The effect of the minimum wage on the fast-food Industry
Comparisons of employment, wages, and prices at stores in New Jersey and Pennsylvania before and after the rise offer a simple method for evaluating the effects of the minimum wage. 410 fast-food restaurants in New Jersey and Pennsylvania following the increase in New Jersey’s minimum wage from $4.25 to $5.05 per hour. Comparisons within New Jersey between initially high-wage stores and other stores provide an alternative estimate of the impact of the new law.
- Minimum wage causes unemployment.
- The higher the wage an establishment pays relative to other firms, the more diligent and loyal its employees, and the less likely they are to quit.
- The resulting high turnover of employees makes unionization more difficult.
- Employers routinely violate current minimum wages, federal and state.
- A big increase in minimum wages makes a hollow victory without enforcement.
- The rise in minimum wage occurred during a recession.
- The increase had been legislated two years earlier when the state economy was relatively healthy.
By the time of actual increase, the unemployment rate in New Jersey had risen substantially and last-minute political action almost succeeded in reducing the minimum wage increase. It is unlikely that the effects of the higher minimum wage were obscured by a rising tide of general economic conditions.
- New Jersey is a relatively small state with an economy that is closely linked to nearby states.
Fast-food stores in eastern Pennsylvania forms a natural basis for comparison withe experiences of restaurants in New Jersey, however, allows us to compare the experiences of high-wage and low-wage stores within New Jersey and to test the validity of the Pennsylvania control group. Since, seasonal pattern are similar in New Jersey and eastern Pennsylvania, as well as across high- and low wage stores within New Jersey, Comparative methodology effectively “differences out” any seasonal employment effects.
- Successfully followed nearly 100 percent of stores from a first wave of interviews conducted just before the rise in the minimum wage (in February and March 1992)
Early in 1992 the impending increase in the New Jersey minimum wage by surveying fast-food restaurants in New Jersey and eastern Pennsylvania. Fast-food industry was driven by several factors. First, fast-food stores are a leading employer of law-wage workers: in 1987, franchised restaurants employed 25 percent of all workers in the restaurant industry. The restriction results in a slightly smaller estimate of the relative increase in employment in New Jersey.
An alternative possibility is that seasonal factors produce higher employment at fast-food restaurants in February and March than in November and December. An analysis of national employment data for food reparation and service workers, however, shows higher average employment. Analysis of the 1991 Current Population Survey reveals that part-time workers in the restaurant industry work about 46 percent as many hours as full-time workers. Katz and Krueger (1992) report that the ratio of part-time workers hours to full-time workers’ hours in the fast-food industry is 0.57.
The authors examine the impact of recent changes in the federal minimum wage on a low-wage labor market The authors draw four main conclusions. First, the survey results indicate that less than 5 percent of fast food restaurants use the new youth sub-minimum wage even though the vast majority paid a starting wage below the new hourly minimum wage immediately before the new minimum went into effect. Second, although some restaurants increased wages by an amount exceeding that necessary to comply with higher minimum wages in both 1990 and 1991, recent increases in the federal minimum wage have greatly compressed the distribution of starting wages in the New Jersey fast food industry. Third, employment increased relatively in those firms likely to have been most affected by the 1991 minimum wage increase. Fourth, changes in the prices of meals appear to be unrelated to mandated wage changes. These employment and price changes do not seem consistent with conventional views of the effects of increases in a binding minimum wage.
Similarly, regressions including the gap variable provide no evidence that the minimum-wage increase led to a systematic change. One explanation of our finding that a rise in the minimum wage does not lower employment is that restaurants can offset the effect of the minimum wage by reducing non-wage compensation. For example, if workers value fringe benefits and wages equally, employers can simply reduce the level of fringe benefits by the amount of the minimum-wage increase, leaving their employment costs unchanged. The main fringe benefits for fast-food employees are free and reduced-price meals.
Part of this work was completed Katz and Krueger 1992. I am very grateful David Card for helping in constructing the data.
David Autor, Lawrence Katz and Alan Krueger