HALF A NOBEL PRIZE & THE STUDY THAT WON IT - Bhanu Sripada

                                    

The Nobel Prize in Economic Sciences this year has been awarded in half to Prof. David Card for his work on the relationship between minimum wages and unemployment. One of the results of this research was that “increasing the minimum wage does not necessarily lead to fewer jobs”.

Prima facie, the argument is counterintuitive. The conventional premise was based on the argument that if workers are paid more, employers will hire fewer of them. Higher wages would reduce profits, hurting employers’ profits. However, empirical research based on live data proved that the conventional premise is not necessarily true. An employment study was conducted in New Jersey and Pennsylvania before and after an increase in the minimum wage in New Jersey. The objective was to disprove that an increase in the minimum wage leads to reduced employment.

Their research, in simple terms, is explained as follows. The minimum wage in both New Jersey and Pennsylvania was initially $4.25 an hour. The minimum wage was then increased to $5.05 an hour only in New Jersey but not in Pennsylvania. At this point, a survey was conducted regarding the change in employment in fast-food restaurants in Pennsylvania, especially the areas close to New Jersey, and then throughout New Jersey as well. Fast food restaurants were chosen because the job requirements and products of fast-food restaurants are relatively homogeneous, making it easier to obtain reliable measures of employment. The results of the survey from their research paper indicated that despite the increase in wages, full-time equivalent employment increased in New Jersey relative to Pennsylvania. Furthermore, restaurants in New Jersey which were earlier already paying wages higher than the then minimum wage, $4.25 an hour also increased their employment numbers after the increase in minimum wages to $5.05 an hour.

Any effect of a seasonal change in employment was nullified because it would have affected New Jersey and Pennsylvania. However, it was observed that the prices of fast food increased, implying that the burden of the increase in wages was passed on to the consumers. The effects observed in this study could be attributed to the growing economy. Even if the government didn’t increase the minimum wage, workers would have had a minimum threshold below which they couldn’t sustain themselves anyway, and would’ve preferred unemployment benefits rather than a job that doesn’t pay enough to sustain themselves. It is noteworthy that employers do not hire workers based on how many they can afford, rather based on how many they need to run the show. Hence, the employment changes are affected by the decisions of the employers and not the minimum wages set by the government.

This study is significant especially in contemporary politics as we are witnessing an increasing trend of policy decisions and political sentiments being driven by statements like ‘Immigrants increase unemployment’, ‘increase in minimum wages cause unemployment, without paying proper heed to empirical evidence. This study can now be extrapolated to causations and correlations with respect to wages paid to men, women, the parity, and how it changes when wages are increased.