Monday, September 18, 2006

At SSRN And Mankiw's Blog

I have finally completed the first draft of my paper Some Fallacies of Austrian Economics. I wonder if the historical documentation is too extensive for it to be accepted by some journal somewhere. On the other hand, I suppose some Austrians might like some text between equations.

I have been amused by watching commentators on Greg Mankiw's blog be unable to register that some might doubt that minimum wages above the (?) market-clearing wage cause unemployment.

8 comments:

Blissex said...

«I have been amused by watching commentators on Greg Mankiw's blog be unable to register that some might doubt that minimum wages above the (?) market-clearing wage cause unemployment.»

I have had this discussion several times...

One of the most amusing aspects is that people have been astonished when I pointed out that even Debreu/Lucas and all mainstream economics do not say that a rise in wages results in unemployment.

What they actually say is that results in less hours worked which is a completely different conclusion.

Therefore the following scenario is entirely plausible even in neoclassical Economics:

* The average worker has to work 60 hours per week at minimum wage of $5/h to earn $300/w.

* The minimum wage is raised to $7.50/h.

* The average worker can now work only 40h/w to earn the same $300/h as before.

* No job has been lost.

Note that I am quite sure that any professional economist, especially one as bright and educated as Mankiw, knows fully well that in the neoclassical model labor demand is expressed in terms of hours of work, not jobs, and that the neoclassical model cannot be used to determine how hours worked are parceled into ''jobs''.

Never mind that labor demand schedules are not necessarily smoothly downwards, and that anyhow labor demand, being the demand for a factor, depends on its relative profitability and not its price.

Never mind your questions mark before «market clearing»... :-)

h. economicus said...

There are empirical pieces by Neumark et al. addressing this issue. My recollection is that in their framework, the finding is that the major margin of adjustment to increases in the minimum wage are hours worked. Lost hours are sufficient to offset the hourly wage gain, so that overall incomes fall.

The Card and Krueger findings remain controversial. The main line of attack, as I understand it, is that the responses to the establishment level surveys that they and others conducted (at fast food restaurants) appear to be unreliable. However, it should be noted that the book that Robert frequently cites ("Myths and Measurement") relies on evidence from other data sources as well. Reliable inference is confounded by the infrequency of minimum wage changes in the U.S.A., along with the tendency for states to follow the federal minimum wage. There are few periods that are ideal candidates for the so-called "natural experiment" methodology.

Blissex said...

«There are empirical pieces by Neumark et al. addressing this issue. My recollection is that in their framework, the finding is that the major margin of adjustment to increases in the minimum wage are hours worked.»

I like empirical studies, but my main point was that the neoclassical theory (or the imaginary ''law of demand'') does not say that jobs will be lost.

The effect can be on hours worked, or prices, or profits, and how much on each depends on elasticities.

Which is a much fuzzier message than ''if you DARE to ask fora higher minimum wage YOU WILL BE FIRED!''.

«Lost hours are sufficient to offset the hourly wage gain, so that overall incomes fall.»

Well, that depends case by case. However that there is a superlinear effect on hours worked, so that total amount paid out in salaries falls, seems to me rather improbable in most cases. I would expect the major impact to be on profits and then on prices rather than on hours worked (for relatively small increases in a relatively healthy economy).

I have cursorily scanned a few studies about different regions of the USA where different levels of the minimum wage have been introduced and most seem to confirm that as expected the major effect is reduced profits because of higher wages with a very small impact on hours or prices.

After all owners have no reason to reduce their turnover as long as profits are not lower than what employers can get by liquidating and reinvesting their capital in something else.

Indeed I was not surprised to see that the Restaurant Association of America, who have a duty to care about the profits of their members, are now all in favour of increases in the EITC as an alternative to increases in the the minimum wage.

Most likely a percentage of the EITC becomes a subsidiy to the profits of employers of low wage workers, and the EITC is paid out of general tax revenue, that is a profits subsidy paid for by the middle classes.

h. economicus said...

My intention here is not to defend the "standard" neoclassical model. However, I thought I would add the following:

* The neoclassical model predicts that a minimum wage will lead to underemployment, rather than unemployment, although this distinction is rarely made in textbooks. As you've implied, the distinction depends on how establishments bundle together hours to form jobs.

* That hours lost might outweigh the increase in hourly earnings with regards to overall take home pay is little more than an assertion that labour demand is elastic.

radek said...

I've been through this in other blog discussions so I won't go over all of it again. So just a few points...

As a purely empirical matter increasin' min wages do decrease employment, not just hours worked. At hand I only have some older references but roughly a 10% increase in min wages reduces employment of teenagers by somewhere between 1 and 3% (Brown, JEP, 88). Furthermore states where "students" can be hired at lower minimum wages, so called "training wages", controlling for other things have higher employment of the relevant group. So there are employment effects, not just in neoclassical theory.

Yes I know. Card and Krueger. Katz and Krueger. But the reason these studies got so much attention is precisely because their findings were so unusual (over at CT daniel and kieran are on about publishing bias. Welp, this is one area where if anything an opposite bias holds - you get brownie points for doing a study with zero effect, studies which find effects are too numerous. If I could do a (original) study which found no effect that'd be pretty darn nifty for me). And yeah, the methadology had some problems.
And at the end of the day the truth is that in US min wages are set pretty close to what they'd be anyway so you're not gonna get much of an effect.

It's different if the min wages depart significantly from their "mkt" value. Freeman and Freeman in "Immigration and the Work Force", eds. George Borjas and Richard Freeman (92), show that the attempt to implement US-mainland minimum wage laws in Puerto Rico led to really big job losses. Also Katz (same Katz) and Loveman (NBER WP 93, probably published somewhere since then) found a large effect of minimum wages on unemployment of unskilled workers in France where the gap is much larger. Then there's also a good bit of more anecdotal evidence from developing countries which tried to impose high minimum wage laws.

