
The Curse of Econ 101 - rbanffy
https://www.theatlantic.com/business/archive/2017/01/economism-and-the-minimum-wage/513155/?utm_source=atlfb&amp;single_page=true
======
skywhopper
The thing that the Econ 101 demand curve leaves out of the minimum wage debate
is that those extra wages have side effects that impact the curve itself.
Workers who are paid more at their primary job may not need to work a second
job and/or will have more money to spend at other establishments that also pay
their employees minimum wage, driving back up the demand for workers. Also,
workers who are less stressed about affording the repairs on their car, or
making the rent this month, or paying for their kid's medicine, will be better
and more productive employees, generating additional value for their
employers. These effects are harder to measure and imagine than a simple
demand curve. They encourage more automation, sure, but automation has side
effects, too. It keeps prices from growing as fast, which means people can
spend the money they save elsewhere on other products or services, which
increase demand for workers in that industry/establishment; if designed
correctly automation can make workers' lives better even if there don't need
to be as many workers; and automation itself is a product that needs to be
designed, sold, purchased, installed, maintained, and upgraded, all of which
drive up demand for still other jobs.

Sure, there's a point where a minimum wage would be too high and would start
causing drag on the economy, and while I personally don't have a handle on the
economics required to calculate an estimate of where that point is, it's clear
that we aren't anywhere close to that point. Historical minimum wages have
been higher, and just basic common sense tells you that so long as inflation
is happening, the minimum wage should also be going up to keep pace. The
"living wage" standard that a full-time minimum wage job ought to cover basic
living expenses for a typical family seems like an entirely reasonable
standard that has the benefit of being somewhat possible to be objectively
determined.

~~~
rjtavares
It's unfortunate how difficult it is to have a reasonable discussion about
economic policy issues. What you describe is pretty obvious - yet most people
that have a say in this issue treat it like it's a binary decision ("increase
vs. don't", instead of "increase how much?").

------
soVeryTired
Supply and demand curves aren't observable: only their intersection, price, is
observable. The curves also move about in unpredictable ways. So we've got
this situation where unobservable quantities move with unknown dynamics in a
noisy, unpredictable fashion.

In order to get anywhere with a statistical estimation problem as hard as
that, you have to impose a _lot_ of prior structure. I'd be surprised if, much
of the time, you didn't end up effectively assuming the answer you want to
see.

I'd go as far as to say supply and demand curves are a pretty useless
abstraction. I've watched two economists argue over whether the 2015 oil price
slump was a supply shock or a demand shock: if they can't get that right, what
hope do the rest of us have?

~~~
grenoire
In all fairness, you are wrong about your first argument. Both demand and
supply curves are empirically observable through auction mechanisms and market
reaction tests.

I'd be happy to forward you to research on them if you are interested, but
don't try and pose opinion as fact if you aren't in the field.

~~~
soVeryTired
In some cases I agree that an auction will give you an estimate of what demand
or supply would look like at different prices. Northwestern university used an
interesting variant of a Dutch auction to sell its sports tickets:

[https://hbr.org/2013/05/any-business-trying-to-
sell](https://hbr.org/2013/05/any-business-trying-to-sell)

But auctions are often impractical. Auction mechanisms that induce
participants to bid their true preferences are complicated, and you're still
forced to assume that the auction participants behave rationally and
optimally.

In general, the point that I'm trying to communicate is that it's very
difficult to disentangle supply and demand: much harder than most people
realise.

------
payne92
TL;DR The Econ textbook model of rising prices —> lower demand is incorrect
for minimum wage labor. Areas that have raised minimum wages have not reduced
employment.

I believe many economists (including this author) are missing the structural
changes caused by technology. The labor market is not just humans any more,
and if/when human labor prices go up, the economics of automation are even
more attractive. Ask any robotics startup.

As the article states, the real dollar value of minimum wage labor hasn’t gone
up much in decades. This fact (combined with a relatively low unemployment
rate) seems to puzzle many economists. But it makes a lot more sense when you
consider the labor “market” to include robots and automation.

