Minimum wage, major controversy

from Orange County Register

UCI's David Neumark has helped shape the debate among economists over the effects on jobs and poverty of raising the minimum wage.
By ANDREW GALVIN

As the U.S. Congress considers raising the minimum wage for the 20th time since it was created in 1938, one of the leading experts involved in the debate is a bit conflicted.

David Neumark, a recent addition to the UC Irvine economics department, has concluded from his two decades of research that higher minimum wages cost jobs and don't reduce poverty.

In the 1990s, he twice testified about his findings at congressional hearings. Republican legislators who opposed higher minimum wages cited his work to buttress their arguments.

But he feels that his work has earned him a reputation at odds with his private political leanings.

"I have to admit, frankly, I was really sick of getting pegged as a conservative, because I wasn't at all," he said in an interview last month at his UC Irvine office. "I only ever voted for Democrats in my life, except for this past governor's election."

Neumark's career has helped shape the sometimes fiery national debate over minimum wages – and earned him some enmity.
Decades of debate

Minimum wages have always been controversial. Early attempts to establish a wage floor were struck down by the Supreme Court in the 1930s. President Franklin Roosevelt succeeded in establishing a national minimum of 25 cents an hour in 1938. Over the years, Congress has raised the minimum in 19 increments, most recently in 1997, to $5.15. Democrats are now proposing an increase to $7.25 by 2009.

The debate played out in California earlier this year, when the Legislature voted to increase the state's minimum wage from $6.75 to $7.50 as of Jan. 1 and to $8.00 in 2008. Twenty-eight other states also have approved minimums higher than the federal one.

Advocates for the working poor say that a legislated minimum wage can help those at the bottom of the economic ladder afford basic necessities. Businesses – and most economists – have argued that minimum wages lead to more unemployment because companies will choose to hire fewer low-skilled workers if forced to pay a higher wage.

The debate acquired a new urgency in the 1990s, when fresh research challenged the traditional view among economists that increasing the minimum wage would tend to have negative effects on employment.

On one side were David Card and Alan Krueger, both then at Princeton University. Their most famous study looked at employment at fast-food restaurants in New Jersey. Through telephone interviews with managers at the restaurants, they found that an increase in that state's minimum wage "slightly increased employment."

That study was heralded by Democrats in Congress and the Clinton administration as reason to justify raising the national minimum wage.

Meanwhile, Neumark and his research partner, William Wascher, an economist with the Federal Reserve Board, had also been looking at state minimum wages. Their research tended to confirm the traditional view that higher minimums hurt employment.
Tough words

Things started to get "a little nasty," Neumark recalled, when Card and Krueger released a 1993 paper disputing some findings of Neumark and Wascher.

"Perhaps Neumark and Wascher are not to be blamed too harshly for their mistakes and faulty analysis," the paper said. "The economics profession places a high premium on empirical results that confirm accepted theories. The negative employment effect of the minimum wage is a lesson taught in almost every introductory economics course and textbook. But there is a lesson here. In situations where the economics profession has a 'stake' in the outcome, researchers should strive to be especially careful and even-handed ."

To Neumark, Card and Krueger were "essentially accusing us … really accusing the profession, of kind of being unable to get past its biases and therefore not looking at the data neutrally, but doing things … to always find the predicted effect."

Later, Neumark and Wascher obtained payroll data from some of the same New Jersey restaurants that had participated in Card and Krueger's survey. They crunched the numbers and got a result that undercut Card and Krueger – again finding reduced employment.

Neumark says that Card and Krueger's reliance on telephone surveys had created flaws in their data through misunderstandings.

Ultimately, Card and Krueger re-analyzed the New Jersey fast-food study with new data and concluded that the minimum wage increase "probably had no effect" on employment.

Card, who is now at UC Berkeley, declined to comment for this article, except for a couple of brief e-mails. In one, Card wrote: "In all honesty, I do not think much of Neumark or his work."
Preference for Bay Area

Harry Holzer of Georgetown University was chief economist at the U.S. Department of Labor during the Clinton administration. He considers himself a friend of Neumark's and has worked on papers with him.

He recalls that back in the 1990s, Neumark "was known as the guy you didn't like if you wanted to raise the minimum wage."

Neumark's lasting contribution to the minimum wage debate, Holzer said, has been to bring it back to where it was 25 years ago.

"Card and Krueger had shifted it and convinced a lot of people that you can have your cake and eat it too," Holzer said. "I think David reestablished the argument that you have to be thoughtful about this and you have to worry about the downside risk."

Holzer's view is that while a higher minimum wage probably causes a small amount of unemployment, it produces other worthwhile benefits, such as attracting some young people back to the labor force and boosting earnings for others.

Nowadays, the controversy seems quieter. President Bush said last week he would support an increase in the minimum wage if it were coupled with tax breaks for small businesses.

But hard feelings have a way of lingering.

In an interview published in the December issue of The Region, a magazine published by the Federal Reserve Bank of Minneapolis, Card said his work on the minimum wage "has cost me a lot of friends."

For Neumark, it possibly cost him a preferred job. Recently, he decided to return to academia after a few years at the Public Policy Institute of California, a nonpartisan think tank in San Francisco. As he scouted California for a university job, Card's presence at Berkeley loomed as a strike against him.

"I would have stayed in the Bay Area if I had an option," Neumark said. "I would say my relationship with Card was sufficient that he wasn't going to hire me at Berkeley – there was that much distance between us."

Card, in an e-mail, wrote "I have nothing to say about Neumark, except that his not getting hired at Berkeley had nothing to do with me."

In any event, David Brownstone, chairman of UC Irvine's economics department, was glad Neumark was available.

Neumark is "a world-renowned labor economist who has made important contributions to many areas in this important field," Brownstone said in an e-mail.

Contact the writer: 714-796-6045 or agalvin@ocregister.com