Why Card and Krueger were wrong about the minimum wage
It’s always a little difficult when claiming that the famed result of a Nobel-winning economist was wrong. But that’s where we are and the proof comes from a simple observation:
American junk food chains are taking over Britain’s high streets, the owner of the UK’s oldest Indian restaurant has said.
Ranjit Mathrani, the founder of MW Eat, has said higher taxes and increased labour costs are playing into the hands of US fast food giants as they are better equipped to cope than smaller independent restaurants.
It comes amid the fear of sweeping restaurant closures in the wake of Rachel Reeves’s Budget, which increased both employer National Insurance rates and the National Minimum Wage.
Mr Mathrani said: “The McDonald’s of the world and the KFCs of the world, with automation, will be less affected. The ones who will be most affected will be informal dining, everyday eating out for people who want table service and decent food at reasonable prices.
We can, because of course we can, mutter about self-dealing and even self-interest there. But the observation is obviously correct too.
We can do food service with lots of labour and little capital or we can do food service with lots of capital and little labour. Labour and capital are substitutes for each other in this sector.
If we change the relative prices of labour and capital then we’ll change the business model used to provide food service. Make labour more expensive relative to capital and the labour intensive sector will shrink, the capital intensive sector expand. This is not a complex argument and is also clearly true. How much it’s true is arguable but the basic process is not arguable.
Which gives us that Card and Krueger paper about how a higher minimum wage did not lead to fewer jobs in fast food in New Jersey and Pennsylvania. The study was of the chains only. The capital intensive end of the fast food experience - the labour intensive Moms and Pops whacking out sandwiches with a chopping board and a slicer were not studied at all.
But we’ve changed the relative prices of labour and capital here. We’d expect - insist upon even - growth in the capital intensive part of the industry, shrinkage in the labour intensive. So, if we study only the capital intensive sector’s reaction to that change in relative prices we are - well, let’s say we’re at severe risk of drawing the wrong conclusion.
Sadly, entire political philosophies have now been built upon this, erm, possibly erroneous conclusion. The British government, for example, now insists that a minimum wage of 66% of the median won’t have any large disemployment effects. This is probably not true.
As Sam Clemens once pointed out: It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
Tim Worstall