This consensus began to fray with a 1992 study by economists David Card and Alan Kreuger, who found that New Jersey’s minimum wage hike — from $4.25 to $5.05 — did not lead to expected job losses in the state’s fast food restaurants. This finding has been hotly contested, but even if it were true, it doesn’t mean there are no other downsides to minimum wage laws. For example, sometimes employers don’t respond to minimum wage hikes by laying off workers, but instead by raising prices for consumers. (Minimum wage opponents haven’t helped their case by hitching it almost exclusively to job losses while ignoring the other, equally pernicious, adjustment responses by businesses.)
There is only one scenario, according to Naval Postgraduate School economist David Henderson, under which a modest legally mandated minimum wage might do more good than harm: when employers enjoy monopsony power (a monopoly on the buying side) in the labor market, either because there are very few of them or because workers can’t leave for some reason. Employers then have a relatively free hand to hold wages down. A mandated minimum wage under those circumstances merely diverts the firm’s “excess profits” to the worker, something that would have happened automatically in a more competitive market. But it doesn’t diminish a company’s productivity or its incentive for additional hiring — thereby actually boosting job growth. But genuine monopsony isn’t common and would require a very finely calibrated and skillfully crafted minimum wage, which is not how blanket policies work in the real world.