The impact of a minimum wage on employment has long been of interest to economists such as Stigler (1946), because it provides a relatively direct test of a conventional theoretical prediction that a binding increase in the minimum wage should reduce employment among low-skilled workers. Although this theoretical prediction has not gone unchallenged as in Lester (1946), early empirical work summarized in Brown, Gilroy, and Kohen (1983) confirmed theoretical predictions using aggregate time series data for young workers, which indicated that a minimum wage has a small negative employment effect. By 1990, there was general consensus in the profession that minimum wage laws reduced employment among teenage and low-wage workers, albeit by a small amount.
Ehrenberg (1995) and others have argued that subsequent empirical evidence provides less confidence in both the conventional view that the minimum wage lowers teenage or low-skilled employment and that neoclassical theory can account for the relationship between them. For example, Card and Krueger (1995) show in a 30-study meta-analysis that past time series results are sensitive to the specification and suggest that, when appropriately specified, the minimum wage has had no significant effects on employment over the last 25 yr. Alternatively, Neumark and Wascher (1998) find negative employment effects of the minimum wage consistent with structural change using time series data and specifications that do not suffer from the biases present in earlier work. Cross-sectional studies, as in Currie and Fallick (1996), Burkhauser, Couch, and Wittenburg (2000), and Neumark and Wascher (2001), also find mixed evidence of employment effects on low-wage workers due to the minimum wage. Thus, traditional empirical assessments of the minimum wage yield mixed evidence on the employment impact of the minimum wage.
The "natural experiment" methodology was introduced as an alternative to the cross-sectional and time series approaches and exploits both the time series wage variation before and after the treatment of a minimum wage increase and the cross-sectional wage variation between the treatment state and a control state that did not experience a change in the minimum wage. For example, Card and Krueger (1994) analyzed employment growth in 410 fast-food restaurants in New Jersey and Pennsylvania before and after the 1992 minimum wage increase in New Jersey from $4.25 to $5.05. They find no evidence linking the increase in the minimum wage to reduced employment in fast-food restaurants both when comparing New Jersey with Pennsylvania and when comparing impacted versus nonimpacted restaurants in New Jersey. Neumark and Wascher (2000) reexamine the impact of the 1992 New Jersey minimum wage increase using payroll data for hours worked by fast-food employees and Bureau of Labor Statistics (BLS) eating and drinking employment data and find that the minimum wage significantly reduced employment in New Jersey versus Pennsylvania. Thus, even studies that apply similar natural experiment techniques and data for a given minimum wage treatment, as in Katz and Krueger (1992), Deere, Murphy, and Welch (1995), Kim and Taylor (1995), and Card and Krueger (2000), can yield different conclusions regarding its employment effect.
Our empirical analysis exploits a unique natural experiment initiated by Oregon and Washington voter initiatives that raised the minimum wage over three successive years (1997-1999 in Oregon and 1999-2001 in Washington) by approximately 37% in both states. Following prior work, we focus on the eating and drinking industry (SIC 58), which is a low-wage industry that has been extensively studied in prior work due to an expectation of a binding minimum wage. BLS wage data available between 1997 and 2001 indicate that the successive minimum wage increases become increasingly binding for most, but not all, eating and drinking jobs at the lower end of the wage distribution. …