An Anonymous First-Rate Economist On the Economics of the Minimum Wage

From Don Boudreaux of Cafe Hayek. Excerpts:

"First-year GMU economics masters student Ash Navabi sent to me notice of a commenter at on this post at Economics Job Market Rumors.  According to Ash, the commenters “Economist 1C88” and “Economist E446” are the same person.  Whoever this commenter is, I tip my hat to him or her.  He or she says in these seven short comments at least as much as, and perhaps more than, I’ve said about the minimum wage in dozens of longer blog posts – and he or she says it more eloquently, clearly, thoroughly, and cogently.  I paste these seven comments [I only post some-CM] with my own numbering, but without further edit or comment by me, below the fold.  Read these comments and treat yourself to the reasoning of a first-rate economics mind.  Every word below the fold (save for the obvious quotations from other commenters) is that of Economist 1C88/E446.  (For the record, I have no idea who this economist is.)"

"suppose that for every single margin, you’ve found a way to argue that the supply and demand responses are inelastic. Now take a step back and think about the hypothetical world you’ve created. In this world, both the supply and demand curves for low-wage labor are near-perfectly vertical. This means, of course, that any shocks to supply or demand must result in massive equilibrating movements in the market-clearing wage. Does this actually happen? Not even close: 10th percentile wages are surprisingly stable relative to 50th percentile wages, and the big changes that do occur tend to come from the minimum wage itself.

So the project of denying every supply and demand response at the low end of labor markets is doomed from the start. But this doesn’t stop many of you from attempting it. I call this (forgive the alliteration) the Selective Skepticism of Substitution Syndrome.

Whenever someone mentions a margin along which firms or households could substitute in response to changing prices, thereby creating unintended consequences from the policy you support, you’ll dig deep and find a way to argue (earnestly as ever) that the substitution response is actually close to zero. Then they’ll mention another margin; again, you’ll find a way to deny it, and so on it goes…

The problem with all this Selective Skepticism of Substitution is that it makes you look silly. Surely there are, in reality, plenty of ways in which agents substitute in response to changing relative prices. That’s how the economy works! It would really be quite a coincidence if substitution happened to be shut down in only those cases that matter for the minimum wage.


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I want you to look at the table of occupations from the BLS’s Occupational Employment Statistics, and sort by median wage. Think about all those occupations with median wages below $15 – and then also think about all the occupations with median wages a bit above $15 that still have 20 or 30 or 40 percent of workers making below $15.

If we raise the minimum wage to $15 and entry-level fast food or cashier jobs are just as easily available as they are today, do you really think that none of the kinds of people who currently train for the other jobs with median wages below $15 will be tempted to just pick the lower-end jobs instead? “Pest Control Workers” have a median wage of $14.74 – are you really so confident that none of them will say “f*** pest control, I’m going to earn the same wage working the counter at McDonald’s”? The 25th percentile wage for “rock splitters, quarry” is only $12.81 – are you really so sure that none of them will get tired splitting all those rocks and take the Safeway cashier job closer to home instead, once it pays just as much?

The answer is that of course some of them will be tempted to switch jobs (or choose different jobs in the first place). It won’t necessarily happen right away – there are costs to moving between jobs, and even bigger costs to switching careers, so you’re not going to do it in response to a fleeting, idiosyncratic, almost below-the-radar change in the minimum wage (like, erm, virtually all of the cross-state minimum wage changes used for identification in existing “cleanly identified” studies). But it will happen in the long run, and even a very small response would be enough to swamp low-end labor markets – which are quite small relative to the vast middle of the distribution – and displace the existing workers.

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They’ll say that some kind of Keynesian channel, with minimum wage workers spending out of their now-higher wages, boosts demand and undoes the negative effect. (This is deliciously innumerate: only a tiny fraction of the marginal consumption basket of minimum wage workers flows through to other minimum wage workers. Perhaps 189d is trying to argue otherwise by complaining that “preferences are not homothetic” – with the presumption, I suppose, that at the margin minimum wage workers happen to spend 100% of their income on McDonald’s, even though the inframarginal share is more like 5%!)

– They’ll say that it’s really a story of monopsony – where firms face upward-sloping supply curves for labor, and use this market power to pay workers less than their marginal product. If you force them to pay a minimum wage, the story goes, then monopsony considerations will disappear and firms will actually demand more labor. (Of course, unless the monopsony wedge is huge, it’s not clear how this story can justify an aggressive minimum wage – and if the monopsony wedge was really that big, it would imply massive returns to employee recruitment that are hard to reconcile with the evidence. Nor is it clear why monopsony is such a big deal in the low-end labor market – of all places!

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To top it all off, none of these stories can explain the key feature of the minimum wage literature that supporters are always citing – which is that estimates for the disemployment effect are generally near zero. Not positive or negative depending on the exact balance of the monopsony and substitution effects (which might vary predictably based on the features of the industry or occupation), but zero.

To be precise, the estimates cluster around zero, with these researchers never able to reject the null hypothesis of zero at a rate higher than you’d expect from chance alone, and the most precise point estimates getting closer and closer to zero (as you may have seen in all those funnel graphs). Taking all the evidence at face value, in fact, you must believe that we have a rather precise quantification of the effect of the minimum wage, at almost exactly zero.

How remarkable that the monopsony or Keynesian or whatever channels happen to precisely cancel out the substitution channel in every environment that left-leaning labor economists study!"