Saturday, July 18, 2015

Matthew Kahn Questions Krugman On The Minimum Wage

See Paul Krugman Enters the Field of Labor Economics.
"Did Prof. David Neumark agree with Paul Krugman's NY Times piece today praising the benefits of raising the minimum wage?   Here are some direct quotes that challenged some things that Becker, Heckman, Rosen, Lazear, Murphy and Topel taught me a long time ago.

"Many economists used to think of the labor market as being pretty much like the market for anything else, with the prices of different kinds of labor — that is, wage rates — fully determined by supply and demand. So if wages for many workers have stagnated or declined, it must be because demand for their services is falling."

.....

Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.

How can this be? There are several answers, but the most important is probably that the market for labor isn’t like the market for, say, wheat, because workers are people. And because they’re people, there are important benefits, even to the employer, from paying them more: better morale, lower turnover, increased productivity. These benefits largely offset the direct effect of higher labor costs, so that raising the minimum wage needn’t cost jobs after all."

My Questions for Dr. Krugman;

1. Taking his claims as true, why do small businesses lobby against raising the minimum wage?

2.  Why did Tom Holmes find in his seminal 1999 JPE paper that manufacturing clusters on the Right to Work Side of state borders and avoids the union side of the border?

3.  Why did Erin Mansur and I find the same result in our 2013 paper where we build on Holmes' paper and show that labor intensive manufacturing industries are even more likely to avoid the union side of the border as they are more likely to locate in the adjacent county in the Right to Work State? 
4.  The Card-Krueger study is certainly important but the variation they used to estimate their effect is tiny relative to the upcoming doubling of the minimum wage up to $15 in cities such as LA and San Fran. How is Dr. Krugman so sure that he can "extrapolate out of sample" to a policy that has never been tried before?  Does he have a valid structural model that he can use to conduct such extreme policy counter-factuals?"

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