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Economics is a Science. Really.

November 3, 2006, 11:58 pm

I was going to respond to Kevin Drum's post crowing that the Oregon minimum wage increase didn't do any harm.  But Brian Doss at Catallarchy does a fine enough job that I will outsource to him. Here is a taste:

The 5.4% unemployment rate tells us a bit more; its 1 point higher
than the national average. I'm not going to be as quick as Kevin to
infer causation from correlation here either, but it doesn't seem like
much of a positive spin to say that a rate of unemployment that's 25%
higher than the national average is good because it happened to be 7.2%
back in 2002"¦

Also, the quote seems seriously confused that there is a meaningful
distinction (in this case) between the theoretical and statistical
(what else would employment economists use in their theory?). Despite
that confusion, David Neumark (mentioned in the WSJ article) does lay out a fairly comprehensive, concrete,  statistical study of minimum wage laws and their effects here,
among other things showing that for whatever else a minimum wage does,
the effect is primarily among the teenaged to those in their early 20s,
the sign is negative, and in the long run negative if a minimum wage
prevents a teen or young adult from gaining employment and more
importantly not gaining the habits of employment.

Further evidence of the this kind is summarized by Alex Tabarrok here,
whereby he relates studies showing that 25% of the folk on the mininum
wage (nationall) are teenagers, and 50% of all minimum wage earners are
aged 25 and younger. These are people, Alex notes, that with age and
experience will likely soon earn more than minimum wage anyway, thus as
an antipoverty tool it's fairly weak....

Its a particularly bad antipoverty tool, it has non-trivial effects
on the structure of employment within and across industries, and has
possible non-trivial long term negative effects on low-skill
individuals' abilities to stay employed and to increase their own
productivity and standards of living. All of the things it purports to
want to do can be done by much more targeted, efficient, and effective
policy tools.2 

"˜Liberals' of America, please, I beg of you: save your breath for policies that actually help poor Americans, eh? And it you won't do it for me, can you do it for the children"¦?

There is much more good stuff.

Whenever I read these articles by progressives that basically boil down to "the most basic laws of supply and demand don't apply to labor, which is the most fundamental trade good in the economy," I just have to shake my head.  I am reminded of my advice to progressives:

Economics is a science.  Willful ignorance or emotional
rejection of the well-known precepts of this science is at least as bad
as a fundamentalist Christian's willful ignorance of evolution science
(for which the Left so often criticizes their opposition).  In
fact, economic ignorance is much worse, since most people can come to
perfectly valid conclusions about most public policy issues with a
flawed knowledge of the origin of the species but no one can with a
flawed understanding of economics.

Tags: , , , , , , , , ,
Category: Economics
  • http://www.two--four.net/weblog.php Billy Beck

    Ask 'em why the minimum wage should not instantly be raised to fifty dollars an hour.

    They'll go out like a light, every single time.

  • MesaEconoGuy

    It would be very interesting, though nearly statistically impossible, to collect information on who votes for Democrats (who want to raise the minimum wage) comparing the number of actual potential beneficiaries of an increase in the minimum wage with those who wouldn’t necessarily benefit, but who feel better about themselves for taking this stand.

    I think you’d find that the former group is shockingly small compared to the latter – and that’s a very large red flag, enough qualify this idea as dangerous, since it’s effects wouldn’t be directly observed or felt by the majority of its spporters.

  • http://www.halfsigma.com Half Sigma

    "the most basic laws of supply and demand don't apply to labor, which is the most fundamental trade good in the economy"

    Labor is more like a commodity, and we see in the commodity markets that price increases (like oil going from $20 to $60 per barrel) have barely any impact on demand.

    Read my blog post on the Iron Law of Wages.

    Increasing the minimum wage and seeing no impact on unemployment is completely consistent with economics if one has a deeper understanding of economics than merely a supply and demand line both conveniently slanted at a 45 degree angle.

  • http://ratio-ultima.blogspot.com/ Ultima Ratio

    There are some possible explanations for why an increase in the minimum wage might not cause any change in the statistics for unemployment (though people must inevitably lose their jobs, as you have observed):

    A highly inelastic labor demand curve is one possibility. Another is that the effect of an artificial price floor on labor hits small businesses hardest, but can be defrayed by larger businesses (e.g., Target, Walmart). So the effect of a minimum wage may just be a transfer from mom-and-pop concerns to Big Box stores.

    We discuss the issue here.

  • http://www.halfsigma.com Half Sigma

    Yes Ultima Ratio, the demand curve for unskilled labor is inelastic, because unskilled labor is a fungible commodity in plentiful supply. The price sinks to what, if it were a physical commodity, would be the cost of production. David Ricardo calls it the "natural price of labor."

  • http://www.grandinite.com Aaron

    I'm studying the minimum wage hike in Missouri right now. It's going from $5.15 to $6.50. Here are a few interesting facts about the minimum wages.

    Some that stood out:

    1. 3/4 people at the minimum wage work in food, retail and hospitality - essentially non-tradeable stuff.If the minimum wage causes hotel costs in Missouri to increase, thereby leading to an increase in the price of hotel rooms, people aren't going to stay in hotels in Wisconsin or Iowa when they go to their conference in Missouri. Employers will simply respond by raising the job responsibilities for these minimum wage jobs.
    2. Minimum wage earners account for only 3% of the total hourly employee population, most of these people are very young. It increases the incentive for food services to automate - substitute away from labor to capital.
    3. Missouri's minimum wage hasn't been changed since 1997. Inflation's eaten away at the real value, and most employers have already adjusted their wages upwards of $6.50, so the effect will be even smaller.
    4. The minimum wage isn't even enforceable in Missouri - if you want that money, sue your employer. Get a second minimum wage job to pay for legal fees. LMAO.
    5. Increasing the minimum wage will induce more labor force participation among youth, whose value of marginal product is low, but improvable. Ceteris paribus, and increase in the labor force participation rate will automatically boost the unemployment rate.

    So the effect of a minimum wage may just be a transfer from mom-and-pop concerns to Big Box stores.

    That's the true effect right there. I agree.

    BTW: Economics isn't a science. It's a social science. There's a tremendous difference. Using science as a talisman to beat some over-stylized model onto reality instead of adapting the model to accept realistic assumptions is akin to thumping folks on the head with a leather-bound King James in the hopes of converting them.