Economics: It's Complicated

When you pass a law which bans firms from employing people for less than per hour, it logically follows that a profit-seeking firm won't employ people who produce less than .

If people produce more than per hour, the overwhelming effect of the law will be to ensure that they are forced to receive compensation in a pecuniary form rather than in a non-pecuniary form -- eg, as cash rather than as health benefits or proximity to home. Since the value of the latter two are tax-free whereas pecuniary compensation isn't, this is likely to harm the low-paid by shifting them to an inferior form of compensation.

So, the only theoretical case you have where this might benefit the low-paid is when there is an extreme monopsony situation for low-paid work. People who care about ensuring that the low-paid get paid their marginal productivity would more fruitfully turn their efforts to removing barriers to entry for firms who can profit by employing them at higher wages.

There's also a rational expectations case to consider -- that if it is difficult to shed workers, and employers expect compulsory minimum wages to rise above what workers produce, then they might not hire them in the first place. I'm not sure if anyone has studied this particular idea, which would of course explain Card-Krueger's results while invalidating their theory.

I really don't see much in this interview that would challenge what is taught in undergraduate economics. The general problem with public debates on economic issues are overwhelmingly that people ignore basic economics, not that they are overly dogmatic about it.

"The predominant theme, I suppose, is that after Economics 101 comes . . . a whole bunch of additional stuff."

When I was a college student in the 1970's, one of my econ teaching fellows remarked that, in a sense, all of economics was in the introductory textbook, and every thing in more advanced courses was just elaboration and special cases. And, that was true, because the textbooks were all variations on Paul Samuelson's textbook, which was, itself, a re-write of his 1947 "Foundations of Economic Analysis", which had codified economic theory into systematic algebra and calculus. Foundations was a kind of economic Euclid, proving one theorem after another, but Samuelson's textbook was a more open and eclectic work, incorporating many examples and illustrations; still, they shared a similar outline.

Economists love their theory, and Samuelson had codified the theory, and economic textbooks became about presenting that theory.

Card's work is empirical. And, although it has some fairly harsh implications for economic theory, like most economics done over the last 50 years, it has not fed back on the theory as presented in the textbooks. The unwillingness of economists to alter the fundamental theory in response to empirical investigation, has made professional work in economics increasingly esoteric, and the textbooks increasingly misleading. It is no longer true that all of economics is in the textbook; increasingly, very little economics, as the specialists know it, is in the textbooks.

It isn't just that there is more, and more complicated, after the textbooks. The problem is that what is in the textbooks is wrong, incoherent or irrelevant, but it is never modified, refocused or corrected.

Re: When you pass a law which bans firms from employing people for less than per hour, it logically follows that a profit-seeking firm won't employ people who produce less than

If they need the work done, they'll pay what they have to. That's the way the real work work. Don't believe me? Check out your own spending habits. If you're like me, you may think that $135 a month for cable TV + broadband Internet is way too expensive. But I do need the service and there's no cheaper alternative, so I grit my teeth and pay it. And employers have options that are denied to me as a cosnummer: they can raise their prices (and since the increase in the minimum hits everyone, they would not be at competetive disadvanatge vis a vis their competitors who also would need to do that); and they can pay their non-minimum wage folks (and themselves-- and in publicly traded companies, their stockholders) slightly less. Money, and productivity too, are 100% fungible.

"If they need the work done, they'll pay what they have to. That's the way the real work work. Don't believe me? Check out your own spending habits. If you're like me, you may think that $135 a month for cable TV + broadband Internet is way too expensive. But I do need the service and there's no cheaper alternative, so I grit my teeth and pay it."

Then it's worth $135/month to you. If they raised it to $500/month, would you still pay? $1000? Why not?

Hayek also thought that European levels of intervention in the economy lead to oppression and failure as well. And, he was wrong.

I think there is kind of shell game going on when libertarians cite Hayek it isn't always clear whether they are citing him on the point everyone agrees on (central planning is bad) or the point not everyone agrees on (the welfare state is bad).

If you're like me, you may think that $135 a month for cable TV + broadband Internet is way too expensive. But I do need the service and there's no cheaper alternative, so I grit my teeth and pay it.

You don't need cable TV and broadband internet.

Geoffrey Hodgson (How Economics Forgot History) says that the ad hoc adaptations for special cases (kludges, tweaks) do most of the work of economics. Benoit Mandelbrot (The Misbehavior of Markets) says the same, and compares economics to Ptolemaic astronomy, which kept adding ad hoc epicycles until the system worked.

