« Shlaes on Phelps | Main | How Demand Curves Slope Downward» Russell Roberts
October 12, 2006
Hall of Shame
Russell Roberts
Six hundred and fifty economists, many of them illustrious and at illustrious institutions, believe that demand curves are vertical:
We believe that a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed. In particular, we share the view the Council of Economic Advisors expressed in the 1999 Economic Report of the President that "the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment." While controversy about the precise employment effects of the minimum wage continues, research has shown that most of the beneficiaries are adults, most are female, and the vast majority are members of low-income working families.
The full text of the petition endorsing an increase in the minimum wage, along with the economists who signed it, is here.
What were they thinking? Little or no effect on employment? How can you sign your name to something like that and call yourself an economist? I guess you could argue that there's little effect on TOTAL employment. That effect is very hard to find empirically because so few workers are affected by the minimum wage and its impact gets swamped by other factors. But among low-skilled workers, the ones we want to help? Maybe the people who signed believe that "modest" increases in the federal minimum wage (to $7.25) would effect so few people (many of whom are already covered by state minimum wage laws), that the effect is mainly symbolic. So signing a petition is more of a political statement than a statement about economic reality.
It wouldn't bother me if they petitioned for social programs that would help workers who lose their jobs due to an increase in the minimum wage. You can be in favor of that and still be a first-rate economist—you believe that the benefits of increasing the minimum outweigh the harm and you'd like to mitigate the harm. But to argue that there's no harm, that there's a free lunch because the demand curve for low-skilled labor is vertical? How do you defend that?
(HT: Chris Meisenzahl)
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Comments
Do you know personally any of those that signed the petition? If so, have you asked them what the hell they were thinking? I'd be interested in finding out the justification they give you for signing that crap.
Posted by: Kevin Nowell | Oct 12, 2006 12:55:15 AM
I've sent email to one of them (who happens to teach at a university in New York). I'll report back on what he has to say.
Posted by: Russell Nelson | Oct 12, 2006 2:31:17 AM
I think economists are afraid that the people will tire of the crap and revolt while they're on the set of CNBC. So they play the populist card with safety in numbers.
Posted by: KirkH | Oct 12, 2006 2:47:00 AM
is this what they mean by applied economics?
... apply it as you like it...
Posted by: colson | Oct 12, 2006 3:41:24 AM
It's too bad they can't have their degrees revoked for some kind of malpractice or professional misconduct.
Posted by: Chris Meisenzahl | Oct 12, 2006 6:50:16 AM
In the spirit of Card/Krueger, I think there's a big difference between employment and unemployment -- they're not just opposite directions on the same continuum.
When you raise the minimum wage, you attract new workers to the workforce, where they displace existing, marginally profitable workers. The new workers were not technically "unemployed" since they weren't seeking work before the wage increase, but the displaced workers, who must now seek new work, technically *are* "unemployed."
Thus a wage increase can have subtly different effects on employment and unemployment, and if you look carefully at propaganda like this petition, you will see that they carefully word it to mask the truth. Card/Krueger relied on this distinction in their N.J. study.
Both sides in this debate make the mistake of arguing as if the workers before and after a wage hike are the same -- they're not. The right focuses on the effects felt by the current workers (unemployment goes up), while the left focuses on staffing levels (employment does not go down).
What's important is that the left recognizes the truth: that is why their talking points include the argument that "higher wages attract better workers." Okay, I'll bite -- where, exactly, are all the not-so-good workers supposed to go -- welfare maybe? (The left never answers that one.)
On the bottom line, higher minimum wages do not help the people they're intended to. Some of the poorest will lose their jobs. There's never been any evidence that rising minimum wages fight poverty -- and even Card/Krueger, the patron saints of modern-day minimum wage advocacy, admitted that they found no evidence that the wages reduced poverty.
The wages do help some special interests (such as the ones that fund EPI.org, above), and those interests rely on the bleeding heart ignorance of the left at large to advance their agenda.
Mass stupidity does not change reality. If it did, the world would still be flat. Minimum wages don't work, even if you can find an argument that conceals the damage they do.
Posted by: cpurick | Oct 12, 2006 7:17:06 AM
Hmmm. Vertical demand curve. Of course! I LIKE that one... Must file it on the hard drive!