~~~
SiVal
Funny how the same people who insist that we should raise the cost of
cigarettes because, of course, it will reduce demand for cigarettes, and we
should raise the cost of fossil fuels because of course it will reduce demand
for fossil fuels, also insist we should raise the cost of minimum-wage jobs
because...for great justice!

I like NN Taleb's skin-in-the-game take on it. The only people who get to vote
on the minimum wage would be those who work at a minimum wage job or want to
do so. Instead of other people getting them fired to signal their virtue, let
the people who will face the consequences decide. If _they_ decided to raise
the minimum wage, I would support it, too. If they decided they'd rather not,
I wouldn't insist on overriding them.

~~~
a3n
Cigarettes and fuel are passive objects. People, including minimum wage
earners, are economic actors that make decisions.

It's complicated.

EDIT: Or perhaps we've come to think of minimum wage earners as passive
objects, no different from fungible cigarettes.

~~~
mooreds
Agreed. I don't think that cigarettes will work harder or gain more skills if
they are more expensive.

------
Synaesthesia
Economic models usually assume free movement of labor when actually labor is
quite restricted in its movement thanks to immigration laws. Capital is very
mobile and can flow easily to where costs are low.

~~~
mooreds
And not just immigration laws, but family ties, moving expenses, higher rents,
etc, even within a country. There are a number of reasons it's harder to move
labor than capital.

------
DArcMattr
I have a Master's in Economics. In graduate classes, much of the work done in
intro-level courses is tossed aside for more capable models that require a
fair bit of calculus to understand. The easiest being the Solow growth model.

The intro courses delve into macro static models with at most 2 variables
(think Keynsian Cross). In the graduate level, macro theory is taught as micro
theory. While the deleterious effects of price controls still hold true at
higher levels of economic reasoning, it's a multi-variate problem. With any
price control, think of it as damage the rest of the people acting in the
economy think of ways to route around. If a minimum wage increase takes place,
perks can be cut without affecting overall employment levels as an example of
how overall employment may stay the same.

------
roenxi
The claim that Econ 101 does not apply to the labour market is a pretty
extreme claim. If the studies aren't showing a consensus, I'm betting on Econ
101. Note that below, jasode has pointed out that the 1994 Card & Krueger
study was based on phone surveys rather than payroll data.

There is some real and interesting debate on the question of should the cost
of minimum living standards be borne by companies (through the minimum wage)
or governments (through straight welfare). I'd love to see a compromise where
it was still economic to do low-value work that is currently not done due to
minimum wages.

~~~
frgtpsswrdlame
It's not really an extreme claim. Honestly, if you're speaking on economic
issues and the model you're using only has two lines: Supply and Demand, you
really shouldn't be speaking.

Here is a good little blog about how the S/D graph for labor is unscientific.
[http://noahpinionblog.blogspot.com/2016/12/an-econ-theory-
fa...](http://noahpinionblog.blogspot.com/2016/12/an-econ-theory-
falsified.html)

~~~
roenxi
You hit a nerve there.

1) The economy is everyone's business, especially when governments get
involved. It is better for us all if things are discussed publicly, politely
and with all views available (albeit, potentially rebutted).

2) Arguing that something that looks like a reasonably competitive market is
not a reasonably competitive market is an extreme claim. Low-wage labour might
not be a competitive market, but the evidence bar for showing that is still
high.

3) Your article is a good read, but it has 2 bits of data that I'm already
happy to agree with:

3.a) There is more going on with immigration than supply and demand; skills
transfer is a big deal and I would expect migrants to have more gumption
because they have shown some initiative migrating.

3.b) Raising the minimum wage obviously doesn't always have a "big immediate
negative impact". The magnitude of the negative impact might be fast, slow,
big or small based on how carefully the minimum wage is set. But the politics
of minimum wages don't look like they are being imposed on the basis of a
straightfoward economic case. They are being set first by politicians,
justified second by some economists.

~~~
frgtpsswrdlame
>2) Arguing that something that looks like a reasonably competitive market is
not a reasonably competitive market is an extreme claim. Low-wage labour might
not be a competitive market, but the evidence bar for showing that is still
high.

