Were Card and Krueger asking the right questions in their famous effort to gauge the impact of a minimum wage increase? Tim Worstall suggests that they were not. Card and Krueger compared fast food chains on both sides of the border between Pennsylvania and New Jersey. Yet the chains don’t represent the entire fast food industry:
Firstly there are the chains, yes. The Burger Kings, Arby’s and the like which were studied. Then there’s the other part, the independents. The delis, Mom and Pop stores, meatball and subs places, these make up the second part of the fast food industry.
Now, something that might not be obvious from the outside but is very much so from those who have worked in the industry (yes, that would be me) is that the independent sector is much more labour intensive than the chain sector. The chains are better equipped, differently supplied (things as seemingly trivial as buns for hamburgers arriving pre-cut instead of having to be sliced open in store) and labour as a portion of turnover is much lower (and capital correspondingly higher) than in that independent sector.
So, if the price of labour rises, we would traditionally say that the amount of labour used in the entire sector, independents and chains, would decline. However, we would expect the use of labour to decline more in the independent, the more labour intensive, sector than in the chain, the capital intensive sector. In fact, we can construct entirely believable models which show employment rising, falling or staying stable in the chain sector while labour employed in fast food as a whole declines from the rise in the cost of labour.
For example, the rise might be sufficiently severe that a goodly portion of the independent sector simply goes out of business. This could increase the trade of the chain sector sufficiently that labour demand there rises despite (or even because of) the rise in labour costs.
Please note, I’m not saying that is what happened: only that it is possible and entirely consistent with simple basic economic understanding. By studying only one part of the sector we don’t in fact find out anything useful at all about the entire sector’s response to a change in the minimum wage. By looking only at the response of the capital intensive part we are ignoring the response of the labour intensive part. It really is possible that a minimum wage rise will increase the demand for labour in the capital intensive, chain, sector while reducing it by more in the labour intensive, independent, sector.
I assume that Card and Krueger gave this question at least some consideration, and I’d be eager to hear their reply.