≡ Menu

Quotation of the Day…

… is from page 455 of the second edition (1985) of Deirdre McCloskey’s brilliant textbook for courses in intermediate microeconomics, The Applied Theory of Price (footnote deleted):

The assertion that the minimum wage causes unemployment and especially that it causes unemployment among teenagers is controversial.  It is fair to say that most economists believe this assertion.  But some do not believe it, on various grounds.  One line of counterargument is that the minimum wage encourages businesses to improve machinery, buildings, materials, and other things workers work with to justify the higher wage paid.  It is argued that an unskilled worker pushing a broom is not as valuable as the same worker pushing a $1500 automatic broom-mop-waxer.  There is an element of confusion in the argument, for it must be admitted that if it were good for the economy to invest in such automatic equipment before the minimum wage the economy might well have done so already.  And if it were bad for the economy it is strange to argue that the investment thus induced artificially by the minimum wage is a good thing.  Another and more persuasive line of argument … is that working conditions will adjust to offset the higher wages.  A slow janitor at $2 an hour is no better bargain to the company than a fast one at, say, $5.  The company that hires the janitor will be willing to pay the higher price if it can specify that the janitors rush around at top speed.  A faster pace of work or a greater degree of self-supervision or a higher standard of precision might all tend to compensate for the higher wage paid.  This line of argument, however, has the same fault as the first.  True as it may be, it does not necessarily justify the minimum wage.  The mix of wages and conditions that existed before the state intervened in exchange presumably had some desirable feature, or else it would already have been bargained away.  In the end the argument in favor of the minimum wage must come down to a simple distaste for the result of exchange in the absence of intervention.  The feeling is that we simply should not tolerate anyone in a job so undignified that it was worth only $2 an hour.  Better that such people be supported by the rest of us, or even starve, than that they be required to work at such a job.

Thirty years ago, when Deirdre wrote the above, the economics profession was more in agreement than it is today about the negative consequences of the minimum wage on low-skilled workers.  The shrinking since then of this level of agreement, however, ought not be interpreted – as some people interpret it – to mean that today most economists agree that at least modest increases in the minimum wage do not reduce low-skilled workers’ job options.  If this 2013 survey of prominent economists by the University of Chicago’s Booth School of Business can be read as revealing the current state of thinking of economists generally, then a plurality of economists still agree that raising the minimum wage (at least if the raise is by 24 percent or more) does indeed “noticeably” make it more difficult for low skilled workers to find jobs.

(Note: The answers to which I refer are to Question A in this survey.  These same economists’ responses to Question B in the survey do not mean that ‘most’ or even a plurality of economists today deny the standard prediction that raising the minimum wage reduces low-skilled workers’ job prospects.  Question A is ‘positive’ while Question B is normative.  As David Hume made clear – and as these survey results serve as evidence – no “is” ever implies an “ought.”)

The shrinking of economists’ (weak but real) pre-1990s consensus in support of the proposition that even modest hikes in the minimum wage reduce job prospects for low-skilled workers began in earnest with the 1994 publication of David Card’s and Alan Krueger’s paper “Minimum Wages and Employment:  A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.”  My aim here is not to point out specific research-design flaws in this paper; David Neumark and William Wascher (among others) have done a fine job on this front.  Instead, I suggest that the warm reception that Card’s and Krueger’s paper received by many economists reflects the (to me sad) reality that the percentage of economists who have mastered sound price theory has shrunk.  Mastery of technique, as impressive as such mastery is, has both selected in to the economics profession people who are especially good at technique to the exclusion of people who are especially good at economic reasoning, and – because mastering technique is not costless – pushes students of economics to spend more time mastering technique and, hence, to spend less time mastering sound microeconomic reasoning.

In short, the economics profession is today more populated with people who simply do not know what probing questions to ask.  Such people suppose that if they gather and process data and then generate statistically significant results, they are doing sound research.  The conformity of such statistically significant results with some coherent underlying theory is either of no concern (“The data speak for themselves!”) or, more frequently, such conformity is forced in an ad hoc manner – such as when those economists who find empirically that modest hikes in the minimum wage cause no negative employment effects for low-skilled workers explain their finding by asserting that this finding is evidence of monopsony power in the market for low-skilled workers.

Such economists not only implicitly assume, often without justification, that their econometric results capture enough relevant features of an enormously complex and ever-changing reality to enable them to draw from their findings firm conclusions about reality.  These economists also – trusting their data but having too little facility with microeconomic theorizing – don’t probe with questions the validity of the theory that they grab to explain their empirical findings.

Such questions would here include “If monopsony power is so widespread as to justify minimum-wage legislation, why are profit rates in industries that employ lots of low-skilled workers very low?”  “Why do not other greedy employers enter the market to take advantage of these underpaid workers and, thereby, compete wages up to competitive levels?”  “Why should we suppose that our finding of monopsony power at time t and in place g means that such power will exist – with a certainty sufficient to justify our advocating a hike in the minimum wage – also at time t+1 in place g (or exists at time t in places h and j, or will exist at time t+1 in places h and j)?”  “What reason have we to presume that government officials can, as a rule, be trusted with the power to impose minimum wages in ways that are welfare-enhancing rather than vote-enhancing?”  “Why, if employers really do possess monopsony power, must these employers raise the wages of their current low-wage employees if and when these employers seek to hire more low-skilled workers?  That is, wouldn’t monopsony power give to employers who possess it the ability to hire a new worker at a wage higher than the wage paid to its existing workers without that employer worrying about losing any existing workers to other employers?  Or put differently: why presume that no wage discrimination exists in labor markets that are genuinely infected with monopsony power – wage discrimination that might well render even a modest hike in the minimum wage destructive of some jobs for low-skilled workers?”