Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania

This study investigates the impact of a minimum wage increase on employment levels in the fast-food industry. Conventional economic theory predicts that raising the minimum wage forces profit-maximizing firms to reduce employment. The authors test this hypothesis by analyzing the 1992 increase in New Jersey's minimum wage from $4.25 to$5.05 per hour, using Pennsylvania, where the minimum wage remained at $4.25, as a control group.

The researchers conducted a telephone survey of 410 fast-food restaurants in New Jersey and eastern Pennsylvania. They collected data in two waves: one shortly before the minimum wage increase (February/March 1992) and one 7-8 months after (November/December 1992). By comparing the changes in employment, wages, and prices between the two states, as well as comparing stores within New Jersey that were differentially affected by the wage hike, the authors were able to isolate the effect of the policy change. They also examined whether the increase led to changes in non-wage compensation or store opening rates to ensure the results were robust.

The empirical results challenge the standard prediction that higher minimum wages lead to job losses. The study found that fast-food employment in New Jersey increased by 13 percent relative to Pennsylvania. Furthermore, within New Jersey, stores that were forced to raise their wages to meet the new minimum showed higher employment growth compared to stores that were already paying above the new minimum. The authors also found that while prices for meals increased in New Jersey relative to Pennsylvania, there was no evidence that the minimum wage hike discouraged new store openings or led to significant reductions in non-wage benefits.

This paper is a landmark study in labor economics because it provides rigorous empirical evidence that contradicts the textbook model of competitive labor markets. By demonstrating that a minimum wage increase can occur without causing disemployment in a low-wage sector, the findings have significantly influenced the debate on labor policy and prompted economists to reconsider alternative models, such as monopsony, where firms may have some market power in setting wages.