Tuesday, August 30, 2011

Obama's Chief Econ. Adviser Once Made An Amazing Discovery: Demand Curves Slope Upward

In a 1994 paper published in the American Economic Review, economists David Card and Alan Krueger (appointed today to chair Obama's Council of Economic Advisers) made an amazing economic discovery: Demand curves for unskilled workers actually slope upward! Here's a summary of their findings (emphasis added):
"On April 1, 1992 New Jersey's minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in the minimum. Comparisons of the changes in wages, employment, and prices at stores in New Jersey relative to stores in Pennsylvania (where the minimum wage remained fixed at $4.25 per hour) yield simple estimates of the effect of the higher minimum wage. Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent."
Note: In that case, New Jersey should have increased the minimum wage even higher than $5.05 per hour, and employment would have increased even more than 13%!

It was only a short time before the fantastic Card-Krueger findings were challenged and debunked by several subsequent studies:

1. In 1995 (and updated in 1996) The Employment Policies Institute released "The Crippling Flaws in the New Jersey Fast Food Study"and concluded that "The database used in the New Jersey fast food study is so bad that no credible conclusions can be drawn from the report."

2. Also in 1995, economists David Neumark and David Wascher used actual payroll records (instead of survey data used by Card and Krueger) and published their results in an NBER paper with an amazing finding: Demand curves for unskilled labor really do slope downward, confirming 200 years of economic theory and mountains of empirical evidence (emphasis below added):
"We re-evaluate the evidence from Card and Krueger's (1994) New Jersey-Pennsylvania minimum wage experiment, using new data based on actual payroll records from 230 Burger King, KFC, Wendy's, and Roy Rogers restaurants in New Jersey and Pennsylvania. We compare results using these payroll data to those using CK's data, which were collected by telephone surveys. We have two findings to report.

First, the data collected by CK appear to indicate greater employment variation over the eight-month period between their surveys than do the payroll data. For example, in the full sample the standard deviation of employment change in CK's data is three times as large as that in the payroll data.

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 CK. For comparable sets of restaurants, differences-in-differences estimates using CK's data imply that the New Jersey minimum wage increase (of 18.8 percent) resulted in an employment increase of 17.6 percent relative to the Pennsylvania control group, an elasticity of 0.93. In contrast, estimates based on the payroll data suggest that the New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania control group. This decrease is statistically significant at the five-percent level and implies an elasticity of employment with respect to the minimum wage of -0.24."
MP:  It should be noted that even if empirical evidence suggests that raising the minimum wage has no effect on the level of employment, that finding does not necessarily mean that the minimum wage has no adverse effects.  There could be many other negative effects making unskilled workers worse off, even if they manage to keep their job following a minimum wage increase.  Here are some examples:

1. Reduction in the number of hours worked;
2. Reduction in fringe benefits like reduced cost uniforms, reduction or elimination of reduced cost or free meals at restaurants, elimination or reduction in company-sponsored holiday parties, picnics, events; 
3. Reduction or elimination in any health care benefits;
4. Reduction in on-the-job training, etc.

The most likely outcome of a minimum wage increase, confirmed by Neumark and Wascher and consistent with the Law of Demand, would be that everything beneficial for unskilled workers decreases: employment levels, hours worked, fringe benefits, subsidized uniform and food, training, etc.  Let's hope that labor economist Alan Krueger, as he assumes his new position as Chief Economist to the President, remembers that demand curves really do slope downward, despite his original flawed findings based on faulty survey data.    

39 Comments:

At 8/30/2011 10:07 PM, Blogger sethstorm said...

Unfortunately when you lower it, you create a greater incentive to act in ways that are financially impossible to guarantee the safety of those that perform the work. In addition, it also creates the incentive to turn the work into slavery. The wages would move, but prices would not move for the same products - causing the products that are at the new level to be as low quality as the people that can afford or make them.

 
At 8/31/2011 1:19 AM, Blogger OBloodyHell said...

>>> Let's hope that labor economist Alan Krueger, as he assumes his new position as Chief Economist to the President, remembers that demand curves really do slope downward, despite his original flawed findings based on faulty survey data.

Yeah. Fat Chance. The dude's an ephing libtard. One can presume he's a VERY ephing libtard just from the fact that The Big 0 hired him.

