Tuesday, February 19, 2013

Thoughts from Bob Murphy on the minimum wage

Some of this is good and some of this is bad.

Obviously no one thinks demand curves aren't downward sloping, for example (although I admit this is a catchy rhetorical device, used by Borjas in the past). If you think this is the argument you are not understanding the claim. Bob also shares this graph which has been going around:

I'm a little surprised this is even making the rounds. Put this in real dollars instead of nominal and give me something like an inverse GDP gap and let me know what you think. I swear something else was going on around this time I just can't put my finger on it...

In my view, monopsony is Econ 101 logic - albeit a little later in the semester, and it does not require some kind of cartel, and the whole reason why nobody wants to be an unskilled worker is precisely that they can't work just anywhere! He's also concerned about disentangling state policies from minimum wage changes, which is odd - that seems trivial as long as you're not working in the cross-section. I may be obtuse, but I also don't think the point of monetary policy is to lower real wages, although money illusion type stuff is related to the upward sloping SRAS. I'm sure there are several other problematic claims in there too, but let's get to the good points:

1. He makes the point that this is not good policy in a depression. I tend to agree which was why I was not supportive the day after the State of the Union. I actually do think it's very plausible that it could on net boost aggregate demand. I think the employers "can afford it", that we are likely bargaining over surplus here, and that teenagers spend money. But you are probably going to be balancing an AD effect on a plausibly (although not very large) negative effect on teenage employment. We have much better options at our disposal than that. It does make me wish we had better research on the impact of the minimum wage over the business cycle.

2. He brings up an important point about contamination of the counterfactual - what if firms move across state lines. I imagine the argument is that in the short run this is not a major factor, and I'd probably be convinced of that myself. But if you have price effects or if people just seek out better service in the restaurant that's not understaffed - and they go across state lines to remedy it - then you would have a contamination problem. Practically speaking, in the short run, I doubt this is a problem. But I am sensitive to the contamination of the counterfactual issue - it's something that bugs me about a lot of job training evaluations where it's potentially a more serious problem. In the long run you might have serious firm relocation effects if the minimum wage is set too high. That would be interesting to study.

A final note. Anyone who says something like this: "I’m sorry, I just get the feeling that the story changes to fit the progressive policy of the day" needs to realize that although they may honestly think this is what's going on, they shouldn't be surprised when people stop taking them seriously. Bob is usually great at appreciating the thought process of the other side but not agreeing with it, so I'm not singling him out... it just seems like I'm hearing this way too much lately.


  1. (stats and commentary are from the original AEI post, link below)

    "Put this in real dollars instead of nominal"

    The nominal MW increased by 41% from 2007 to 2009, far outpacing inflation. Keeping everything in 2007 dollars (when the MW was $5.15), the min wages for 2007-2009 come out to:

    2007: $5.85 (after MW increase)
    2008: $6.41
    2009: $7.03

    That's still a 36.5% increase (from $5.15 to $7.03) over two years.

    "I swear something else was going on around this time"

    Yes, of course. But from 2002-07, the teen unemployment rate usually exceeded the nat'l avg by about 11%. Since the 3 MW hikes, the teen unemployment rate has exceeded the nat'l by about 16-17%.

    You may be right that the MW hikes had nothing to do with this. Still, I'm curious--what was the real cause?


  2. "Obviously no one thinks demand curves aren't downward sloping"

    Post-Keynesians? Steve Keen?


    1. Geez, apparently I need to watch colloquialisms around you.

      How about this: the question of whether demand curves are downward sloping has nothing to do with the major disagreements over the minimum wage.

      I use the word "major" here on the off chance that at some point Keen said something about the minimum wage. LK gives a good list of standard exceptions, but they don't have anything to do with the topic at hand.

    2. Sorry, I don't mean to be picky. How about, "Obviously I still believe that demand curves are downward sloping"?

      It's hard to tell exactly what one means in print sometimes. I figured that you were being colloquial, but I wasn't 100% sure--the Post-Keynesian position on the Law of Demand was quite shocking to me, so I didn't know if you were aware of it.

      Re: Keen, LK on min-wage--I wouldn't be surprised at all if they adamantly believed that demand curves for labor are not downward sloping. They seem to believe that market clearing prices and the tendency toward equilibrium are complete fictions in *all* markets, and esp. in the labor market. I think there's a high chance that, for Post-Keynesians, downward sloping demand curves and the MW are highly related issues.

