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Bryan Caplan on Minimum-Wage Legislation

This entry at EconLog by my colleague Bryan Caplan is the best blog post you’ll read today – indeed, it’s likely the best post that you’ll read this week, and possibly even this month.  Bryan here says much more than I’ve said in my many postings, over the past month, on the minimum wage; Bryan says it much more concisely; Bryan says it much more compellingly.  Here’s Bryan’s conclusion:

From the standpoint of public policy, the minimum wage is a symbol of the view that “feel-good” policies are viable solutions to social ills: “Workers aren’t paid enough?  Pass a law so employers have to pay them more.  Problem solved.”  From the standpoint of social science, the minimum wage is a symbol of the myopic view that you can become an expert on X by reading nothing but the leading research that explicitly addresses X: “Does the minimum wage reduce employment?  Read the top papers on the minimum wage.  Problem solved.”

We need to get rid of the minimum wage.  But that’s only a first step.  Our ultimate goal should be to get rid of the errors that the minimum wage has come to represent.

My only disagreement with Bryan is that, unlike him, I do not admire David Card’s and Alan Krueger’s now-famous research on the minimum wage.  Bryan says that this research is “well-done” – by which I take him to praise the research.  I can agree that this research is well-done in many dimensions – it’s careful; it’s honest; it’s clever – without agreeing that it is good research.  I think it is not good research, for three reasons.

The first reason is that I cannot get past my initial reaction to reading Card’s and Krueger’s chief paper, in the American Economic Review, nearly 20 years ago; that reaction was “These guys completely miss the point of Fritz Machlup’s and George Stigler’s objections to the claims of Richard Lester.”  (The quotation found here from Thomas Sowell nicely captures the Machlup-Stigler point.)

My second reason for dissenting from Bryan’s favorable assessment of Card’s and Krueger’s research is that the theoretical model brought forward as the alleged explanation for their results is wholly unconvincing; as an explanation its application is simply too contrived.  There is literally no monopsony employer of low-skilled workers.  So to salvage the monopsony model in this instance resort is had to the claim that the supply curve of low-skilled workers facing employers is upward sloping.  This fact – as discussed in previous posts here – does indeed yield the neat conclusion that each worker’s hourly wage is kept below that worker’s hourly contribution to his or her employer’s bottom line.  But as I (and I’m sure others) have pointed out, this same model applies also in output markets; because every seller faces a downward-sloping demand curve for its product, a theoretical case can be made for price-ceilings – a case that shows that such ceilings might actually increase the quantities supplied in equilibrium on markets.  And yet I doubt that more than a minuscule handful of economists would leap from this textbook possibility to the conclusion that price ceilings are good policy.

The third reason I cannot follow Bryan in applauding Card’s and Krueger’s research on the minimum wage is found in everything else that Bryan says in his profound and penetrating post.  Because Bryan is both correct and wise in all else that he says in his post, I can conclude only that Card and Krueger, and those economists who buy their conclusions, disagree with much, and perhaps all, of Bryan’s arguments.

Empirical researchers who claim to find an exception to the law of demand – especially when any alleged confirmation of such an exception stands to please powerful political forces and to satisfy the popular priors of most people who have no exposure to formal economic theory – must be unusually careful.  I have absolutely no doubt that Card and Krueger conducted their research, and promote its findings, with the highest scientific integrity.  But that reality doesn’t render their research worthwhile.