From that, we can presume that, for him, the Liberal Midnight Reset Button prevents him from learning anything of the sort. "Increasing Minimum Wage has no negative effect on employment, nor does it increase unemployment" is an Officially Accepted Liberal PositionĀ® (OALP) and is a particularly cherished one.

Ergo, despite the wishful thinking that he learned something, the actual chances of this are vanishingly close to zero.

 
At 8/31/2011 1:23 AM, Blogger OBloodyHell said...

seth, you're a retard.

Your claim is retarded, ludicrous, and makes absolutely no rational sense whatsoever.

Hence, you're a retard, first for stating it at all when it's blatantly nothing but a mindless blathering of hot words, and second, for either believing it or thinking others would.

 
At 8/31/2011 2:53 AM, Blogger PeakTrader said...

I think, it was "Myth and Measurement: The new economics of the minimum wage" by Card-Krueger that responded to the criticism.

Of course, some people refuse to work for fast-food restaurants, and other minimum wage jobs, unless wages are higher.

It's interesting a labor economist was picked, which seems to reflect Obama is desperate to bring down the unemployment rate.

 
At 8/31/2011 3:44 AM, Blogger Tim Worstall said...

There's another fault with the original research.

They're looking at the wrong sector.

Chain restaurants are, almost by definition, more capital intensive than Mom and Pop stores. A rise in the price of labour would be expected to hit more heavily in the more labour intensive part of the sector than in the more capital intensive.

It wouldn't be that tough to construct a model where the higher min wage drove the Mom and Pop stores out of business, thus increasing demand for the chain stuff.

 
At 8/31/2011 3:53 AM, Blogger Ron H. said...

"It's interesting a labor economist was picked, which seems to reflect Obama is desperate to bring down the unemployment rate."

I guess he'll do it by recommending an increase in min wage to $30/hr. Employers will line up to hire people at that wage!

 
At 8/31/2011 3:58 AM, Blogger Ron H. said...

"They're looking at the wrong sector.

Chain restaurants are, almost by definition, more capital intensive than Mom and Pop stores. A rise in the price of labour would be expected to hit more heavily in the more labour intensive part of the sector than in the more capital intensive.
"

They looked at mom & pop stores first, but couldn't find a large enough sample for their survey. Most went out of business after the last min wage hike.

 
At 8/31/2011 5:09 AM, Blogger geoih said...

Quote from sethstorm: "Unfortunately when you lower it, you create a greater incentive to act in ways that are financially impossible to guarantee the safety of those that perform the work."

In other news, gravity makes you fall down.

 
At 8/31/2011 7:05 AM, Blogger Methinks said...

I guess he'll do it by recommending an increase in min wage to $30/hr. Employers will line up to hire people at that wage!

Oh, no! Peak Trader will tell you his models show that's too high.

Of course, the only models that matter are those created by employers for their individual enterprises, but that's never stopped central planners before!

I do have to admit that econometrics is a lot of fun. You can really lull yourself into believing you can not only understand complex problems you don't have enough information about but you can solve them at the stroke of your statistical software as well! It takes a certain amount of naivete and/or hubris, but those things are not in short supply among economists. Especially labour and development economists.

 
At 8/31/2011 7:05 AM, Blogger Methinks said...

I guess he'll do it by recommending an increase in min wage to $30/hr. Employers will line up to hire people at that wage!

Oh, no! Peak Trader will tell you his models show that's too high.

Of course, the only models that matter are those created by employers for their individual enterprises, but that's never stopped central planners before!

I do have to admit that econometrics is a lot of fun. You can really lull yourself into believing you can not only understand complex problems you don't have enough information about but you can solve them at the stroke of your statistical software as well! It takes a certain amount of naivete and/or hubris, but those things are not in short supply among economists. Especially labour and development economists.

 
At 8/31/2011 9:46 AM, Blogger Buddy R Pacifico said...

Excellent commentary by Prof. Perry.

 
At 8/31/2011 9:52 AM, Blogger juandos said...

"I guess he'll do it by recommending an increase in min wage to $30/hr"...

Well shame on you Ron H and others of like mind, don't you want people (regardless of talent or work ethic) to make a living wage?!?!

