Saturday, 23 January 2010

Econ 101 and the minimum wage

In a posting about the minimum wage Eric Crampton, at Offsetting Behaviour, quotes the National Business Review as saying
When the 2025 Taskforce made its controversial list of proposals for increasing New Zealand’s economic performance to catch up to Australia’s, it missed an obvious one.

The only way to really lift New Zealand’s woeful economic performance is to smack every New Zealander over the head with a textbook of “Economics 101”.

This nation-wide lack of financial common sense was reflected in a poll by the NZ Herald that found 61% of respondents want the minimum wage lifted to $15 an hour.

Of course, the Herald didn’t ask the follow-up question- “do you support higher unemployment, particularly among groups vulnerable to labour market changes such as young people and Maori, as well as the possible collapse of many businesses already burdened by ever-increasing government-imposed costs?”
One of those who needs a smack 'over the head with a textbook of “Economics 101” ' is Marty G at The Standard.

In a comments to a posting about the minimum wage at The Standard I made the point that most economists would argue that an increase in the minimum wage would increase unemployment among those at the bottom end of the wage distribution. When asked for empirical evidence to back up my claim I referred to the book, “Minimum Wages” by David Neumark and William L. Wascher, Cambridge: MIT Press, 2008. To counter my claim Marty G wrote
One book by two no name US neoliberal economists, whose 2007 paper says:

“We review the burgeoning literature on the employment effects of minimum wages – in the United States and in other countries – that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage.”
This quote interested me since it seems to undermine the Economics 101 idea that demand curves slope downwards, so I went looking for the quote. The "two no name US neoliberal economists" are David Neumark - Professor of Economics, University of California, Irvine - and William L. Wascher - Senior Associate Director, Division of Research and Statistics, Federal Reserve Board - and I found the 2007 working paper that Marty G seems to be referring to, see here. The working paper was published in Foundations and Trends in Microeconomics, 2007, Vol. 3, Nos. 1-2, pp. 1-182. The quote that Marty G gives comes from this abstract to this paper.

Now let me quote the sentence that come directly after the quote that Marty G gives,
“However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect.”
So in other words, the very next sentence after the quote Marty G gives, counters the very point that Marty G seems to have been trying to make by using the quote, and in fact support my claim. Marty G was being selective, shall we say, with the use of his quote.

Neumark and Wascher go on to say,
“A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few – if any – studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.”
Thus the 2007 paper that Marty G quotes in fact supports my contention that the minimum wage reduces the employment of low-wage workers.


Crampton said...

David Levy always stressed the importance of "reading the next line".

The folks over there are partisans, not truth seekers. Why are you wasting your time with them?

Paul Walker said...

Amusement, mainly.