Thursday, February 14, 2013

The Minimum Wage Debate, and Intellectual Honesty

-- Posted by Neil H. Buchanan

In his 2013 State of the Union Address on Tuesday, President Obama called for an increase in the federal minimum wage to $9.00 per hour.  The editorial board of The New York Times pointed out that this was something of a retreat from the President, who endorsed a $9.50 minimum wage in 2008.  Hopes that his second inaugural address might have been the beginning of a newly aggressive liberal Obama thus took another small hit, but it would be churlish not to acknowledge that he at least said something forceful about this important issue.

The predictable response, from the Fox-iverse and all the business pundits, was that the minimum wage kills jobs.  Because this is a debate that never goes away, and because those anti-minimum wage pundits always wrap themselves in the mantle of "solid economics," I will take this opportunity to describe how the minimum wage debate has played out among economists.  This is an especially interesting story, because it offers a rare opportunity for me to say something good about modern economics and some of its biggest stars.  (Regular readers of this blog know that my general view of economists -- even though I am one -- is quite negative.)

Thousands of undergraduates sign up for Principles of Economics (usually Econ 101) every year.  Huge numbers of them learn that minimum wages are bad.  Although the more careful economics professors will avoid the value-laden word "bad" (because we are supposed to be practitioners of "economic science,"  cough cough), the message is unmistakable.  Students will learn that the "invisible hand" of the market will efficiently allocate goods and services through the price mechanism, if only prices are allowed to adjust as needed.  (That the word "efficiency" actually has no coherent meaning in economic theory is not part of the story, of course.)

A minimum wage is, therefore, the ultimate sin, under this story.  The government, in a misguided effort to help workers, instead gums up the works by forcing profit-maximizing firms to pay more than they would otherwise pay.  This policy benefits the lucky workers who are able to keep their jobs, but inexorably results in layoffs of those who are not worth the higher wage.  A nice, simple mathematical model shows that, if one accepts all of its assumptions, the costs outweigh the benefits.  So it is not that the professors teaching these concepts have anything against paying workers more money, it is just that "solid economics" tells us that doing so does more harm than good.

A much smaller number of students end up taking the intermediate microeconomics class.  Among those who do, only a tiny number will take the course from a professor who will show that, under a different set of economic assumptions, minimum wage increases lead to increased employment.  Even then, the argument is that the assumptions underpinning the second model are more unrealistic than the first (although that hardly seems possible), and nearly everyone walks out of class feeling that the thing they learned in the second week of Freshman year is still "the truth."  Advanced undergraduate students, or graduate students, might later learn about "efficiency wage" models that also contradict the conventional wisdom, but by then, only a few people even care about the issue.

Meanwhile, labor economists over the years have tried to test empirically whether minimum wages affect employment levels.  Results differed, but the non-confirming results were not enough to shake the consensus.  Then, almost 20 years ago, two rising stars in economics changed everything.  Using a very limited study (based on fast-food establishments in New Jersey and Pennsylvania), David Card and Alan Krueger found that a higher minimum wage had no negative effect on employment levels, and might even have some positive effects.  This was a bombshell, made all the more potent when Card was awarded the John Bates Clark Medal (for the best economist under the age of 40) the following year.

Ever since the Card/Krueger study was circulating (months before publication), the pushback from the pro-business crowd has been fierce.  There was a study by two economists who claimed to have replicated the survey that Card and Krueger relied upon, but making corrections that reversed the results.  Those economists, however, refused to share their data (violating scholarly norms), and their credibility was further tarnished when it turned out that their rushed study had been financed by the fast food industry.  Card and Krueger then published a "meta analysis" of previous studies of the minimum wage, concluding that there was evidence that the anti-minimum wage studies had been affected by researcher biases.  In other words, because everyone "knows" that the minimum wage reduces employment, some researchers manipulated their empirical work to confirm that preconception.

Even so, the original Card/Krueger study was quite limited in scope.  Was it a one-off?  As it turns out, quite the opposite is true.  That study has been the basis of a flowering of scholarly work on the minimum wage, some of which is nicely summarized in a short post on Slate yesterday by Matt Yglesias.  The point -- and I believe that I have made this point here on Dorf on Law at some point, but I cannot find the post -- is that, in the Card/Krueger study and the scholarly debate that ensued, the economics profession had a moment of which it can be quite proud.  Too often, the basic model of science to which economists claim to adhere -- theorize, hypothesize, test, update to take into account what we have learned -- is honored in the breach.  In the minimum wage debate, economists adhered to the scientific method.  Not everyone is convinced, but the evidence has caused economists as a group to question what we thought we knew.

Even better, these studies have actually had an effect on policy.  Unlike my favorite subject, budget deficits, where the pro-stimulus people either trim their sails or are marginalized (despite much, MUCH stronger empirical evidence supporting Keynesian theory than the evidence supporting the new minimum wage consensus), the minimum wage debate in political circles has actually changed because of the Card/Krueger line of scholarship.  This is not a matter of some economists whose normative sympathies are liberal, who are willing to hold their professional noses while advising politicians who ignore "solid economics."  It is a situation in which economists who advise Democratic politicians can point to the evidence and say that increases in the minimum wage will help the people who need help the most.  Too bad the House of Representatives will never let it happen.