Why do you believe it looks like a reasonably competitive market? Tons of
studies have been done on minimum wage effects and the conclusions are at
least indecisive. If this is a reasonably competitive market why is it so hard
to definitively show that? It's not like it's hard to prove competitive
markets - anyone can do a study where you take say gas stations, lower the
price per gallon at one and watch them pull more customers.

>the evidence bar for showing that is still high.

Surely the evidence bar is just as high to show that it _is_ a competitive
market? This is another problem I have with Econ 101 - the idea that the
default state of a market you don't understand is competitive is a political
idea, not an economic one.

>1) The economy is everyone's business, especially when governments get
involved. It is better for us all if things are discussed publicly, politely
and with all views available (albeit, potentially rebutted).

Sure, I also live in the world and exist in a physical system so it's also my
business which interpretation of quantum physics is correct. But I recognize
that my existence in a system and my understanding of it are separate so I
don't walk around lauding the Copenhagen interpretation (or walk into any
other dispute in physics) because I read a few pop-sci articles on it. I feel
the same way here. The challenge for scientifically minded laymen in the 21st
century is that you can't "know everything." I believe that's also true for
economics and a humbling here would serve everyone well.

If you walked into an econ forum and found a thread about programming and it
was filled with stuff about how functions are bad, no one needs version
control and a bunch of quantum computing gobbledygook, you'd probably try to
correct them. And when you discovered that they held these beliefs not because
they didn't know anything about programming (although they didn't) but because
these beliefs somehow validated their existing political view of the world and
thus they couldn't be talked out of it you might throw your hands up. My
previous comment could (rightfully) be interpreted as me throwing my hands up.

>But the politics of minimum wages don't look like they are being imposed on
the basis of a straightfoward economic case. They are being set first by
politicians, justified second by some economists.

Is that not exactly what is going on in this thread? A bunch of people with a
fundamentally political disagreement about the minimum wage desperately
hunting for economic validation of their belief? In this thread we are all the
politicians in your example, stumbling into subjects we know nothing about and
finding post hoc rationalizations for what we already "know."

~~~
kiliantics
Quality response, thank you. I think most people don't choose their ideology
and when the only ideology you know is the one you were given, it is very
difficult to see past. This leads to some very pervasive notions, particularly
in social and economic views, that are steeped in mostly unchecked ideological
bias.

------
xapata
The minimum wage argument assumes that corporations choose whether to hire
based on an evaluation of the productivity of a worker. In reality, nearly all
companies choose a wage by simply looking at their neighbors.

------
minikites
>They concluded, “Contrary to the central prediction of the textbook model ...
we find no evidence that the rise in New Jersey’s minimum wage reduced
employment at fast-food restaurants in the state.”

This is really the heart of it, people who are libertarian/pro free-
market/Austrian economists simply reject any evidence that challenges their
assertions about economics:
[https://en.wikipedia.org/wiki/Praxeology#Austrian_economics](https://en.wikipedia.org/wiki/Praxeology#Austrian_economics)

>Austrians argue that that empirical data itself is insufficient to describe
economics; that consequently empirical data cannot falsify economic theory.

~~~
briandear
So a phone survey vs. the life work of multiple Nobel economists?

As far as evidence, if you've ever run a restaurant, you know what happens
when you increase labor costs by 15%? -- You don't have a restaurant anymore.
Or you end up with this:

[http://del.h-cdn.co/assets/15/31/1438287597-screen-
shot-2015...](http://del.h-cdn.co/assets/15/31/1438287597-screen-
shot-2015-07-30-at-338.jpg)

~~~
madhadron
> the life work of multiple Nobel economists

This doesn't mean quite what you think it does. The Nobel prize in economics
is unrelated to the other Nobel prizes. It is not awarded by the Nobel
committee. It is given by the central bank of Sweden to economists that it
likes.

------
youdontknowtho
I've felt for a long time that most of Economics is just political ideology
masked as science. That's just me though.

~~~
kunimu
This is partially true. Economics originated in the field of _political
economy_ , which was at the time for lack of a better word, _bourgeois_. The
political economists existed in a sense only to advise the government and
monarchies on economic policy. When Marx set out to critique this field in his
magnum opus which took thirty years of study to complete, _Capital_ , he
criticised them of obsessing over superficialities and only observing
appearance rather than to drop down to the essences of capitalism.

