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Is Economic Theory Worthless?

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Here’s a letter to economics educator Elaine Schwartz:

Elaine:

Thanks for including me on the mailing list for your Econlife [2] series. Your series is very good.

I can’t resist, though, commenting on the quotation that you shared today [3] from Nobel laureate economist Eric Maskin on the proposal to raise the federal minimum wage to $15 per hour. Asked by surveyors at Chicago’s Booth School of Business [4] if “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states,” Prof. Maskin replied that he’s “uncertain.” The reason he gave for his uncertainty is this: “An increase to $15/hour is a big jump, and I’m not sure we have the data to know what the effect on employment would be.”

Prof. Maskin’s response makes me weep for my profession. If economic theory does not allow us to predict the general effects on employment of a 107 percent increase in the minimum wage, then economic theory is worthless. Why develop, learn, and teach economic theory if, in the face of such a big jump in the minimum wage, we must nevertheless wait to see whether or not any negative impacts on the employment of low-wage workers are revealed by the data?

I for one don’t believe that economic theory is worthless. I for one reject what so many other economists today apparently embrace – namely, the notion that the only role of the economist is to report on “the data” and to otherwise remain mute.

It’s dismaying that an economist as prominent as Prof. Maskin evidently has no idea that more than doubling the hourly wage will reduce employers’ demand for low-skilled workers.

Someone might defend Prof. Maskin by noting that – as Deirdre McCloskey [5], Richard McKenzie [6], and, most recently, Jeffrey Clemens [7] have correctly argued – employers can respond to a rise in the minimum wage in ways other than by employing fewer workers. Employers can instead, for example, reduce the number of hours workers work, scale back fringe benefits, or increase jobs’ onerousness.

All true. Yet it’s impossible for me to believe that such a gargantuan hike in the minimum wage will play out in all ways other than in job losses. But even if I’m mistaken, if Prof. Maskin had these other negative consequences of minimum wages in mind, he surely would have mentioned them in his comment.

Again, if we economists truly cannot know, until we are told by the data, the general impact that a 107 percent increase in the minimum wage will have on the employment prospects of low-skilled workers, we ourselves are as devoid of advanced, worthwhile skills as are the workers who will be cast into the ranks of the unemployed when the minimum wage is raised.

Sincerely,
Don

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