Logically according to one description of the system, small increases in minimum wage should increase unemployment. Empirically, it seems that they don't, or that the small increase in unemployment is overbalanced by the improvement in the lives of those who get the increase.

And now we have two (2) people here already, or even three (3) out of four (4) total, whi simply repeat the dogma Card's results called into question, in the belief that that would settle the argument.

The theoretical prediction that an increase in the minimum wage will cause some people to be laid off is a comparative statics result. It predicts a direction, not a magnitude. The prediction may be true, but a small change in the minimum wage may yield an effect too small to be measured in comparison to other relevant factors. I think this was the main substantive point of the original post -- we are talking about small changes with regard to the theoretical effect (although potentially large changes in people's material well being), which means it is an empirical question what the effect will be. Those who reject Card's work on theoretical grounds are mis-representing the theory.

Along with his minimum wage study, David Card's other most famous study was one widely cited to show that immigration doesn't lower wages. He looked at wage levels in Miami in the five years following the Mariel Boatlift of 1980 and showed they weren't lower than in four control cities where there wasn't a sudden huge influx of immigrants.

As far as I can tell, nobody ever responded to this study by pointing out what was different about the economy of Miami in the years 1980-1985 that might have raised wages. Can you think of something that was unusual about Miami in the first half of the 1980s that might have injected a lot of money into the local economy, thus raising wages? I give the answer here:

http://www.vdare.com/sailer/060707_borjas.htm

Economists are supposed to be "worldly philosophers," but in my experience, economists (left, right, or center) tend to be unaware of what's going on in society to the point of autism.

Matt is quite right. We've left the Age of Ideology behind and are now in the Age of the Fine Print:

At the end of the Cold War, Francis Fukuyama announced that we had reached "The End of History." Obviously, somebody forgot to send History the memo.

Yet, in the narrow Hegelian/Marxist sense in which Fukuyama used the term "History," he was correct. The big controversy of the 20th Century—socialism vs. capitalism—was effectively over. Pure socialism was dead. Capitalism had survived, but not laissez-faire. From now on there would be markets, but with government interference.

Unfortunately, many commentators are still living in the past. They think basic ideology is still the big issue—the free market vs. socialism. Well, history hasn't ended, but it has moved into a new stage. Regulated capitalism has won, so most of the political struggles in the future are not going to be about the old boldface big ideas like nationalizing the means of production, but about the fine print.

The politics of the present and future will revolve around various organized interests trying to put one over on the disorganized rest of us in the particulars of legislation.

Contra Fukuyama, there will never be a ceasefire in this struggle between the clever and the clueless. The Age of Ideology is over but the Age of the Fine Print is upon us.

For instance, back in 1996 when the California legislature unanimously deregulated the state's electricity market, few in public life bothered to read the fine print because the ideological principle of deregulation seemed so historically inevitable at the time. Well, it turned out the devil was definitely in the details. The only people who mastered the minutiae were the traders at Enron and other such firms, who raped California out of billions.

So if the US had had no minimum wage in the 1990s, when unemployment was at 4%, how low do the laissez-faire purists think unemployment would have dropped? 3%? 0%?

Meanwhile, if the US had had no minimum wage in the 1990s, how much lower would competitive forces have driven wages at the bottom end of the scale? Would people who were making $5 an hour instead have been making $4 an hour? Those making $7 an hour, $6 an hour? And, with no bottom limit, how many workers would have been employed at $1 an hour?

Ah, but perhaps that would have been made up for in lower prices, due to lower demand. Okay, when unemployment was at 4% and inflation was at 2%, we could have had unemployment at 3% and inflation at 1%? Really? Seriously? How come no society in the world that lacks a minimum wage ever exhibits numbers like that?

Everyone who has ever actually hired low-skilled labor knows that the people you're hiring lack bargaining power. You could easily jew them down an extra buck an hour, and they'd still have to take the job. (Note: I am a flaming Hebe.) But you'd be taking food out of their kids' mouths, and decent people tend to pay their low-skilled workers at least a little more than the lowest price they could possibly get them for. The minimum wage is simply a society-wide means of ensuring that at that lowest wage level, employers aren't tempted (or even, in a profit-maximizing shareholder capitalist system, forced) to behave like dicks.

Not to be a smartass, but what does "Consequently, it you hard parties of the moderate, democratic left nationalizing industry" mean?

Not to be a smartass, but what does "Consequently, it you hard parties of the moderate, democratic left nationalizing industry" mean?

I was wondering that myself. I guess it sounded good at the time.

I am a flaming Hebe.

No. You're a Bad, Bold, Big-Nosed, Biblical Brother!

