OAC Archive: The Shaky Foundations of the Fight Against a Decent Minimum Wage

Archival posting of One America Comittee blog

BruceMcF in Arguments & Analyses, 7/06/2006 at 7:15 AM EST

This last Sunday, I was reading the local paper, and was surprised to “learn” that the proposed rise in the Minimum Wage would cost the Buckeye State 12,000 jobs.

The source was a study from the “Employment Policies Institute”. I do not know their story, but they appear to be opponents of minimum wage increases.

And then I looked into the details. And when I looked into the details, it turned out that the formal and professional looking report was built on a foundation of sand.

Pic: Strategy: Get the Employment Impacts in Fast Food wrong, then apply statewide

(NB. This is not the image from original OAC posting)

The Model: True By Definition

I was surprised when I turned to the report that its “economic model” was extremely simplistic:

Number affected times (Percentage Wage Increase times “Labor Elasticity).

“Labour Elasticity” is in essence:

“Percentage Change in Employment divided by Percentatge Wage Increase”.

Now, if you have the right number for “labor elasticity” the rest is true by definition. So basically, the whole model is built into the question of what the elasticity of labor is. If it is negative, then wage increases drive employment down.  If it is positive, then wage increases drive employment up.

And if it is zero, or more precisely “not significantly different from zero”, then there is no positive or negative impact that can be detected.

And after digging into the studies, it turns out that the number used is very dubious. It is certainly overestimates the impact.  Even more, a study using more complete data finds that the labor elasticity in this particular situation does not have a statistically significant sign at all, neither positive nor negative.

And if we think about it, the fast food industry is one that can fine tune its employment, accepting slightly longer lines on average bysqueezing employment down slightly. If there is no clear negative impact on employment even in the fast food industry, then there is no reason to predict a negative impact across the board.

THE DEVIL IN THE DETAILS: OVERVIEW

Where does the EPI report get their number for labor elasticity? It turns out that the source of their number is very dubious. It is based on a comparison of fast food restaurants in bordering areas in New Jersey and Pennsylvania during a period when New Jersey had a minimum wage set higher than the national minimum.

The negative elasticity model is a “comment” disputing an earlier finding on the same problem that found a very small positive labor elasticity that was not significantly different from zero.

And the “reply” that follows directly after showed that the negative elasticity is based on flawed data. First the “reply” repeats the original analysis with better data, and repeats the original result – mostly positive values, but not high enough to be statistically significant. Then it looks into the “comment” article to find out why it arrived at different conclusions.

And it turns out that the subset of fast food restaurants in Pennsylvania used in the “comment” article is significantly different from all fast food restaurants in that part of Pennsylvania. In other words, the cross border comparison relies on a false picture of what is happening in the lower wage state, and that is the source of the negative elasticity.

In particular, it is data from one Burger King chain in Pennsylvania that provides the statistical significance for the study that gives the negative labor elasticity. It is therefore likely that the labor growth that the employment growth that Neumark and Wascher (2000) attribute to a lower wage is in fact due to gaining much of their Pennsylvania data from an operation that was growing its share of the fast food market at the time.

ADDITIONAL DETAILS

This is all from from work published in a very respected journal — indeed, some would argue the most respected journal, the American Economic Review, the main publication of the American Economic Association.

But looking in the references reveals something quite surprising: first, this is not an article about low wage labor elasticity in general, but only about labor elasticity in the fast food industry. Second, this is not really an article, but a reply to another article that found that there is no statistically significant impact, positive or negative.

That is, the study of the impact of minimum wage increases gets their “elasticity”, which is the sum total of their model, from:

“Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania: Comment.” David Neumark, William Wascher. The American Economic Review. Nashville: Dec 2000.Vol.90, Iss. 5; pg. 1362, 35 pgs

trying to shoot down the conclusions of David Card and Alan Krueger in 1994. And directly after their article is:

“Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania: Reply.”  David Card,  Alan B Krueger. The American Economic Review. Nashville: Dec 2000.Vol.90, Iss. 5;  pg. 1397, 24 pgs

Neumark and Wascher (2000) are trying to shoot down an earlier study by Card and Krueger (2000), by doing their own comparison between New Jersey and Pennsylvania fast food restaurants, with data collected three or more years after New Jersey raised its minimum wage above the national minimum.   Card and Krueger (2000), using more complete data, show that the Pennsylvania subset used by Neumark and Wascher is not representative of Pennsylvania fast food restaurants. This analysis is contained in part III of Card and Krueger (2000), pages 1407-1419.

So, Who is the Employment Policies Institute, Anyway

No, I mean it, who are these people? That is, this is a blog, not a magazine article, so I reckon I’m allowed to ask a question when I don’t know the answer myself.

If anyone knows what the story is with the Employment Policies Institute, it will be handy as I try to find newspaper reporters who are conned by the official-looking “The Effects of the Proposed Ohio Minimum Wage Increase”.