 
At 8/31/2011 11:09 AM, Blogger NormanB said...

Screw economic theory, the GOP is stupid in fighting minimum wage policy. Do the Dems 10% better and take this issue off of the table. Any damagae to kids etc will be more than offset by GOP wins where overall better policy can then be made.

 
At 8/31/2011 11:13 AM, Blogger morganovich said...

here's to the $12 big mac!

 
At 8/31/2011 12:42 PM, Blogger Ron H. said...

"I do have to admit that econometrics is a lot of fun. You can really lull yourself into believing you can not only understand complex problems you don't have enough information about but you can solve them at the stroke of your statistical software as well!"

Sounds like loads of fun. I guess I've missed my calling, as I've always enjoyed computer games like "Sim City". The god-like power at the end of my typing finger is truly intoxicating.

I really envy Alan Krueger. He must be ecstatic, knowing that from now on, not only will his models produce interesting results on his computer screen, but he can actually watch their effects on millions of real people.

 
At 8/31/2011 1:04 PM, Blogger Ron H. said...

"First, the data collected by CK appear to indicate greater employment variation over the eight-month period between their surveys than do the payroll data. For example, in the full sample the standard deviation of employment change in CK's data is three times as large as that in the payroll data."

This sounds like merely an interesting piece of information, until you actually look at the anomalous data shown in the NBER report.

At that point, one can easily imagine someone at each location surveyed, providing their own guesses about employment data, while simultaneously taking orders at the drive-up window.

 
At 8/31/2011 2:28 PM, Blogger Benjamin said...

Somehow, I just can't get into beating up on people earning the minimum wage.

 
At 8/31/2011 3:08 PM, Blogger Ron H. said...

"Somehow, I just can't get into beating up on people earning the minimum wage."

Alan Krueger only makes minimum wage as Chief Econ advisor? Who would have thought!

 
At 8/31/2011 3:21 PM, Blogger Mike said...

One thing I thought was odd...
Don't forget, these 'chain' restaurants ARE (in many cases) mom 'n' pop through franchising. I didn't notice data spelling out 'company owned'.

The odd thing was the number of employees that was given on the phone compared to payroll. Did the researchers lie? The store owner?
Or, is it possible that the hike in wage caused/amplified some illegal activity (illegal workers)?

 
At 8/31/2011 3:23 PM, Blogger Ron H. said...

"Somehow, I just can't get into beating up on people earning the minimum wage."

People making min wage are paid, based on their value to their employer, just like everyone else.

In some cases, they may be paid even more than they're worth, as they can't legally work for less than min wage.

Do you feel sorry for anyone else being paid what they're worth?

 
At 8/31/2011 3:34 PM, Blogger Ron H. said...

"The odd thing was the number of employees that was given on the phone compared to payroll. Did the researchers lie? The store owner?
Or, is it possible that the hike in wage caused/amplified some illegal activity (illegal workers)?
"

After seeing the actual data used in that study, applying Occam's razor suggests that, in some cases, the people responding to the phone surveys didn't have a clue about actual employment numbers at their location, or about food prices, for that matter, so they just took their best guess & made sh*t up.

 
At 8/31/2011 4:02 PM, Blogger Benjamin said...

Ron H-

In every state, lawyers control who gets licensed to practice law, and then they control the legal process through an incredibly clumsy, fantastically expensive and time-consuming system of courts.

The WSJ recently op-ed'ed we should totally deregulate lawyers coast-to-coast. I agree.

Lawyers make $100 an hour and up to $900. It is not a free market. In fact, if you are sued, you have to respond, and answer the complaint.

Where is the wailing about lawyers?

But jeez, every day let's beat up on the minimum wage guys. Real minimum wage is down about 25 percent form the 1960s.

Lawyers have become ever more intrusive, ubiquitous, and thus evermore structurally impedimentative.

You are being led like a cattle with a ring through his nose, in right-wing set piece land.

 
At 8/31/2011 4:29 PM, Blogger Mike said...

Ron,
Good point.
I'd probably agree with you if I looked at the actual data. As a small biz owner, I am confident that I'd know the number of my employees and prices if I had 1 to 3 stores...but if I owned 22 Burger Kings, I may not.

 
At 8/31/2011 5:05 PM, Blogger Ron H. said...

