymentat affectedfirmsand in the indus- tive price changes within the fast-food in-
try as a whole.32 dustry following the rise in the minimum
This same basic insight emerges from an wage.
equilibrium search model in which firms One way to test a monopsonymodel is to
post wages and employees search among identify stores that were initially "supply-
posted offers(see Dale T. Mortensen,1988). constrained"in the labor market and test
Kenneth Burdett and Mortensen(1989) de- for employmentgains at these stores rela-
tive to other stores. A potential indicatorof
market power is the use of recruitment
bonuses. As we noted in Table 2, about 25
32DanielG. Sullivan(1989)and MichaelR Ransom
(1993) present empiricalresultsfor nursesand univer- percent of stores in wave 1 were offering
sity teachers that suggest monopsony-likebehaviorof cash bonuses to employeeswho helped find
employers. a new worker. We compared employment
792 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1994
changes at New Jersey stores that were of- affected by the minimum-wagerise. Taken
fering recruitmentbonuses in wave 1, and as a whole, these findings are difficult to
also interacted the GAP variable with a explainwith the standardcompetitivemodel
dummy for recruitmentbonuses in several or with models in which employers face
employment-changemodels. We do not find supplyconstraints(e.g., monopsonyor equi-
faster (or slower)employmentgrowthat the libriumsearch models).
New Jersey stores that were initially using
recruitmentbonuses, or any evidence that
the GAP variable had a larger effect for REFERENCES
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VOL. 84 NO. 4 CARD AND KRUEGER: MINIMUM WAGEAND EMPLOYMENT 793