Sowell on Card & Krueger

by Don Boudreaux on February 17, 2013

in Myths and Fallacies, Prices, Reality Is Not Optional, Seen and Unseen, Work

Here’s a letter to someone who e-mailed me.  This woman is very much upset by my opposition to minimum-wage legislation:

Ms. Kristin Schall

Dear Ms. Schall:

Thanks for your e-mail.  You allege that I and other “conservative economists are pigheaded in [our] refusal to recognize the revolutionary findings of scientific political economists.”  You describe these findings as “proving beyond a doubt” that “raising minimum wages does not destroy the jobs of poor, struggling workers.”  And you single out for praise the research of economists David Card and Alan Krueger.

Card and Krueger did indeed conduct empirical studies purporting to overturn the proposition that raising the legislated minimum-wage reduces the employment options of low-skilled workers.  But I believe that their work falls far short of being the successful revolution in labor economics that you think it to be.

First, several empirical studies before and since the publication of Card’s and Krueger’s have shown results contrary to theirs.*  It’s simply untrue that there is such a bulk of empirical research in support of the Card-Krueger thesis that it has been proven “beyond a doubt.”  More importantly, evidence for their proposition is still so tentative that it is, in my opinion, insufficient to justify forcible interference by government in private labor contracts among consenting adults.

Second, Card’s and Krueger’s method of measuring the effects of raising minimum-wages – which involves surveying employers, before and after minimum-wage increases, to gauge their reactions to higher minimum-wages – is inadequate.  To explain this inadequacy I quote economist Thomas Sowell; it’s a lengthy quotation, but worthwhile to read in full:

“Imagine that an industry consists of ten firms, each hiring 1,000 workers before a minimum wage increase, for an industry total of 10,000 employees.  If three of these firms go out of business between the first and second surveys, and only one new firm enters the industry, then only the seven firms that were in existence both ‘before’ and ‘after’ can be surveyed and their results reported.  With fewer firms, employment per firm may increase, even if employment in the industry as a whole decreases.  If, for example, the seven surviving firms and the new firm all hire 1,100 employees each, this means that the industry as a whole will have 8,800 employees – fewer than before the minimum wage increase – and yet a study of the seven surviving firms would show a 10 percent increase in employment in the firms surveyed, rather than the 12 percent decrease for the industry as a whole.  Since minimum wages can cause unemployment by (1) reducing employment among all the firms, (2) pushing marginal firms into bankruptcy, or (3) discouraging the entry of replacement firms, reports based on surveying only survivors can create as false a conclusion as interviewing people who have played Russian roulette.”**

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

P.S.  I’m not a conservative economist.

* For example, Richard V. Burkhauser, Kenneth A. Couch, and David C. Wittenburg, “Who Minimum Wage Increases Bite: An Analysis Using Monthly Data from the SIPP and CPS,” Southern Economic Journal, Vol. 67, January 2000, pp. 16-40.

** Thomas Sowell, “Minimum Wage Laws,” in The Thomas Sowell Reader (New York: Basic Books, 2011), p. 112 (original emphasis).

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