"You are being led like a cattle with a ring through his nose, in right-wing set piece land."

Wait! - Who is this? Are you really Larry pretending to be Binji?

"Real minimum wage is down about 25 percent form the 1960s."

That's a good thing! That means that more people with low or no skills can get jobs.

I don't feel sorry for lawyers, and I don't feel sorry for min wage earners. They are paid what they are worth to those who pay them. I assume all such agreements are voluntary.

This wailing about poor min wage workers get's tiresome. People with no skills or experience must start somewhere, and they start at the bottom of the so called ladder in entry level jobs. As they acquire valuable skills and experience, they don't stay at the bottom long, but move up the ladder to bigger and better things. This is a constant process.

Increasing the min wage raises the bottom rung above the reach of some, and protects those already on the ladder from competition from below. If that bottom rung moves above the value of some, they may be kicked off the ladder to join those who can't reach the rung.

Why does anyone consider that a good thing?

 
At 8/31/2011 5:09 PM, Blogger Mike said...

Minimum wage is such an insignificant percentage of the work force (and mostly made up of kids/young adults) it's hardly worth talking about at all. Just another divider the Dems and GOP can get us to argue about while they screw up important stuff.

 
At 8/31/2011 5:23 PM, Blogger Ron H. said...

"I'd probably agree with you if I looked at the actual data. As a small biz owner, I am confident that I'd know the number of my employees and prices if I had 1 to 3 stores...but if I owned 22 Burger Kings, I may not."

If you owned 22 Burger Kings, you would likely know exactly how many people worked for you, and the price you charged for every item, or that information would be at your fingertips, or you would transfer the call to someone who worked for you that DID have that exact information. This assumes you were interested in responding to a phone survey.

I suspect that some of the respondents to the survey had no direct knowledge of the number of employees at their location, and at the same time they answered questions for the phone surveyor, were taking orders and asking customers if they wanted fries with that order. In other words, they were'nt the right people to ask.

 
At 8/31/2011 5:32 PM, Blogger Benjamin said...

Ron H-

You don;t feel sorry for lawyers?

You missed the point.

You should detest and loath lawyers, who control access to their industry, yet you are required to hire a lawyer to defend yourself in court. And you have to defend yourself if sued.

(You can move for dismissal, but even that takes a lawyer).

 
At 8/31/2011 5:36 PM, Blogger Mike said...

Ron,
I partially agree...not sure what you do for a living, but if I had time to take the call, I'd be able to rattle off accurate information about the most the most minute detail of my business....let alone the number of people that I pay.

 
At 8/31/2011 5:56 PM, Blogger Ron H. said...

"Minimum wage is such an insignificant percentage of the work force (and mostly made up of kids/young adults) it's hardly worth talking about at all. Just another divider the Dems and GOP can get us to argue about while they screw up important stuff."

That's right. Min wage is a political issue, not an economic one - except to those harmed by it.

 
At 8/31/2011 6:58 PM, Blogger Craig said...

It's interesting a labor economist was picked, which seems to reflect Obama is desperate to bring down the unemployment rate.

It only shows that the left has learned nothing from FDR's mistakes. Keep wages high and all will be well was the guiding philosophy in the thirties (Hoover believed it, too). The selection of Krueger fits that model perfectly.

 
At 8/31/2011 8:21 PM, Blogger Ron H. said...

"You should detest and loath lawyers, who control access to their industry, yet you are required to hire a lawyer to defend yourself in court. And you have to defend yourself if sued.

(You can move for dismissal, but even that takes a lawyer).
"

I could say exactly the same about doctors. They control access to their profession, and it's damn hard to treat myself for many medical conditions. I'm not competent to treat anything more serious than a hangnail.

While I can attempt to diagnose and treat myself, I might be better off hiring a professional lawyer or doctor.

Come to think of it, I detest and loath my dentist and accountant for all the same reasons.

Thank goodness there are paralegals and nurse practitioners.

Actually, if you sue me, or file a criminal complaint, I can chose to represent myself. That way, discovery provides me with a lot of useful information, like where you live.

I can drive by and shoot up your house until you reconsider. If I'm constrained by the lock on my cell, my homeys will take care of it for me.