I hate to interrupt a good economic argument with a moralistic one, but roughly 16% of the population has an IQ of 85 or less. All these parallel discussions of trade, immigration and wages tend to ignore the question of how these 48 million Americans are supposed to earn a living.

The political and economic system has to provide for them somehow. I'm not suggesting they should be elected President or anything, but these are good people who deserve the means to support themselves and their families with dignity. They need living-wage jobs.

It's John Kenneth Galbraith v. Charles Murray. Either the price of a Blooming Onion fried appetizer should be high enough that the chef and the waitress and the dishwasher don't have to live with their parents until they're 30, or who cares about them. It isn't my fault they were born stupid and their market wage is exactly what they deserve.

Once you know who's side you're on, the economics flow naturally.

Fuck. Thirty years of increasing productivity with declining real wages and accelerating inequality and the brightest young "Liberals" in the blogosphere are writing paeans to Hayek. Maybe just a little VAT tax, some means-testing and raising caps, and the Delphi and Enron pensions will be covered. Just little tweaks and adjustments, after all we are purt near perfection. No need for ideology or passions, we mustn't frighten the bond markets. And don't look at the murdered countries and don't take the temperature.

Can we outsource MY and Ezra's blogs to Venezuela or something?

Chris (first comment above) said:

"the only theoretical case you have where this [the minimum wage] might benefit the low-paid is when there is an extreme monopsony situation for low-paid work. People who care about ensuring that the low-paid get paid their marginal productivity would more fruitfully turn their efforts to removing barriers to entry for firms."

This is a typical example of somebody who didn't take the advanced course and doesn't realize how complex theory can be. Monopsony is not simply about the presence of competitive firms -- any situation where the individual firm supply curve slopes upward at all (elasticity of supply less than infinity) is a monopsony. In other words, any case where a firm does not lose all of its employees immediately by cutting wages below the "market-clearing" level is monopsonistic. Lack of labor market competition is only one reason this could happen, there are hundreds of others. In particular, Card and Krueger presented a pretty convincing model of turnover-based monopsony, so that low wage labor markets characterized by high turnover show monopsonistic characteristics.

The statement above should have read "any situation where the individual firm LABOR supply curve slopes upward at all...". Though I guess it's obvious from the context.

Jalmari - It's certainly true that lots of people (often in the political sphere) choose the economic theory that supports their ideological position. But it's NOT true that all economists choose their values first and their beliefs second. There are plenty of economists out there who want poor people to have good lives, but don't think the minimum wage is the right way to do that.

As for my take on minimum wages, I'm pretty agnostic. I agree with Brooksfoe that minimum wage hikes generally don't impact corporate bottom lines enough to make them hire fewer workers (if the minimum wage were, say, $100/hr, it would be a different story). But it's also true that most minimum wage benefits go to teenagers, most of whom aren't poor.

From what I've read, I'd be much more in favor of "living wage" laws that apply only to people who are supporting families.

Excellent post. You hit the nail on the head.

Not to be a smartass, but what does "Consequently, it you hard parties of the moderate, democratic left nationalizing industry" mean?

I parsed it as "Consequently, you had parties of the moderate, democratic left nationalizing industry..." But i'm not quite sure that's right.

I'd love to hear a recommendation for an intro economics text that does actually incorporate empiricism, and maybe even some of the research from recent decades, if such a thing exists. Anyone?

The naive supply-and-demand argument put forward by the first post suffers from two problems: it doesn't predict what actually happens (Congress has raised the minimum wage about 22 times since the 1950s --- all but one of those increases were followed by a drop in unemployment), and it doesn't take into effect what happens to those increased wages: overwhelmingly, they are spent on goods and services, which leads to decreased unemployment.

Yes, McDonalds may lay off a fry-cook because the manager can't afford the increased pay-rate. However, the manager's other employes are now spending their increased salary buying groceries. The fry-cook, and the fry-cook's unemployed brother, end up finding jobs as stock-clerks. (Actually, McDonalds may find that demand has increased enough as people spend their newly increased minimum wage that they retain the fry-cook.)

Think of it as "trickle-up economics".

Re: If they raised it to $500/month, would you still pay? $1000? Why not?

No, but we are not talking an increase of that vast magnitude at all. Here's something else that's true of human economic behavior: it's a step function not a smooth function. That is, you can change the inputs (like the price of labor) by a small amount and there will be no change at all in the results. To change the results you have to make a change that hits or exceeds some trigger point. You can find plenty of examples of this principle in your own life. Someone turns the thermostat up by a couple degrees. Maybe you notice but you don't do anything about it. But if someone turns it up by ten degrees, then you react. Or, gas goes up by a nickle a gallon. Big deal, you grimmace but don't change your driving habits, gas goes up by a dollar a gallon and suddenly you start to drive a lot less.

