The CBO On Minimum-Wage Studies

From Don Boudreaux of Cafe Hayek.

"EconLog’s David Henderson has read carefully – in a way that I have yet to do – the Congressional Budget Office study that predicts employment losses for low-skilled workers (only teenagers?) if the national minimum wage in the U.S. is raised.  David highlights the following passage from the CBO’s explanation of its method – a method that included a survey of the existing empirical literature on the effect that minimum-wage legislation has (or doesn’t have) on the number of jobs available to low-skilled workers:

Second, CBO considered the role of publication bias in its analysis. Academic journals tend to publish studies whose reported effects can be distinguished from no effect with a sufficient degree of statistical precision. According to some analyses of the minimum-wage literature, an unexpectedly large number of studies report a negative effect on employment with a degree of precision just above conventional thresholds for publication. That would suggest that journals’ failure to publish studies finding weak effects of minimum-wage changes on employment may have led to a published literature skewed toward stronger effects. CBO therefore located its range of plausible elasticities slightly closer to zero–that is, indicating a weaker effect on employment–than it would have otherwise. (p.22)

As David says, clever.

If I understand correctly what’s going on here, it’s not obvious to me that publication bias for minimum-wage studies runs the way the CBO assumes.  Remember, the standard prediction in economics – the prediction that jumps out most obviously from familiar, textbook supply-and-demand analysis – is that raising the minimum wage reduces the number of jobs available to low-skilled workers.  Empirical studies that find negative employment effects of hikes in the minimum wage are a cause for yawning; in contrast, studies that find no or only small negative effects on employment seem exotic and counter-intuitive (to most professional economists, at least).  If there is publication bias, therefore, these latter studies are more likely to be published in over-large numbers than are the former.

So quite plausibly, any publication bias runs in the direction opposite to that which is assumed by the CBO.  In other words, it makes more sense to assume that the published papers on the employment effects of minimum-wage legislation are biased in favor of those papers that find no or only weak effects of the minimum wage on the employment prospects of low-skilled workers.

The CBO study, in short, seems to give undue weight to the ‘no- or small-effect papers’ and, hence, too little weight to the papers whose findings are more in line with standard supply-and-demand analysis.  If I am correct, then the negative effects on employment of minimum-wage legislation are likely even greater than those predicted by the CBO."