Effects On Increasing Minimum Wage Essay

Effects On Increasing Minimum Wage Essay

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Card and Kruger’s paper (1994) examined the effects on increasing minimum wage, specifically in New Jersey and its effects on employment. Previous studies supported Card and Kruger’s hypothesis that there was no adverse impact on employment when the minimum wage was increased. However, economic theory postulates that a rise in minimum wage would lead to a decrease in employment, as employers attempt to decrease new hiring – this prediction was confirmed by earlier studies.
For this particular research, Card and Kruger examined 410 fast food restaurants in New Jersey and Pennsylvania, the latter being the control group. New Jersey was the treatment group, as that city saw an increase in the minimum wage from $4.25 to $5.05 on April 1st, 1992. A comparison of employment, wages, and store prices was done for both states before and after the minimum wage increase to evaluate the impact of the new law. The authors stated the following as five reasons for selecting the fast food industry as the unit of analysis: major employer of low wage workers, comply with minimum wage regulations, homogeneous job requirements and products, convenient sample frame, high response rates to telephone surveys.
Surveys were conducted in two waves, before the wage increase (February to March 1992) – wave 1 and after (November to December 1992) – wave 2. Overall, response rates for both waves of the telephone surveys were high, 87 percent wave 1 and 99.8 percent wave 2. All stores contacted in wave one were contacted in wave 2 (telephone or face to face interviews), however, the stores that were no longer operating were coded as 0 (permanently closed) or missing data (temporarily closed). Data for the following key variables were initially observed: store...

... middle of paper ...

...fore and after the minimum wage increase (time series). This is an example of a quasi experiment in that there was a control group, Pennsylvania and a treatment group, New Jersey. There was also a somewhat unexpected change, the increase in minimum wages from $4.25 to $5.05, which was large enough to be measured.

Details of Regression Model
As per Adkins and Hill (p. 237)

δ = (Ĉ – Ê) – (B – Â)
(Treatment after – Control after) – (Treatment before – Control before)
(21.02734 – 21.16558) − (20.43941 – 23.33117) = 2.7536
Interaction term δ = 2.7536*
y ii =β1 + β2TREAT1 + β3AFTER1 + δ(TREAT1×AFTER1)+e ii
= 23.23 + 20.44 + 21.03 + 2.75(20.44×21.03) + e ii

* Coefficient (treatment effect) was not statistically significant but demonstrated a positive effect, which was found to be contrary to what the conventional economic model would predict (STATA output).

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