The editor at the Wall Street Journal cut more meat than usual from my op/ed on the Nobel Prize winners. This isn’t a criticism. The Journal has its constraints and the editor told me that the piece needed to be shortened to fit on the page. I would rather have a short article than no article.
Still, I think many readers might find what was cut interesting. So here, I’ll post the relevant paragraphs. Then I’ll post a criticism of the Card/Krueger study on the minimum wage that was made at the time but that I forgot. (An economist reminded me of it on Facebook.) Finally, I’ll quote from an informative comment made by the reader of the Journal on the Journal‘s page.
On how politicians use the Card/Krueger minimum wage study:
Unfortunately, many politicians use the Card/Krueger findings about a 20-percent increase in New Jersey’s minimum wage to argue for a 107-percent increase in the federal minimum wage (from the current $7.25 an hour to $15.) In a 2015 New York Times op/ed, though, Krueger wrote that “a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.”
On David Card’s Mariel Boatlift study:
Another natural experiment in labor markets was the Mariel Boatlift in 1980, which quickly expanded the Miami labor force by 7 percent. Card found no effect on wage rates or unemployment of unskilled non-Cuban workers in the Miami market, a finding that bolsters the case for immigration.
On Italy’s natural experiment with unemployment insurance:
Finally, the Nobel committee’s report cites economist Rafael Lalive’s 2008 study of an Austrian government extension of unemployment insurance benefits from 7 months to 4 years. The benefit went only to workers above age 50. By comparing those just below age 50 with those just above, Lalive concluded that the massive increase had caused people to be unemployed for an extra 15 weeks.
The criticism I left out:
Isn’t the biggest knock on Card and Krueger that they asked about the effects of minimum wage increases on total employment rather than on hours of labor supplied and demanded, along with changes in non-wage employee compensation?
In citing Neumark/Wascher, I implicitly cited that criticism, but should have ideally mentioned it explicitly.
Finally, on the WSJ site, commenter Richard Kelly stated:
New Jersey fast food restaurants had two years to prepare for the minimum wage increase. They did not have to fire people because those two years allowed them to let natural attrition do the job for them. The increase had a most definite negative impact on employment.
I don’t have data on this, but this is quite plausible. If you know a major change is coming and you have 2 years to prepare for it, you won’t typically wait 2 years to act.
READER COMMENTS
Rob Rawlings
Oct 12 2021 at 7:34pm
‘They did not have to fire people because those two years allowed them to let natural attrition do the job for them’
I’m not sure I understand that argument. If before the minimum wage an employee could increase profit by hiring a worker who would eventuality qualify for the minimum wage what would be the logic in letting them go before the minimum wage took affect? Both the employer and employee would benefit from the work arrangement and whatever costs are involved in letting the employee go would presumably be incurred whether the separation occurred before or after the minimum wage was introduced.
robc
Oct 12 2021 at 9:09pm
Transaction costs. New employees have a cost, above and beyond their wage and benefits. So if you would hire 10 before the change and 8 after, there is a break even time before the change where it is not profitable to hire a new employee just to let them go.
Rob Rawlings
Oct 12 2021 at 10:02pm
Thanks, that makes sense.
Art Carden
Oct 12 2021 at 7:34pm
Anticipation matters a lot. WH Hutt discusses this in his work on strikes and argues that exploitation anticipated is exploitation that can be avoided.
Frank
Oct 12 2021 at 9:18pm
Ah, the Mariel Boat lift! Miami is a small open economy, with exports and imports, and a non-traded sector whose wages are determined in the tradable goods industries. The influx of anybody or anything will shift the production structure, but leave wages and rents unchanged in the long run [Rybczinski Theorem].
Card mentions at the end of the paper that there is a clothing and textile industry [exporting to the rest of the US] that absorbed many of the immigrants. Those workers did in fact receive lower wages than their ethnic brethren. This is the short run. Nothing unexpected here.
It’s often a wonder how labor economists and trade economists arrive at different conclusions. This is covered by one of the four maxims economists should keep in mind: It’s often different in general equilibrium.
As a conclusion, while Miami may be a small open economy, the United States is a large one. Migration will affect wages.
Jon Murphy
Oct 12 2021 at 10:24pm
Hm. Isn’t there a problem with treating Miami as a small open economy (SOE) and the US as a large open economy? The US is made up of many SOEs. If all the SOEs have no effect, how will that lead to an effect in the LOE? 0+0+0 = 0
Frank
Oct 12 2021 at 10:42pm
Just like the firms in perfect competition. Price takers.