 
At 8/31/2011 8:37 PM, Blogger Hydra said...

"Real minimum wage is down about 25 percent form the 1960s." That's a good thing! That means that more people with low or no skills can get job.

================>====

What is the point? Why do I want people with low or no skills to have jobs? I wwould not want such a person anywhere near my business - not even working for one of my vendors.

But, given that some capitalist/altruistic is willing to take the risk of hiring such people, how are they better off expending energy on a job that does not pay enough to feed them? Let alone enough to actually live on.

If we cannot pay them enough to live on, there is no incentive for them to work, and even less incentive to have them around.

If you have substandard coffee beans, you don't mix them with the good stuff to increase the yield, you cull them to improve the quality.

 
At 8/31/2011 9:29 PM, Blogger PeakTrader said...

Hydra, how can you sell $1 burgers and make a profit, unless you pay your workers slave wages?

As long as they don't drive customers away, why hire better workers at better wages?

When they don't show up for work, you won't have to worry about giving them a raise.

There's a surplus of disposible unskilled labor willing to work for slave wages at least for a while.

 
At 8/31/2011 10:31 PM, Blogger Ron H. said...

"What is the point? Why do I want people with low or no skills to have jobs?"

I want them to have jobs so they can gain some skills and some experience, so they can eventually become self sufficient, and produce more than they take, and not even think of asking me to support them. That's why.

No one is expected to support themselves on an entry level job. That's just more typical leftist bullshit from you. Most taking entry level jobs are teens and recent graduate who have few skills, and no experience. With time they will move to better jobs that pay them enough to live on. a higher min wage makes that process more difficult.


"If we cannot pay them enough to live on, there is no incentive for them to work, and even less incentive to have them around."

That's bullshit, and you know it.

"If you have substandard coffee beans, you don't mix them with the good stuff to increase the yield, you cull them to improve the quality."

What are you suggesting be done with those not worth the minimum wage?

 
At 8/31/2011 10:37 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 8/31/2011 10:41 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 9/01/2011 12:01 PM, Blogger Ron H. said...

"What is the point? Why do I want people with low or no skills to have jobs? I wwould not want such a person anywhere near my business - not even working for one of my vendors."

What is the point?

The point is that they can gain some skills and experience so they can become self sufficient and productive so leftists like you won't use force of government to take money from me to support them whole they do nothing.

Incentives matter. If people think they need to work at something in order to eat, they will. If they can just wait for government to hand them my money for not working they will do that too. Keep in mind that most such people are teens and young people just starting out, and have no particular value as employees yet, but with experience they will become more valuable.

"But, given that some capitalist/altruistic is willing to take the risk of hiring such people, how are they better off expending energy on a job that does not pay enough to feed them? Let alone enough to actually live on."

There is nothing altruistic about it. See the above. It's not all or nothing. Unless young people are content to live in their mom's basement all thir lives, they want to work to gain skills, and become self sufficient.

And, unless they are willing to pay tens of thousands of dollars and several years of their lives for skills by going to school, work experience is their best bet, and they don't expect to jump right into self support unless they listen to idiots like you who tell them they deserve to make enough to live on.

You think you can legislate supply and demand, with a minimum wage, but you can't. How much would min wage have to be to allow people to be sulf supporting when they start their first job?

"If we cannot pay them enough to live on, there is no incentive for them to work, and even less incentive to have them around."

See the above. The incentive is to gain value so they can demand enough to live on.

 
At 9/01/2011 12:06 PM, Blogger Ron H. said...

"Hydra, how can you sell $1 burgers and make a profit, unless you pay your workers slave wages?

As long as they don't drive customers away, why hire better workers at better wages?

When they don't show up for work, you won't have to worry about giving them a raise.

There's a surplus of disposible unskilled labor willing to work for slave wages at least for a while.
"

And yet more leftist bullshit! I need taller boots. This is getting deep.

I assume those working for slave wages started voluntarily, knowing what the wages were, and are free to walk away any time they wish.

You didn't mention chains, or anyone's mother being held hostage.

 
At 9/03/2011 7:53 PM, Blogger Gennady said...

Adapted from an old Russian joke:
Q: Are Obama, Krueger etc politicians or political scientists?

A: Politicians. Scientists try their theories on cdogs first

 

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