Thursday, September 11, 2014

Survey Of Empirical Evidence Showing Nonexistence Of Supply And Demand Curves

A theme of this blog is that wages and employment are not determined by, and cannot be determined by, the interaction of well-behaved supply and demand curves in the so-called labor market. I here bring to your attention two new papers supporting this claim:

  • Steve Fleetwood, Do labour supply and demand curves exist?, Cambridge Journal of Economics, V. 38, Iss. 5 (Sep. 2104): pp. 1087-1113.
  • The objective of this paper is to show that circumstantial and empirical evidence for the existence of labour supply and demand curves is at best inconclusive and at worst casts doubt on their existence. Because virtually all orthodox models of labour markets, simple and complex, are built upon the foundation stones of labour supply and demand curves, these models lack empirically supported foundations. Orthodox labour economists must, therefore, either provide stronger evidence or stop using labour supply and demand curves as the foundation stones of their models. The conclusion discusses implications for future orthodox and heterodox labour economics.
  • Daniel Kuehn, The importance of study design in the minimum wage debate, Economic Policy Institute (4 Sep. 2014).
  • This paper reviews the empirical literature on the employment effects of increases in the minimum wage. It organizes the most prominent studies in this literature by their use of two different empirical approaches: studies that match labor markets experiencing a minimum-wage increase with an appropriate comparison labor market, and studies that do not. A review of this literature suggests that:
    • The studies that compare labor markets experiencing a minimum-wage increase with a carefully chosen comparison labor market tend to find that minimum-wage increases have little or no effect on employment.
    • The studies that do not match labor markets experiencing a minimum-wage increase with a comparison labor market tend to find that minimum-wage increases reduce employment.
    A better understanding of which approach is more rigorous is required to make reliable inferences about the effects of the minimum wage. This paper argues that:
    • Labor market policy analysts strongly prefer studies that match "treatment" with "comparison" cases in a defensible way over studies that simply include controls and fixed effects in a regression model.
    • The studies using the most rigorous research designs generally find that minimum-wage increases have little or no effect on employment.
    • Application of these findings to any particular minimum-wage proposal requires careful consideration of whether the proposal is similar to other minimum-wage policies that have been studied. If a proposal occurs under dramatically different circumstances, the empirical literature on the minimum wage should be invoked with caution.

8 comments:

dkuehn said...

Unless by "cannot be determined by the interaction of well-behaved supply and demand curves" you just mean "perfect competition", I'm not sure my paper says that.

Anonymous said...

Mr. Kuehn, can you elaborate on your post? Non-economist here, and I'm not entirely sure what you are saying in your response.

Thanks!

Unlearningecon said...

Been thinking of writing something similar for a while. One other piece of evidence is the lack of effect immigration has on native wages. In the standard D-S model, this represents a rightward shift in the supply curve, which should drive wages down. The fact this does not happen is another piece of evidence against D-S in the labour market.

dkuehn said...

Anonymous - so there's still supply and demand in most explanations for why the minimum wage doesn't reduce employment. What you need is market imperfections, not an end of neoclassical economics. There is also adjustment on other margins besides employment, which means you just should use general equilibrium rather than partial equilibrium thinking.

Unlearningecon - immigration studies that focus on markets for specific types of labor do get a negative impact. When you are looking at broader aggregates you need to remember that immigrants are consumers and investors as well. They bring demand for labor as well as supply. That's the traditional explanation (and it's offered by, for example, David Card).

Robert Vienneau said...

Thanks for the comments.

Unlearning, I am sorry to see your blog shut down.

Dan, I claim that your paper, along with other empirical results, supports my point of view. I do not claim that you say so. As far as I can see, for your purposes of impacting policy, you are not much interested in drawing any theoretical conclusions.

You do bring up, on p. 4, "explanations for the lack of substantial disemployment effects" of minimum wages. You mention monopsony there. Why not also note the existence of a respected group of economists, the neo-Ricardians, who do not expect regular functions between employment and real wages?

Also, in classifying empirical studies of minimum wages into two groups, where do meta-analyses fall? Are they a third group?

Phil said...

"Why not also note the existence of a respected group of economists, the neo-Ricardians, who do not expect regular functions between employment and real wages?"

Where can I read more about this?

Could someone list the main reasons why economists think that an increase in the minimum wage would not reduce employment, and might potentially even increase overall employment?


Is the idea that the market demand curve may not always be downward sloping, due to changes in income (as a result of a minimum wage increase) violating the ceteris paribus clause, a reason given by heterodox economists, or not?


Robert Vienneau said...

"Where can I read more about this?"

Here is my most recent example, I guess, of what I am talking about.

I cannot generalize about economists. The income effects you mention are a third reason why firms might want to employ more workers when wages are higher. (The first reason, that I refer to in my post and above, is Sraffa effects. The second reason, that Daniel refers to, arises from failures of competition, e.g. monosony, agent-monitoring costs, etc.)

Phil said...

thanks.