What happens to the job market when the government raises the minimum wage? For decades, higher education in the United States has taught economics students to answer this question by reasoning from first principles. When the price of something rises, people tend to buy less of it. Therefore, if the price of labour rises, businesses will choose to ‘buy’ less of it – meaning they’ll hire fewer people. Students learn that a higher minimum wage means fewer jobs.
But there’s another way to answer the question, and in the early 1990s the economists David Card and Alan Krueger tried it: they went out and looked. Card and Krueger collected data on fast-food jobs along the border between New Jersey and Pennsylvania, before and after New Jersey’s minimum wage increase. The fast-food restaurants on the New Jersey side of the border were similar to the ones on the Pennsylvania side in nearly every respect, except that they now had to pay higher wages. Would they hire fewer workers in response?
‘The prediction from conventional economic theory is unambiguous,’ Card and Krueger wrote. It was also wrong. Fast-food restaurants in New Jersey didn’t hire fewer workers – instead, Card and Krueger found that employment slightly increased. Their paper set off a hunt for other ‘natural experiments’ that could rigorously test economic theory and – alongside other research agendas like behavioural economics – transformed the field.
Over the past 30 years, PhD-level education in economics has become more empirical, more psychological, and more attuned to the many ways that markets can fail. Introductory economics courses, however, are not so easy to transform. Big, synoptic textbooks are hard to put together and, once they are adopted as the foundation of introductory courses, professors and institutions are slow to abandon them. So introductory economics textbooks have continued to teach that a higher minimum wage leads to fewer people working – usually as an example of how useful and relevant the simple model of competitive markets could be. As a result of this lag between what economists know and how introductory economics is taught, a gulf developed between the way students first encounter economics and how most leading economists practise it. Students learned about the virtues of markets, deduced from a few seemingly simple assumptions. Economists and their graduate students, meanwhile, catalogued more and more ways those assumptions could go wrong.