And cpurick has perhaps the best analysis I've yet seen. The six-hundred-and-fifty have obviously studied more political science than economics.
Posted by: True_Liberal | Oct 12, 2006 8:00:50 AM
My dissertation advisor is a prominent name on that list. I grilled him about it and told him I was disappointed he either: (1) didn't believe it when he taught me in labor economics that the minimum wage is a horrible way to fight poverty; or (2) didn't teach me about the magical powers of mandating higher wages absent productivity increases and not causing employment problems.
His response is below:
"Mike,
I do not believe that the minimum wage is an effective way to fight poverty. My support and endorsement of the letter comes from the symbolic nature of the minimum wage. It was the first piece of protective labor legislation passed at the national level in the United States. Over time its value has eroded relative to average hourly earnings, even though that hasn't been doing so well itself due to the decline of durable manufacturing. In a world in which everything else is indexed- social security, some retiree pensions and we are constantly giving tax breaks to the rich, we need to make a symbolic statement about our concern for the people who are less well off than us. Certainly expanding the earned income tax credit would be a much better way to fight poverty - but budget deficits make it unlikely that this will happen."
Well, I disagree with him about the same old party line of "tax cuts for the rich" and I also told him I don't believe symbolism does much to help the poor - in fact this sort of symbolism could cause many people to think mandated wages are a good idea.
If he knew I was not sympathetic to his views I think it would upset him a great deal.
Posted by: Mike | Oct 12, 2006 8:34:45 AM
So, in other words he stopped being an economist when he endorsed the petition.
Maybe it should read "649 economists and 1 bleeding heart."
Posted by: cpurick | Oct 12, 2006 8:48:38 AM
Forgive me for pointing out the microeconomics, but here is a tool that shows the effect of a minimum wage increase on a small business that relies on a minimum wage workforce to be competitive:
http://tinyurl.com/jcdjw
The bottom line - it ain't pretty, and the tool only considers a one-time increase. I'll have to develop a new version that considers the impact of automatic increases in the minimum wage that are indexed for inflation each year, as many of these "economists" advocate.
Posted by: Ironman | Oct 12, 2006 9:12:16 AM
Hi -
cpurick had it almost right: it's not 649 economists and 1 bleeding heart, but rather 600+ bleeding hearts and an undetermined number of economists adding up to 650.
The real problem is that by making a symbolic gesture you are acquiescing to bad politics: if you can't persuade people that x is a good idea, than make a symbolic gesture to make it look like you think x is a good idea.
This is not merely a simple waste of time, but more fundamentally the lazy man's way out.
Or, of course, there could be something to the point that what they obviously think is a good idea is in reality a rather bad one, but it makes them feel better.
That way lies madness.
John
Posted by: John F. Opie | Oct 12, 2006 9:51:48 AM
"Let them eat cake."
I believe that was spoken by a French economist who didn't understand the connection between economic theory and political reality.
Hmmm.
Posted by: Bruce Hall | Oct 12, 2006 9:58:11 AM
Cpurick,
Re; "...higher minimum wages do not help the people they're intended to."
Nor do they hurt the people they're intended to. Mandating higher wages does not force employers to increase their costs, it forces them to adapt to a new reality. And they will do this primarily by forcing others to adapt to a new reality.
Posted by: Randy | Oct 12, 2006 10:03:26 AM
I find it interesting that neither Card nor Krueger signed the letter. The goofy "poverty-fighting" nonsense may have put them off.
Posted by: Steve Miller | Oct 12, 2006 10:18:28 AM
Well, if you would care to look at actual wage data, instead of writing based on your ideological assumptions, you would find that the wage for the 10th percentile (the lowest ten percent of workers), it is over $7 an hour. Wow! You could raise the minimum wage to $6.50 an hour, and it would still be well below what the going rate is for low skill labor. Now again, why don't people writing crap about how minimum wages cost jobs just, you know, actually read the data and make logical conclusions, just once.
Posted by: Alex | Oct 12, 2006 2:29:13 PM
Alex,
Thanks for you kind words about my integrity. Actually, I've written before on this site about how few people earn the minimum:
http://cafehayek.typepad.com/hayek/2004/08/minimum_wage_da.html
And yes, if the minimum wage is $1 and you double it, it doesn't harm anyone. Of course it doesn't help anyone either. I presume that the people who signed the petition actually want to help people rather than do something purely symbolic.
