16 Feb 2013

Two Views on Minimum Wage Hikes

Economics, Krugman 7 Comments

(This post is taken from the heavy lifting David R. Henderson performed.)

Here’s an economist talking about the textbook view of the minimum wage, and how we should take the (in)famous Card & Krueger results with a grain of salt:

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces.

What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda…Clearly these advocates very much want to believe that the price of labor–unlike that of gasoline, or Manhattan apartments–can be set based on considerations of justice, not supply and demand, without unpleasant side effects…

Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which–Card/Krueger notwithstanding–must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?

In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal.

Just today, Paul Krugman offers a decidedly different take on how we should interpret the Econ 101 textbooks and the empirical evidence:

So what should you know? First, as John Schmitt (pdf) documents at length, there just isn’t any evidence that raising the minimum wage near current levels would reduce employment. And this is a really solid result, because there have been a *lot* of studies. We can argue about exactly why the simple Econ 101 story doesn’t seem to work, but it clearly doesn’t — which means that the supposed cost in terms of employment from seeking to raise low-wage workers’ earnings is a myth.

So a minimum wage increase isn’t some kind of counsel-of-despair way to help workers a bit in a dysfunctional political scene (although there’s that too); it’s actually good policy.

At this point, surely I don’t need to tell you guys who wrote the first block quote above, do I? It was from 1998.

P.S. Yes, in the first block quote, he’s talking about a “living wage” proposal that means a large increase in the minimum wage, whereas in the second he’s talking about a more modest increase. If you think his readers are picking up on all those nuances, and that this is a consistent economic perspective, you have more faith in humanity than I do.

7 Responses to “Two Views on Minimum Wage Hikes”

  1. reader says:

    “It was from 1998.”

    Maybe he changed his mind in the light of new evidence that has been collected in the last 15 (!) years …

    • Major_Freedom says:

      Evidence is too strong a word.

  2. Blackadder says:

    Much as I hate to defend Krugman, the evidence he cited in his post today is almost all post-1998. So I think he could just say that he’s changed his mind in light of new evidence.

    • Bob Murphy says:

      Right, but wouldn’t he also have said, “Hey, I used to believe this too, but in light of…”? It seems like a lot has changed in Krugman’s worldview since 1998, and he’s quite merciless if other economists didn’t go along on his intellectual odyssey.

  3. Robert Fellner says:

    1998 Krugman wasn’t the only one warning us to take the Krueger study with a gain of salt. The co-author of the study, Kruger, also warned us to be cautious: “I want to emphasize that my comments should not be interpreted as support for the position that increasing the minimum wage is sound public policy.”


    The data they used was wrong and re-evaluations of the study showed the opposite effect. They compiled their data based on phone interviews. Other economists re-evaluated the study using actual data – payroll data, specifically – and the results were the opposite of what Card & Krueger found. Read the first 3 paragraphs of this 1996 paper, The crippling flaws in the NJ fast food study , which aptly demonstrates how the 1992 study is fundamentally flawed. http://epionline.org/studies/epi_njfastfood_04-1996.pdf

    Another re-evaluation of the Card/Krueger study found the same flaws:

    “Second, estimates of the employment effect of the New Jersey minimum wage increase from the payroll data lead to the opposite conclusion from that reached by Card/Krueger.”


    • Major_Freedom says:

      Thanks for this information. It’s always good to know the pros and cons of studies, regardless of the conclusions made.

  4. Robert Fellner says:

    Posted a comment drawing attention to the flawed data used in the Card/Krueger study but it is awaiting moderation, probably due to the number of links.

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