Jonathan Chait

Alan Krueger's Key Insight

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President Obama has nominated Alan Krueger as head of the Council of Economic Edvisors. Krueger gained fame in 1992 for a study showing that raising the minimum wage did not necessarily cost jobs. Economic models suggest that a minimum wage hike raises the cost of labor for businesses and, necessarily, decreases demand as a result. Krueger, along with Alan Card, studied fast food restaurants in New Jersey (which raised its minimum wage from $4.25 to $5.05) and eastern Pennsylvania (which did not change its minimum wage.) They found that New Jersey did not suffer higher unemployment among minimum wage workers.

Obviously, the study did not prove, nor did the authors claim, that the minimum wage could be raised infinitely with no cost to employment. Rather, it merely showed that the frictionless supply and demand curves in textbooks do not perfectly translate to the real world, and that, especially at lower levels of impact, the predicted effects often do not materialize at all. This is, in fact, one of the key insights of applied economics and an important division between liberal economists and conservative ones.

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