Home > Uncategorized > David Card and the minimum wage myth

David Card and the minimum wage myth

from Lars Syll

Nobel Prize Economist David Card on testing Econ 101 theories in the real  world - MarketplaceBack in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory’s competitive model — have increased relative to Pennsylvania. However, when ‘Nobel prize’ winning economist David Card and his colleague Alan Krueger gathered information on fast food restaurants in the two states to check what employment effects the minimum wage really have — using a basic difference-in-differences approach — it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

buchC6The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.

James M. Buchanan in Wall Street Journal (April 25, 1996)

  1. Ikonoclast
    October 19, 2021 at 11:08 am

    Born James McGill Buchanan Jr.
    October 3, 1919
    Murfreesboro, Tennessee, U.S.
    Died January 9, 2013 (aged 93)
    Blacksburg, Virginia, U.S.

    Science advances one funeral at a time.

    https://www.chemistryworld.com/news/science-really-does-advance-one-funeral-at-a-time-study-suggests/3010961.article

  2. October 19, 2021 at 12:26 pm

    Is it not possible Lars, just for once, to tell the same story in a positive way? – that David Card and Alan Krueger started a shift in economic thinking as well as in the real world, towards (a) debunking rigid textbook thinking, and (b) improving the livelihoods of workers on low wages? It’s also positive that the Swedish central bank has recognized the importance of this work? – at last!

    One could certainly add that Buchanan-like thinking is still around – obviously that point needs to be made! Also, that it can only be debunked by evidence.

    I would go further, and say that we need to go beyond what I take to be the current situation in labor economics, where we have “standard theory”, as in the textbook models, on the one hand, and the debunking on the other. What we don’t have is a new theory that is based on the evidence. Partly because economists typically think “theory” has to be a mathematical model, preferably parsimonious – it’s not the mathematics that’s the problem, it’s that the theory is a priori rather than evidence based.

    It may be a question of “one funeral at a time”, but more important is that *a bad theory can only be displaced by a good theory* – one that conforms to the empirical facts about the world.

    And the same obviously applies in all branches of economics, not only labor economics.

  3. yoshinorishiozawa
    October 19, 2021 at 3:07 pm

    What we don’t have is a new theory that is based on the evidence. Partly because economists typically think “theory” has to be a mathematical model, preferably parsimonious – it’s not the mathematics that’s the problem, it’s that the theory is a priori rather than evidence based.  evidencebasedeconomics

    Right and true! What is more important than debunking is that a bad theory is replaced by a good or better theory. So, we should not abandon the challenge to displace bad theory by a good or better theory. Lars Syll seems to have abandoned this challenge. He positions himself as philosopher of economics and thinks (I believe wrongly) that its function is always to debunk mainstream economics. But, there must be another function for economics philosophy, that is, to promote new challenges.

    As an economic theorist, I am myself is trying to displace a bad theory by a better theory. For example, see my paper. Lars can criticize it constructively. This paper is based on a theory presented in a book by Morioka, Taniguchi and me. We have tried to link it with stylized facts (a form of empirical facts) as far as possible. Recently asymposium over the book was published. Many methodological questions are argued. If the readers of this page have difficulty to read it, please send me an e-mail: yCshiozawa.net. (Please replace C by @). There are chances to argue constructively.

  4. Craig
    October 19, 2021 at 5:41 pm

    There is no such thing as total freedom in the temporal universe, only the freedom consciously chosen between known barriers.
    This non-fetishized freedom is honest, real and wise.

    Presently there is no actual economic freedom, just a fetishized concept of such when the reality is an unstable alternately goosed and strangled monetary and financial dominance.

    Wake up theorists!

  5. Edward Ross
    October 20, 2021 at 12:55 am

    From the viewpoint of a mature age citizen of the real world the above posts and blogs certainly gets to the heart of the problem which is, a theory that does not stand up to empirical testing, is not only useless in helping to solve economic problems, but it can also be dangerous and lead to conclusions that creates more problems than it solves.
    Here I believe from the experience gained in a long life the importance of an open mind and a common sense approach in problem solving in all walks of life. This is supported by “Re reading Ken Arrows masterful obituary of John Husaryi and his contributions (Economics Journal,111,2001,F747-52)Minds should never be closed even in your 71st year ! ” Harcourt.G.(Post Autistic Economics Review vol 13,2002) Ted

  6. October 20, 2021 at 1:02 am

    David Card:
    I’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.
    From: https://www.minneapolisfed.org/article/2006/interview-with-david-card

  7. October 20, 2021 at 1:03 am

    Sraffa (1926, The Law of Returns under Competitive Conditions) opens his paper with the following eloquent remarks:
    (theoretical foundations of the) supply curve are actually so weak as to be unable to support the weight imposed upon them. (From time to time, someone) expresses doubts openly; then, in order to prevent the scandal spreading, he is promptly silenced, frequently with some concessions and partial admission of his objections, which, naturally, the theory had implicitly taken into account.

  8. John Jensen
    October 20, 2021 at 3:28 pm

    I’m guessing that people’s lives should come before theory so that means that a minimum wage must be a living wage. If Denmark can pay a minimum wage of $USD18/hr. for 7-11 workers without the economy failing and the top marginal tax rate can be 68% on the rich in a country without natural resources and the ratio of millionnaires/capita and GDP is still the same as America I don’t understand why there is a problem – other than a theoretical one.