In this sense, economics is inherently political and ideological, its anathema
is Marxism which is a critique of this political and ideological field, but
not a substitute of its own. It is not an economic theory, nor a political
economic theory, it is a method of critique which is anti-ideological.

~~~
youdontknowtho
That was an awesome breakdown. I've never heard Marxism described quite that
way...but frankly, the only things I've ever heard about Marxism are the
absolutely ludicrous things said by the right and the stuff I've found on my
own. Certainly not a great deal of exposure.

~~~
orwin
Reading Marx (or some explanation of his work from different point of view) is
interesting. I think most of his critics do not apply to this world but he do
have an interesting point of view and adding some of his ideas into your
personal philosophy. I found really good critics of Marx from a rather liberal
philosopher. I forgot his name, it was at my college library, but i'm pretty
sure that if you are interested in philosophy and in economics theory you
should read some of his work.

------
Lazare
That's a lot of words intended to obscure a very simple subject.

1\. Theoretically, a minimum wage will reduce unemployment, and the higher the
minimum wage, the higher the impact. However, even in theory it has to be
quite high to get meaningful impacts, given how noisy employment data is.

2\. The minimum wage in the US is quite low, and has very rarely been
increased sharply. As a result, we've never really seen any large spike in
unemployment, but we also have no reason to think we wouldn't if we ever did.
Nobody has ever tried a minimum wage of, say, 80% of the median wage to see
what it would do.

3\. Although not entirely conclusive, the data from the largest increases does
seem to show spikes in the minimum wage. For example, the University of
Washington released their study on the impact of Seattle raising their minimum
wage from $11 to $13 per hour, and found that the reduction in hours was 3
times higher than the increase in wages, meaning minimum wage workers _lost_
$125 per month in earnings[1]. By contrast, the best studies which show no
effect covered smaller increases or increases to a lower level (as a % of
median wages).

For example, one of the most famous of the "minimum wage has no effect"
studies was by Card and Krueger, and covered a rise in the minimum wage in NJ
from $4.25 to $5.05 in 1992. Adjusting for inflation, $5.05 is around $8.90 in
2017 dollars. It's entirely plausible that $9 might not cause any measurable
impact, but $13 would. In fact, there is some data which suggests that around
50% of median hourly wages is an inflection point at which point you start to
see real impacts. And median hourly wages in the US is slightly less than
$25/hour, which is slightly less than twice $13, so in fact that's entirely
unsurprising.

> When the University of Chicago Booth School of Business asked a panel of
> prominent economists in 2013 whether increasing the minimum wage to $9 would
> “make it noticeably harder for low-skilled workers to find employment,” the
> responses were split down the middle.

$9 is a level at which we'd expect to see a minimal effect. It's plausible to
think that there might be SOME effect, or that there might be no measurable
effect, and some studies have shown such an effect while others have not. It's
not surprising that economists would split. But splitting over $9 would have
an impact doesn't mean there's any debate over whether an impact exists at
some level, and in fact, there is not. And it seems like $13 does have a
measurable impact, and there's really no doubt that $30 or $50/hour would have
a very major impact.

> The real impact of the minimum wage, however, is much less clear than these
> talking points might indicate.

No. There is, at most, a debate over how big an increase it would take for the
impact to become clear.

[1]:
[http://www.nber.org/papers/w23532.pdf](http://www.nber.org/papers/w23532.pdf)

~~~
Sacho
> 1\. Theoretically, a minimum wage will reduce unemployment, and the higher
> the minimum wage, the higher the impact. However, even in theory it has to
> be quite high to get meaningful impacts, given how noisy employment data is.

Er, wouldn't minimum wage have the opposite effect, theoretically? If there
was a job that I would pay $1 for and someone was willing to do, but the
minimum wage is $2, then that job is illegal and won't exist(well, it might,
grey economy and all, but sticking to simple theory). This would increase
unemployment.

