This is a very good article from Free Exchange (The Economist).
Microeconomics is the good economics, where economists by and large agree, conduct controlled experiments that confirm or modify established theory and lead to all sorts of welfare-enhancing outcomes.
To which I respond with two words: minimum wage.
One of the first things we learn in microeconomics is that demand curves slope down: raising the price of something reduces the quantity demanded. A minimum wage should reduce the demand for low-skilled workers as surely as a price floor on milk will reduce the amount bought.
Yet ask any two economists – macro, micro, whatever – whether raising the minimum wage will reduce employment for the low skilled, and odds are you will get two answers.
It is funny how the textbook understanding of minimum wage has fallen out of favor (make something more expensive and people buy less, amazing!). Greg Mankiw cites 79% of economists agree that minimum wage increases unemployment among young and unskilled workers. The data he is working with is a little older. A more recent poll of economists show that only 34% of economists agree and 32% disagree that a $9 minimum wage would make it noticeably harder for low skilled workers to find employment. 24% are uncertain. A part of the difference in the two polls is the inclusion of this word, “noticeably”, but I don’t think that’s enough to make up the difference. What used to be an economic consensus is much more of a split now.
What is true of all economics is that as soon as you wander into policy, you find the debate hijacked by policy advocates who write, report and promote research that reinforces their side of the debate while ignoring or disparaging the other.
I’m not sure if the author is referring to journalists or economists. Economists are certainly capable of confirmation bias of their right wing or left wing presuppositions. My impression is that the minimum wage debate divides up very well by ideology – leftish economists like minimum wage more than rightish economists.
It is fair to say that when it comes to the minimum wage, Barack Obama is a policy advocate, not an economist. Tonight in his State of the Union Address, he will repeat his call to raise the federal minimum wage. Today he has announced he will use his executive authority to entitle employees of federal contractors to a higher minimum wage. In its release the White House says:
‘A range of economic studies show that modestly raising the minimum wage increases earnings and reduces poverty without jeopardizing employment.’
Well, “range” is a pretty imprecise word. There’s also a range of studies that shows raising the minimum wage doesn’t reduce poverty and does jeopardize employment.
Politicians do what politicians do. I don’t blame the politicians as much as all the rooters and ranters who fail to exhibit calm rational skepticism of the evidence for what they’ve always believed in the first place.
The White House also says:
‘Low wages are also bad for business, as paying low wages lowers employee morale, encourages low productivity, and leads to frequent employee turnover—all of which impose costs’…
…is it plausible that Wal-Mart or McDonald’s know their own business so poorly that they are systematically hurting themselves by paying too little? Isn’t it more likely that they have weighed the tradeoff between low wages and poor morale and chosen the combination that maximizes profits?
The idea that the federal government needs to tell firms how to make profit is about as about as ideologically driven as an idea can get. Sometimes I hear about how Henry Ford paid his workers a significant premium so that they could turn around and buy Ford cars -- therefore government should force employers to help themselves by enacting the same model. This old wives tale is very far fetched logically, even if Henry Ford himself promoted it. A serious account of the magnitudes makes the story look ridiculous. With 14,000 workers selling 170,000 cars a year, the premium being paid to the workers couldn’t possibly pay for itself. Not even close.
And besides, wouldn’t you just pay the premium in the form of employee discount so that workers wouldn’t spend it on Toyota products or anything else that they can spend money on?
Why would Henry Ford pay his workers more than he had to? For the same reason almost every employer today pays above the minimum wage – to bid for better workers and reduce turnover. When only 2-4% of workers are paid the minimum wage, one is going to have to admit that on some level workers have bargaining power. In order to believe that they have none you’d have to also believe that all of these employers who pay more than they have to are very very charitable or very very confused about how to make money.
That’s my account of the Henry Ford myth. I hope it didn’t come across as too ranty. Back to The Economist on macro, micro, and the minimum wage.
The article ends with a thought on income inequality which strikes me as wrong,
They are doing the same in the debate over income inequality. Economists can offer explanations for why inequality has risen and what might reverse it, but they cannot advance positive reasons for what the right level of inequality is; this is function of social preferences outside the realm of empirical or even theoretical economics. (At least, they can’t make the case on microeconomic grounds. There are macroeconomic reasons to fret over higher inequality because shifting income from the high consuming poor to the high saving rich reduces aggregate demand.) Fundamentally, economists are troubled by inequality for the same reason non-economists are: it doesn’t seem right.
“It doesn’t seem right” is a great argument for the public, but the economists I’ve heard talk about an efficiency-equity tradeoff. There are a couple reasons why they say equity is valuable 1) because economic consumption has diminishing returns – that is an extra $1 to a millionaire is less valuable than an extra $1 to someone in poverty. This account is not in favor of equality per se, but only equality in so far as it improves the absolute living conditions of the poor (but not necessarily relative to others). 2) the second reason is in favor of equality in and of itself. Economists don’t favor efficiency, they favor utility for which efficiency is a means. If utility is a variable somewhat dependent on equality (I’m not as happy because my standard is what other people have), then equality is a good in itself.
Has the author ever heard Joseph Stiglitz (2001 Nobel Prize winner)? One argument he doesn’t make (to other economists) about the value of equality is “it doesn’t seem right”.
