a first class economist on the minimum wage

An important post on the Minimum Wage debate. Don Bourdreaux posts some blog comments from an anonymous commenter. Excerpts:

On possible unintended consequences:

(1) Low-skilled workers can be replaced by slightly more-skilled workers once the wage difference between them has dramatically compressed.

(2) New workers can enter (or old workers can increase their labor supply) in response to higher wages; if this happens, people who might need the job will be disemployed even if labor demand is constant.

(3) Labor can be replaced by automation.

(4) Customers can substitute between businesses that provide the same basic service but with dramatically different business models. (e.g. less shopping at Walmart, which is now more expensive, and more shopping at Costco; only problem is that Costco has half as many workers per dollar of sales, so labor demand decreases dramatically)

… and so on.

In general, the exasperating thing about left-wing economic commentary is that it always declares victory when it’s cast doubt on one margin of unintended consequences, even when 10 other still-viable margins remain.

And that’s where things get so strange. Aggregate supply and demand responses represent the accumulation of many different margins. When the price of low-skilled labor rises, firms might demand less of it because they find a way to replace it with medium-skilled labor. Or maybe they’ll replace it with automation, or consumers will demand fewer products intensive in low-skilled labor, or they’ll acquire substitutes through trade… or any number of other possibilities. Maybe you have a clever argument for why one of these margins doesn’t matter, but you need to be far more ambitious (reckless, really) to deny all of them.

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.

On incentivizing higher skilled workers to take lower skilled jobs:

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?

On the miracle of left wing wage studies:

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! Truly, this is an economic miracle that should command our deepest respect and attention…

… or else maybe there’s something else messed up with the studies, and the zeros are spurious. Come to think of it, maybe the Selective Skeptics of Substitution aren’t so bad after all. At least their hypothesis, however ridiculous, is consistent with the evidence they cite.

Addendum. A good minimum wage debate:

About christopher fisher

The blog is meant for educational/entertainment purposes. All material can be used and reproduced in any length for any purpose as long as I am cited as the source.
This entry was posted in Econ 101, Economics, Incentives Matter, Price Controls. Bookmark the permalink.

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