~~~
orwin
Not if poor people have to work double hours to be able to live decently. I
won't go deep onto the working mother issues (single mother with two job or
mother with 2 jobs and a father with one but doesn't do anything with the kids
as it is a "woman job") or how people working more than 50 hours a week is a
net loss in productivity and a costly public health issue, but these problems
can be solved with high enough minimum wages or universal income.

~~~
Sacho
I agree but those are issues orthogonal to the basic rate of unemployment, no?
You can have very low unemployment and still have a very poor country if
everyone's working for pennies, and that's a real problem. IIRC too low
unemployment could be a sign of an unhealthy lack of economic mobility -
everyone's stuck in their job and they make barely enough to scrape by, so
they're terrified of dropping out of the workforce to pursue
education/creative endeavors/a new career.

------
edanm
I completely disagree with the article's conclusion. But, this is a pretty
good article. It actually cites opposing views, including linking to them, and
tries to make its case logically. Great writing!

That said, I'm not an economist, but when I see an issue such as this, in
which leading economists disagree with some position, I don't think the
takeaway of one article should be "I now know what the truth is". I mean as
the article itself says, lots of leading economists think a minimum wage is
bad. So if after reading the article your position is "well clearly I now know
better than people who have spent their whole lives on this topic", you're
being arrogant.

Also, from the economists I do hear on a regular basis, it's pretty clear that
they're all very anti-minimum-wage. Obviously this is a self-selected sample,
but I get the feeling that most economists aren't particularly pro minimum
wage - they're either indifferent or at most think that there are some
tradeoffs that can be made in favor of the minimum wage. But there are
_tradeoffs_ , as in the econ 101 model isn't wrong. It's just worth it
sometimes.

On the "empirical" question, I tend to side with Bryan Caplan here - there are
studies going both ways, but since in almost every other situation basic
supply/demand models are correct, there's got to be _really_ strong evidence
against assuming supply/demand models work for labor, too.

------
waynenilsen
This is an interesting article that was cited, pulled out to highlight.

[http://davidcard.berkeley.edu/papers/njmin-
aer.pdf](http://davidcard.berkeley.edu/papers/njmin-aer.pdf)

------
eaandkw2
I don't think that there is any point to having a minimum wage if the Federal
Reserves' mandate of price stability is 2%.

------
briandear
There is so much wrong with this article.

"Many companies can recoup cost increases in the form of higher prices;
because most of their customers are not poor, the net effect is to transfer
money from higher-income to lower-income families."

Higher income people aren't the primary customer for McDonalds (in the US.) If
you raise a Big Mac price by $2, "rich" people might buy the same amount, but
poor people will buy less and poor people are a much larger share of the Big
Mac market than rich people, thus it would be a net loss.

"Even if a higher minimum wage does cause some people to lose their jobs, that
cost has to be balanced against the benefit of greater earnings for other low-
income workers."

This is just nuts. Some guy now makes $20k per year, but some other guy now
makes $0 per year, instead of both making $15,000 per year. That's a net loss
of $10,000 per year in economic activity. It makes one person slightly better
off, while making the other person infinitely worse off.

The other interesting thing about this debate is that those arguing for higher
minimum wages also tend to advocate for unrestricted immigration and so-called
sanctuary city policies which necessarily results in a greater supply of
lower-skilled labor. Without a minimum wage, immigration of lower-skilled
workers would necessarily regulate itself as wages fall to equilibrium. You
don't even need immigration law -- the free market would limit and allow
immigration as wages moved. Essentially it would make the market for labor far
more liquid.

Despite the article's derisive condemnation of "Econ 101," supply and demand
is still a thing. An increased supply of labor means that the equilibrium
price is now lower, which with the price floor of minimum wage means that
there is an even greater surplus of labor.

The article seems to criticize so-called "Econ 101" while dismissing Nobel
economists Friedman and Hayek. I'm pretty sure those guys were far beyond Econ
101. The author talks about how in the 1950s 1 and 3 workers were in a union,
with the implication that the higher wages that resulted were good for
society. However the author conveniently leaves out that the US had a poverty
rate of 22.4% in 1959 and in 2015 that poverty rate was 13.5%.

Perhaps there's an argument to be made for higher minimum wages, but this
article certainly hasn't made it.

