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The Myopic Empiricism of the Minimum Wage
From Bryan Caplan.
"Unlike most opponents of the minimum wage, I admit that David Card and Alan Krueger's famous research on the topic is well-done. How then can I continue to embrace (and teach!) the textbook view that the minimum wage significantly reduces employment of low-skilled workers?
Part of the reason is admittedly my strong prior. In the absence of any specific
empirical evidence, I am 99%+ sure that a randomly selected demand
curve will have a negative slope. I hew to this prior even in cases -
like demand for illegal drugs or illegal immigration - where a
downward-sloping demand curve is ideologically inconvenient for me.
What makes me so sure? Every purchase I've ever made or considered -
and every conversation I've had with other people about every purchase
they've ever made or considered.
Another reason why Card-Krueger hasn't flipped my position: Despite
my admiration for their craftsmanship, even the best empirical social
science isn't that good. I expect true theories to predict the data
only two-thirds of the time - and false theories to predict the data
one-third of the time. (N.B. Many of the weaknesses in empirical social
science are systematic, so the Law of Large Numbers is no salvation). Bayesian upshot: The Card-Krueger findings only slightly reduce my initial high confidence that the minimum wage causes unemployment.
But suppose you disagree with me on both counts. Suppose you have a
weak prior about the disemployment effects of the minimum wage. Suppose
further that you think that the best empirical work in economics is
very good indeed. Doesn't existing evidence then oblige you to admit
that the minimum wage has roughly zero effect on employment?
Hardly. Why not? Because there is far more "existing evidence" than
meets the eye. Research doesn't have to officially be about the
minimum wage to be highly relevant to the debate. All of the following
empirical literatures support the orthodox view that the minimum wage
has pronounced disemployment effects:
1. The literature on the effect of low-skilled immigration on native wages. A strong consensus finds that large increases in low-skilled immigration have little effect on low-skilled native wages. David Card himself is a major contributor here, most famously for his study of the Mariel boatlift. These results imply a highly elastic demand curve for low-skilled labor, which in turn implies a large disemployment effect of the minimum wage.
This consensus among immigration researchers is so strong that George Borjas titled his dissenting paper "The Labor Demand Curve Is Downward Sloping."
If this were a paper on the minimum wage, readers would assume Borjas
was arguing that the labor demand curve is downward-sloping rather than vertical. Since he's writing about immigration, however, he's actually claiming the labor demand curve is downward-sloping rather than horizontal!
2. The literature on the effect of European labor market regulation. Most economists who study European labor markets admit that strict labor market regulations are an important cause of high long-term unemployment.
When I ask random European economists, they tell me, "The economics is
clear; the problem is politics," meaning that European governments are
afraid to embrace the deregulation they know they need to restore full
employment. To be fair, high minimum wages are only one facet of
European labor market regulation. But if you find that one kind of
regulation that raises labor costs reduces employment, the reasonable
inference to draw is that any regulation that raises labor costs has similar effects - including, of course, the minimum wage.
3. The literature on the effects of price controls in general.
There are vast empirical literatures studying the effects of price
controls of housing (rent control), agriculture (price supports), energy
(oil and gas price controls), banking (Regulation Q) etc. Each of
these literatures bolsters the textbook story about the effect of price
controls - and therefore ipso facto bolsters the textbook story about
the effect of price controls in the labor market.
If you object, "Evidence on rent control is only relevant for housing
markets, not labor markets," I'll retort, "In that case, evidence on
the minimum wage in New Jersey and Pennsylvania in the 1990s is only
relevant for those two states during that decade." My point: If you
can't generalize empirical results from one market to another, you can't
generalize empirical results from one state to another, or one era to
another. And if that's what you think, empirical work is a waste of
time.
4. The literature on Keynesian macroeconomics. If you're even mildly Keynesian,
you know that downward nominal wage rigidity occasionally leads to lots
of involuntary unemployment. If, like most Keynesians, you think that
your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying
that a government-imposed minimum wage leads to unemployment. The
challenge is tough because the whole point of the minimum wage is
to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.
The minimum wage is far from the most harmful regulation on the
books. Why then do I make such a big deal about it? Because it is a
symbol of larger evils.
From the standpoint of public policy, the minimum wage is a symbol of
the view that "feel-good" policies are viable solutions to social ills:
"Workers aren't paid enough? Pass a law so employers have to pay them
more. Problem solved." From the standpoint of social science, the
minimum wage is a symbol of the myopic view that you can become an
expert on X by reading nothing but the leading research that explicitly
addresses X: "Does the minimum wage reduce employment? Read the top
papers on the minimum wage. Problem solved."
We need to get rid of the minimum wage. But that's only a first
step. Our ultimate goal should be to get rid of the errors that the
minimum wage has come to represent."
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