Mr Noah --- currently some 49% of minimum wage workers are over 25 years of age according to the BLS.

That is the point of the Card discussion, look at the actual facts before you go applying some simple analysis.

Teenagers -- 16 to 19 of age account for 24% of minimum wage workers.

The BLS has very nice data on all kinds of things about minimum wage employees.

Maybe you should look at it.

If you raised the minimum wage a penny an hour, would any employer fire an employee rather than pay the extra 40 cents a week? In a large enough economy, there may be some business somewhere operating that close to the bone, but the impact on unemployment would be negligible. Given the modest real value of the minimum wage and any increases over the last quite a while, isn't the likeliest explanation for why Card's work doesn't correspond to Economics 101 theory that the amounts are too small to matter?

Here I present references arguing that the intro economics argument on minimum wages is incoherent and invalid on its own terms. By the way, the history of the Harvard economics department (tenure battles over Sweezy, Bowles and Gintis; Marglin not being permitted to teach a section of the intro course; Mankiw; and Shleifer) suggests the Harvard economics department is a propaganda outfit.

Economics is all about "cash flow." FDR and his advisers in the 1930s realized that the only way to pull America back from the brink of utter collapse was to pump more money into the pockets of a large percentage of Americans without money. Why? Because these unemployed and underemployed Americans would spend it, thus stimulating private business growth, and thus more jobs...thus creating a sound, economic "cash flow" loop...putting money into the hands of the neediest who would spend it.

The federal government had to be the catalyst, though, if this plan was to work. The private sector, being so fragmented, wouldn't be able to sustain such a gargantuan, nationwide economic effort. Thus, FDR's creation of all the federally-funded work projects that put money into people's pockets...for them to spend in the private business sector...stimulating job and business growth. In other words, stimulating "cash flow," especially in the private sector, that had been sluggish since the stock market crash.

Of course, the federal monies had to come from somewhere, which meant that the wealthiest individuals and families saw their federal taxes increase, which left them wealthy, but just not as extremely wealthy as before. And then the economic recovery began...with WWII finally providing more than enough employment opportunities and money in people's pockets.

It is my contention, though, that if FDR and his advisers had not done what they did in the 1930s to pull all of America up by it's bootstraps (especially the poorest), then America would have been less well-prepared to handle the Nazi/Imperial Japanese threat that erupted into world war in the 1940s. Thus, FDR's redistribution ("cash flow" reversal) of American wealth during the 1930s helped prepare the U.S. for WWII and our subsequent victory.

So, what about increasing the minimum wage today? This represents a similar "cash flow" reversal in which presumably money from the wealthiest in our society is redistributed among the poorest members of our society, thus stimulating increased consumer spending (especially by the poorest), leading to job creation and small business expansion.

But why do I say presumably? Bush and his wealthy neo-con Republican and neo-con Democrat pals believe that doing the exact opposite is called for. That is, giving huge tax breaks to the wealthiest members of our society, while disrupting (if not outright destroying) the "cash flow" going to the poorest members of our society. But, of course, we all see the results of this "money grab" by the wealthiest citizens in our society: the concentration of wealth (and power) at the top, the shrinking, beleaguered middle-class and more and more U.S. citizens sinking into poverty.

Now, transpose what Bush and his elite advisers have done back to the 1930s. Would what they are doing today have helped America pull out of the Great Depression or would their economic policies have hurt our country, and as I've contended, made us less capable of waging WWII successfully? I believe Bush economic policies back in the 1930s would have been a major disaster (equivalent to the inept Republican response to Hurricane Katrina but on a national scale) especially as Communism and Nazism were on the rise.

However, we face a similar situation today. Supposedly we, as a nation, are at war, a world war, called the War on Terror, that Bush and the Republicans say will be neverending (to speak nothing of Iraq). And their "sensible" economic response? Give huge tax cuts to the wealthy while doing everything in their power to impede, disrupt, destroy our nation's "cash flow" to the poorest in our society...with the middle-class being squeezed in the middle. Sane? Hardly. Greedy? Definitely. Dangerously incompetent? Yes.

So, how do we reverse this insane, greedy, dangerously incompetent economic policy favored by the "culture of corruption" Republicans? Increase the minimum wage immediately, for a start. The poor will spend it, generating jobs and stimulating small business growth, while shoring up the shrinking middle-class from below.

It's the only "sane" thing to do, which is why Bush and the "culture of corruption" Republicans will be totally against it.

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