Posted by: Russ Roberts | Oct 12, 2006 3:14:51 PM
From the professor's repsonse:
"...we need to make a symbolic statement about our concern for the people who are less well off than us."
Good grief. How much more welfare and how many more assistance programs for the poor and how many more charitable organizations will it take before a symbolic statement can finally be considered to have been made?
If this is the logic behind the petition, then the entire exercise is a logical fallacy: 650 economists using their job titles but not their economics to support a cause.
Posted by: ben | Oct 12, 2006 3:37:17 PM
This month's Scientific American has an article by Jeffy Sachs claiming that high-tax countries with generous welfare and social programs outperform countries with economies that are taxed less and spend less in the public sector. His article title and part of the text suggest that he is taking a 'scientific point of view' instead of a ideological one. Many of the statements he makes seem woven from the same cloth as the letter that these 600+ economists signed.
At what point does the field of economics begin to find underlying data that all economic statements and models MUST agree with or they're considered wrong. I know it was far easier for the physical sciences to obtain that data, but the field of economics will be plagued by garbage theories until there are generaly acknowleged sets of data that economists statements will be judged against.
Posted by: George | Oct 12, 2006 4:12:47 PM
Sounds like it's time for a "modest" decrease in the number of people who work as economists.
Posted by: Kevin | Oct 12, 2006 6:14:25 PM
I guess that means you are ok with real wages declining, by not increasing the minimum wage at the inflationary rate....if declining real wages are good for employment, $0/hour ought to be fantastic for employment.
Yes, that's sarcasm, but given the light treatment of the problem and solution, that's all it deserves. The problem is more complex than this simplistic analysis suggests..
Posted by: RP | Oct 12, 2006 7:26:32 PM
Fractionally declining real wages are a non-issue symptom (during periods of negligible inflation) of the actual problems: a massive influx of low-wage (and unskilled, black market) immigrant labor, and the continued increase in single-family earners.
Of the latter, approximately 8% of families in their first marriage are at or below the poverty line, compared with 33% of families headed by a divorced or single parent, and about 60% of families headed by a never married or single parent.
Raising the minimum wage will have almost no effect on either of these classes, save possibly to put some out of work, making them worse off.
Posted by: MesaEconoGuy | Oct 12, 2006 8:24:50 PM
Not to mention that the minimum wage is fundamentally racist. By forcing employers to treat all employees equally based on price, it allows employers to discriminate based on race.
Unfortunately, it's an ugly argument because it assumes the existance of racism. People who are opposed to racism say "Well, why don't we just get rid of racism?" Sure, you can have that AND a pony, too.
Posted by: Russell Nelson | Oct 13, 2006 1:40:25 AM
A strict interpretation of the simplistic model presented in principles of economics courses would imply that when minimum wages go up, employment either stays the same or falls. That is all that it says.
How much employment falls (if at all) is an empirical question. It could be a small effect or a huge effect. Theory gives little guidance on the magnitude of the effect and so in good conscience an economist can believe that increases in the current minimum wage may result it either large or small employment effects.
A large body of empirical research suggests that the employment effect is small when the minimum wage does not bind on a large number of workers. So this petition is consistent with the wide latitude provided by theory and the evidence provided by data.
The beef here is not really with economists per se; I guess it is a complaint that employers have not fired enough minimum wage workers in response to past minimum wage increases.
Posted by: Dan Rosenbaum | Oct 13, 2006 2:31:20 AM
"small effect" = people losing their jobs.
I guess those must be "small" people who don't matter.
There is no rationalizing this when the only argument for the policy is to help those same people.
Posted by: cpurick | Oct 14, 2006 6:39:47 AM
Dan R -- The evidence is that the amount of unemployment is not measurable; not that nobody has lost their job. If you fire a rifle into the air, you can be quite sure that the bullet will come down even though you can be equally sure that you have little chance of finding exactly where or what it hit. In essence, the signators are saying that the bullet will not hit anybody or anything important.
Posted by: Russell Nelson | Oct 15, 2006 3:09:25 AM
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