But, liberterian leanings and all, I can't get really worked up about minimum wage increases like the ones in US. For one thing, as I said above, I think it's barely above what the mkt would crank out anyway. Second the folks loosing the jobs, or hours, are mostly teenagers who should be skateboardin' or fine tuning their myspace pages rather than working anyway. Yeah I know people argue that shitty fast food jobs teach important skills like punctuality and not telling your boss to fuck off when appropriate and hence are a ladder to more gainful employment later on, but I think I'm one of the few people in this world who has actually traveled that career trajectory.

As a poverty fighting measure (leaving the dead weight loss triangle and producers' surplus out of the social welfare function) min wages can go either way. Some loose jobs and are poorer, but some keep their jobs and are richer. Ideally, when the min wages go up, you'd want the pimply teenager from a upper middle income family to get fired (since something's gotta give) and the single mother of two who supplements her meager income with welfare checks to keep her job at the new higher wage. In my above mentioned experience I think this is what mostly happens. Non-teenage workers are a lot more reliable and hey, sometimes the bossman can be human too. And in fact while overall the min wage does not seem to have much of an impact on poverty rates (again, as you'd expect if it's close to mkt wage) it does seem to have a bigger impact upon poverty rates among particular demographic groups, like single mothers(though both employment and wage effects tend to be bigger) (reference; some paper in a Labor econ class I took eons ago).

And finally I gotta ask. What is the Debreu/Lucas model? I know Arrow-Debreu. I know Lucas (islands and helicopters) but Debreau/Lucas?

Blissex said...

«As a purely empirical matter increasin' min wages do decrease employment, not just hours worked. At hand I only have some older references but roughly a 10% increase in min wages reduces employment of teenagers by somewhere between 1 and 3% (Brown, JEP, 88).»

Indeed! But my point is that the theory does not say that is necessarily true. it all depends on elasticities and profitability.

And this matters, as there is a whole world of difference politically between ''SCIENCE PROVES THAT YOU WILL BE FIRED!'' and ''oh well probably if your salary goes up quite a bit maybe you have a small chance of ending up on welfare''.

Look at it from the point of view of the Restaurant Association of America: if say the min wage goes up 50% and 5% of jobs are lost, the total min wage bill still has gone up 40%, and that usually comes out of profits (and a bit from consumers). Then they say that they are really concerned only about the 5% of employees that end up on welfare. How touching :-).

But they need not worry: given the feedback loops in the economy, Blissex Curve Theory says that all increases in the minimum wage pay for themselves, because higher demand drives absolute profits higher even if the rate of profit falls. :-)

«It's different if the min wages depart significantly from their "mkt" value.»

Sure, as I had written «for relatively small increases in a relatively healthy economy» because what matters is whether the job is still profitable or not, and that involves a band, and going out of that band hurts a lot more. Indeed if neoclassical economists had some sense those demand/supply schedules would be drawn as ribbons, not as lines (and not with monotonic smooth inclines either).

«min wages can go either way. Some loose jobs and are poorer, but some keep their jobs and are richer.»

Sure, but what's the overall practical effect? Within the limits of keeping the jobs sufficiently profitable, typically the effect is a transfer from minimum wage employers to minimum wage employees, and most employees keep their jobs and work a bit less hours, and there is a small increase in welfare payments. For most people, including min wage workers, the downsize is nothing much to get excited about.

That's why neoclassical economists rarely mention the impact on profits (and prices) and focus relentlessly on the ''law of demand'' and ''YOU WILL BE FIRED!''.

«What is the Debreu/Lucas model? I know Arrow-Debreu. I know Lucas (islands and helicopters) but Debreau/Lucas?»

It is my pernicious way of labeling Debreu equilibrium plus Lucasian rational expections, a combination which is after all still the state of the art (oh thats too funny!) and in its own perversity is a lot better than pure Debreu, and at the same time even more ridiculous :-). The issue of course is money, which in Debreu is more or less irrelevant (and in Debreu/Lucas too, only more subtly so). Just found a random paper that presents an interesting point of view on how important has the Lucasian ''revolution'' been:

http://WWW.IRES.UCL.ac.BE/CONFERENCE/21_01_2005/Vercelli.pdf

As a general comment I have been astonished by your arguments, because they are the same or similar to the arguments I have been using in many cases. They are based on plausible assumptions, looking at statistics, at tradeoffs, at elasticities. Not scare stories based on deeply flawed models with, as Robert said, imaginary market clearing situations.

perhaps you should like Robert unleash your inner Sraffa, look at Schumpeter, the original Keynes, the latter Fischer, ... :-).

Of course only if you have already got tenure. Else the contamination could prove fatal... :-)

Solveig Singleton said...

A historical note here: What type of losses result from minimum wage hikes and who gets worked up about it is partly a function of culture. The national minimum wage that was part of the NRA was referred to by the Black press as the "Negro Removal Act," because they *correctly* anticipated that in a racist context, the passage of a national minimum wage would result in a wave of unemployment among African-Americans; it would be worth checking if it also affected women, as well, who before the minimum wage could also underbid white males for jobs.

Solveig Singleton said...

"given the feedback loops in the economy, Blissex Curve Theory says that all increases in the minimum wage pay for themselves, because higher demand drives absolute profits higher even if the rate of profit falls. :-)"

I am not an economist so perhaps I do not understand your sense of humor, but I do hope this is a joke. Or may we cheerfully raise the minimum wage to $50.00 an hour?