Saturday, July 25, 2015

There are conflicting empirical studies of the effect of minimum wages. When that occurs, it's probably safest to go back to the basic theory.

See Paul Krugman on the minimum wage.
"Paul Krugman recently had this to say on the minimum wage:
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.
This struck me as very odd. I've done work that suggests that minimum wages probably cost jobs (although admittedly my research was on the Great Depression, and hence may not be applicable to today.) But it's widely known that there is lots of other research suggesting that minimum wages cost jobs. In addition, economic theory suggests that when you make something more expensive, people will buy less of it. Perhaps strangest of all, Krugman's claim is contradicted on the very first page of the study he links to as having "confirmed" his claim:
On balance, case studies have tended to find small or no disemployment effects. Traditional national level studies, however, have produced a more mixed verdict, with a greater propensity to find negative results.
Paul Krugman has said that he doesn't read conservative blogs, so obviously he may not be familiar with the literature on how the minimum wage costs jobs. But that's no excuse for not even reading the first page of the study he links to in support of his claim.

Krugman doesn't come right out as say that the Card-Krueger study provides support for the Democratic Party's recent attempt to raise the minimum wage, but that's surely the implication that most readers will draw from his post. And yet even the Card-Krueger study doesn't necessarily support the Obama administration's proposal for a $10.10 minimum wage, or the Congressional Democrats attempt to raise the minimum wage to $12/hour. The studies he cites look at the effects of small increases in the minimum wage.

There are conflicting empirical studies of the effect of minimum wages. When that occurs, it's probably safest to go back to the basic theory. That doesn't necessarily mean that minimum wages are bad policies, perhaps the gains in income outweigh the cost in unemployment. But it's disingenuous to claim that we can raise minimum wages without any disemployment effects."

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