      Anyway, I didn't mean to cause any unpleasantness. Please don't mistake me for attack dogs like MF, that's not my intended MO. :)

    3. Aha - sorry about that. Yes, there are those in the heterodox crowd that have very odd ideas about basic econ tools (some Austrians too). That's definitely true, but doesn't really speak to the sort of people talking about monopsony (which has a downward sloping demand curve).

    4. Post Keynesians do not deny that it is a real world empirical phenomenon that, generally speaking, when the price of a good is lowered, the quantity demanded rises - and vice versa.

      John S has raised issues which are basically about the theoretical form of the law of demand, the abstract law formulated with the troublesome ceteris paribus limitation. Is this like a law of nature? Can it even be proved? Is it even logically consistent?

      I just point you to Steve Keen, Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn; Zed Books, London and New York, 2011), pp. 38-73.

      If, for example, the ceteris paribus requires that real income must remain constant, all price changes must change real income, and it is not possible for a price change to occur in the real world without changing real income. We have a law that is formulated in a way that is grossly unrealistic, if not logically incoherent: even Mark Blaug notes this problem (Economic Theory in Retrospect (5th edn.). Cambridge University Press, Cambridge,1996, pp,140–141).

      Also, these ideas aren't "very odd": they are mostly the findings of higher-level neoclassical literature: how the law of demand can be proven only in the case of a single consumer (Keen 2011: 51). Nor can we generalise the law of demand and prove that it necessarily applies to a whole market either (Keen 2011: 51). A market demand curve “can take any shape at all – except one that doubles back on itself” (Keen 2011: 52).

      And final point: the Sonnenschein-Mantel-Debreu theorem?

    5. LK--just curious: what's your take on raising the min-wage to $9? Yay or nay? Will it harm young workers w/o a degree?

    6. Suppose we concede that minimum wages (MW) will cause some degree of unemployment (which concedes a lot that I don't think needs to be conceded).

      Well, one of the major arguments for a minimum wage is a moral one: people should not be working for wages below the poverty line.

      And does some degree of unemployment from the MW matter? Not if we really had full employment fiscal policy: whatever unemployment that resulted would be swamped by the effects of massive government fiscal policy. Unemployment would be low. Problem solved - and morally too by providing the poorest people a living wage.

  3. Daniel wrote:

    I'm a little surprised this is even making the rounds. Put this in real dollars instead of nominal and give me something like an inverse GDP gap and let me know what you think. I swear something else was going on around this time I just can't put my finger on it...

    Daniel, obviously I'm being catty on my blog too, so I can't object to your sarcasm here, but I have to ask: Do you honestly not see how the ball is in your court on this? The chart is showing the *excess* teen unemployment rate. If it were graphing the absolute teen unemployment rate, then yes, I would be an idiot.

    But since it's the excess rate, and I've thus far heard nobody even try to address this point, that means if there be an idiot in the conversation...

    1. I had not seen that this is the excess rate. This is interesting. Difference in difference methods typically use comparable workers in other states, but it would be interesting to see this "excess unemployment" concept used for DIDs with older workers in the same state (you'd be subtracting out the changes in the older person's unemployment).

      I still don't think it proves what you think it proves. I just did the same exercise for different education groups for higher and lower educated workers - it's the same pattern. My wife has a master's degree and she's working a job right now that only requires a bachelor's degree, which she applied for after the crisis (she didn't get other jobs). When demand is weak more qualified people are going to keep their jobs and be underemployed than less qualified people, regardless of the minimum wage.

      Now that I think of it, maybe this wouldn't make as good of a DID.

      I'm not sure I agree about whose court the ball is in. I'm citing meta-analyses of thorough, peer reviewed studies. I don't think you can just pull up a quick graph that doesn't isolate the minimum wage effect and say that the ball is in my court.

      So I think the same problems with this apply to the actual teen unemployment rate (and the graphs wouldn't look all that different, I imagine) - but I don't think you're an idiot. I'm just not particularly persuaded to drop the other stuff I've read.

    2. And this is more about hiring and turnover than wages. Most employers don't randomly fire their workers to give the inexperienced an equal chance. Those without experience are always at the bottom of the totem pole.

    3. "I don't think you can just pull up a quick graph that doesn't isolate the minimum wage effect and say that the ball is in my court."

      True, true. This graph by itself isn't a knockout punch, and it needs more refinement. Nevertheless, it does seem that the teenage UE rate was affected more severely than the general UE rate. Some explanation (whether min-wage hikes or something else) seems warranted here.

  4. When one sees such poor arguments not even addressing the most obvious of concerns, what can one think but ideological blindness. The AEI just confirms it.


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