Jon Murphy
Oct 12 2021 at 10:45pm
Yeah that doesn’t actually answer the question.
Frank
Oct 12 2021 at 11:17pm
That way of looking at perfect competition requires that there are an infinite number of firms, and an infinite number of SOE’s. But we have to watch the infinity stuff: Infinity plus one equals infinity!
Easier to look at the problem as conditions under which a firm, or an SOE, is a price taker or not.
Even when firms, or an SOE, are price takers, groups of firms, categorized into countries by what factor prices they face, are not.
Unskilled labor immigration into the US, because it is not a price taker, will lower the real wage, reduce labor intensive imports, and reduce capital intensive exports, and increase the return on capital.
Follows from Rybczynski.
Jon Murphy
Oct 13 2021 at 8:15am
Incorrect. Perfect competition just means there is a number of firms such that no one firm can affect price by adjusting production (in theory, that number could be as low as 2). This does not imply an infinite number of firms. Indeed, such a claim violates the model itself as the number of firms in the marketplace is determined by the cost structure they face and the demanders in the market.
In a perfectly competitive marketplace, if more suppliers enter the market, then the equilibrium price falls because the supply curve has shifted.
Frank
Oct 13 2021 at 11:58am
Yeah, the firm is a price taker in perfect competition, but a bunch of firms called an industry, together with demand, is a price maker. A small open economy is a price taker, but a bunch of SOE’s is a price maker.
Freedom Fan
Oct 13 2021 at 1:14am
Is it just me or is the most annoying thing about the Card/Krueger minimum wage study that it completely ignores the primary mechanism by which minimum wage laws lead to lower employment?
In the short-run, all of the fixed capital to operate fast food restaurants has been invested and is a sunk cost. There are further fixed costs and non-impacted variable costs (e.g., the salaries and wages of higher compensated managers). So, the relatively small hike in the min wage has a relatively small impact on the overall profitability of the business. Further, it takes a minimum number of employees to keep a restaurant open at any given time.
So the only potential levers to disemployment are reduced store hours or slightly reducing staffing, which could in turn reduce revenue through longer wait times or otherwise diminished consumer experience. Unless the min wage pushes locations into full-scale unprofitability, of course the disemployment effect will be negligible.
On the other hand, the min wage increase lowers the prospective IRR of every prospective new business (or expansion) that employs low skilled workers. It also increases the prospective IRR on every business that produces machinery (e.g., kiosks) that replaces low skill workers.
That’s what causes real disemployment and it’s indisputable to anyone who understands how investments are made.
To that point, even talking about raising the minimum wages causes disemployment as it changes the expected value of IRR on investments that would employ or replace low skilled workers.
The “natural experiment” we need is a constitutional amendment to eliminate the minimum wage in half the states and see what happens in 3-5 years. I certainly would place my bets.
Henri Hein
Oct 13 2021 at 1:28pm
Lots of interesting perspectives on Card/Krueger. My own beef is that, as I understand it, they concentrated the survey on chain restaurants. I would expect chains to withstand a rise in the minimum wage better than independents – they have more access to capital and probably other resources such as training and equipment. If enough mom-and-pop restaurants close down, you might even see business ticking up for the chains, which could explain why they were hiring.
Eric B Rasmusen
Oct 13 2021 at 2:44pm
Looking at the critiques and responses or lack of them, isn’t Card-Kreuger completely discredited for simple reasons? The theory is absurd, the data is badly collected, and a replication with better data reaches the opposite result from theirs, the one supported by the standard theory. Finus Welch on the data problems is particularly convicting. Did Card ever respond to it? I’ve posted links and quotes at
https://www.rasmusen.org/rasmapedia/index.php?title=Minimum_Wage
Floccina
Oct 13 2021 at 2:57pm
Not to mention that a wife with a reservation wage of $14/hour getting a job for $15/hour over a young man with reservation wage of $4/hour getting a job for $7.25/hour is not necessarily a good thing.
Stephen
Oct 13 2021 at 5:52pm
In addition to the other “knocks,” isn’t there the issue of the unseen effects on poorly educated and other disadvantaged would-be workers not hired because of the increased minimum wage? How does one calculate those potentially dreadful costs?
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