  9. Craig
    October 20, 2021 at 4:59 pm

    A 50% discount/rebate policy at the point of retail sale enables a $7.35/hr. minimum wage worker to purchase goods and services as if he/she were making $14.70/hr. and immediately doubles everyone’s potential purchasing power. Don’t be like a hard headed/reality denying neo-liberal macro-economic doink. Look at the above empirical and temporal universe reality and recognize it as paradigm changing. You’re welcome…for the opportunity to see a new reality and think a new thought which is a rare occurrence in life.

    • yoshinorishiozawa
      October 20, 2021 at 6:38 pm

      Dear Craig,
      are you sure that your policy plan is based on a good theory based on evidence?
      Measurement without theory was dangerous as Koopmans argued. However, a policy without theory is much more dangerous.

      • Craig
        October 21, 2021 at 4:43 am

        Yoshi, My theoretics are the very same as the heterodox thinking of MMTer’s Monetary Sovereignty, Steve Keen’s Minsky Financial Instability Hypothesis, Michael Hudson’s Financial Parasitism et al. However, as I have repeatedly stated here for years (and the afore mentioned theoreticians [unconsciously] confirm) the actual/deeper problem is the present monetary and financial paradigm which parasitically dominates and manipulates virtually all other commercial and individual agents.

        My contribution is recognizing the present paradigm and, by a study of historical paradigm changes, discovering the signatures of new paradigm concepts and thus the new one required in money and finance.

        The new paradigm fits seamlessly within the heterodox theories above and all but the most misaligned current economic structures, and in fact effectively integrates their goals into the economy while enabling many other solutions than they have considered possible.

      • yoshinorishiozawa
        October 21, 2021 at 1:43 pm

        I only know that you repeatedly insisted your policy plan. Having heterodox picture and having a good heterodox theory are two different things.

      • Craig
        October 21, 2021 at 6:41 pm

        Logic is logic. If the theoretics of the heterodox reformers I mentioned above conceptually align with the new paradigm of monetary grace as in gifting…then they are aligned. And, if the new paradigm resolves the problems theorists want to solve and enables even more beneficial things than those theorists currently think are possible…then they better get on the bandwagon for the new paradigm or at best they risk logical failure and at worst some hidden or unconscious agenda.

  10. Gerald Holtham
    October 24, 2021 at 5:30 pm

    The Card et al finding is not a problem for the supply-curve construct as some contributors seem to think. If the price goes up, in a simple schema. the supply goes up. A rising price (wage in this case) moves you out along the supply curve to more employment. The difficulty for the simple text book schema lies with the demand curve. Demand for labour is supposed to fall when the price rises. It is the demand curve that as to be re-thought.
    You can resolve a lot of “puzzles” in economics if you drop the assumption that the system is in a full-information equilibrium and make allowance for uncertainty. Suppose, for example, that all the fast food restaurants were not in equilibrium. They would like to operate at higher levels of capacity but would require more staff to do so. However they were pessimistic about being able to get adequate staff by raising wages. They thought other restaurants would also raise wages, there would be competition for labour and they would be back with same number of employers but paying them more. Being pessimistic about the elasticity of the aggregate supply of labour they remained operating below their optimum capacity. When all are forced to raise wages they find the labour supply does in fact increase so wages and employment rise together.
    Is that the true explanation? I don’t know; perhaps not. But if you have a hypothesis you can test it. If it fails you’re supposed to try another hypothesis. It is ok to question the data too. But you can’t keep questioning the data if it keeps telling the same story.

  11. Gerald Holtham
    October 24, 2021 at 5:37 pm

    correction: same number of employees (not employers).
    One partial test of the hypothesis advanced would be: has the number of advertised vacancies in fast-food restaurants fallen to a lower level in New Jersey compared with Pennsylvania? If not, something else is going on.

  12. Ken Zimmerman
    October 29, 2021 at 10:02 am

    Workers  need  better  conditions  from  which  to negotiate with  employers. In more developed  labor  markets,  there is  a  role for  minimum  wages,  for  a  core level of employment  protection legislation and  for  mechanisms  to protect  workers  from  the impoverishing  effects  of job  loss,  increasingly  brought  on  by  technological  change. These protections  have to be flexible  and  distributed  evenly  across  workers;  not,  as  is the case today  in  many  countries,  in  a  way  that  creates  a  dual  market  of protected insiders  and  unprotected  outsiders.  With  the rise in  labor  saving  technology,  the state should  explore ways  to regulate technology driven  growth  in  ways  that  balance the competing  need  to promote  economic  growth  and  innovation yet  limit  worker displacement  and  unemployment.  Some have suggested  a  form  of time insurance to compensate limited  wage displaced  workers  for  a  portion  of lost  income. Others, including  Bill  Gates,  have  proposed  a  more  radical  “robot  tax,” taxing  companies  who use labor  saving  technology  in  an  effort  to slow workforce automation. In more informal labor  markets,  there is still scope for  a  minimal  set  of labor  standards  that include societal  level  minimum  wages,  basic  health  and  safety  conditions.  The Cambodian  apparel industry  provides  an  illustrative example  of how governments can  successfully  introduce both  at  very  low income levels. Such policies  are also important elements in building  a  strong  and  resilient  middle  class.

    Fundamentally, such policies strengthen noticeably not just the aspiration of obtaining jobs but wanting to make jobs and the companies where they’re situated successful. This in turn helps make the broader society more successful and more attractive for both workers and companies. Voila, the New Jersey-Pennsylvania minimum wage, employment ‘mystery ‘ explained.

    • test test
      October 29, 2021 at 10:29 am

      How about just implementing Job Guarantee? Full employment all time, no matter where we set the minimum wage.

      • Ken Zimmerman
        November 8, 2021 at 7:53 am

        Easy to say, hard to do. So far we can’t even get a $15 minimum wage.

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