A basic supply and demand model would say that setting the minimum wage above the equilibrium wage should cause unemployment because there would be more people willing to work at a higher wage, but less jobs available. Companies would also be able to be more selective in their hiring at a higher wage, and so low skilled workers might be less likely to get jobs. This basic theory says that raising minimum wage would make employers cut back on jobs. However, upon reviewing the literature, I found that it is more likely that there is no negative effect on employment with an increase in the minimum wage. I looked specifically at the fast food industry for this paper, but the results would likely apply to any industry that relies heavily on the minimum wage.
My expectations going into this paper were what the basic econ 101 model would say. A basic supply and demand model would say that setting the minimum wage above the equilibrium wage would cause employers to cut back on jobs and should cause unemployment because there would more people willing to work at a higher wage, but less jobs available. Companies would also be able to be more selective in their hiring at a higher wage, and so low-skilled workers might be less likely to get jobs. I also expected that restaurants would raise menu prices to reflect the cost of higher minimum wage onto consumers.
One of the most important studies that I use in my paper is by Card and Krueger in 1992. New Jersey in 1992 raised its minimum wage from $4.25 to $5.05. Card and Krueger surveyed fast-food restaurants before the increase and then again after the increase and compared their findings to similar stores in eastern Pennsylvania. They concluded that the increase in the minimum wage actually increased workers in New Jersey. They later expanded on this theory to say that if there are not increases in employment, there are at least no real negative effects or increases in unemployment. Their work was extremely contested because it goes against a very basic rule in economics. However, when other economists tried to prove their theory wrong, they largely were unable to do so.
One thing that most economists do agree on is the reflection of an increased minimum wage onto the consumer. One researcher said that “most, if not all, of the higher labor costs faced by employers are pushed onto customers in the form of higher prices.” When wage increases, you have to increase menu prices to stay afloat. But fast food restaurant prices are generally very sticky, and so often an increase in wages takes around a year to show in menu prices. The increase in menu prices does not necessarily have a negative effect on sales, though. The “hungry teenager effect” says that a higher minimum wage leads to the purchasing of more minimum wage goods. Teenagers are a likely group of people to be working for minimum wage. For example, a teenager works at a convenience store for minimum wage will likely feel like he is making a vastly greater amount of money after his wage increases. He is then more likely to go to a fast-food restaurant and buy a meal there increasingly often. Thus, the “hungry teenager effect.”
The conclusions I drew in my paper were that an increase in the minimum wage likely has no negative effects on employment, which is not what I was expecting to find. As would be expected, though, an increase in wage does reflect onto the menu prices consumers pay.