Wednesday, January 24, 2007

Economists vs. Normative Conclusions

A while back my friend noted how he hates when economists use their economic principals to draw normative conclusions offering as an example this piece from Slate which said "spending on gifts is a resource allocation disaster". Another friend rejoined that no, real economists never do this and that it just looks like economists are making normative statements because certain subjects are easier to study than others when using the tools of economics. So for example, it's not that economicis normatively favor free-trade over economic equality, it's just that it's easier to measure GDP than it is to quantify how much inequality increases due to free trade.

Today I read Tyler Cowen, one of my favorite libertarian blogger post this:
My colleague Dan Klein continues his pathbreaking work on the sociology of the economics profession. He asked petition signatories why they favor increasing the minimum wage. The results are striking, most of all for how far they stand outside traditional economic reasoning...
(emphasis mine)
What follows is a list of comments by lefty economists where they argue for raising the minimum wage on normative - not economic - grounds. Very few of them make any kind of economic argument at all. Most of them make arguments concerning a desire for equality.

It seems Cowen is jumping from "increased economic output is what we usually study in economics" to "if you concern yourself with other things than you are acting contrary to economic thought". This kind of thinking is just pernicious.


Rebecca C. Brown said...

Doesn't raising the minimum wage help increase economic output? I've always thought, based on my own quick and sloppy data analysis and on the statements of economists, that minimum wage increases ultimately financially benefit everyone. Can someone give me some links supporting that idea?

(I'm too lazy to do the itmyself and, thanks to the liberation afforded to me by the 1950s, have to work all day at my well-paying job, and hence have little time to scour the web for links.)

Tommaso Sciortino said...

Well, normally most economists think about it like this:

"If we assume efficient markets minimum wage will cause some people to lose jobs while changing the balance of power away from employers and to employees. This would decrease economic output while changing distribution a bit."

Most markets aren't efficient so you can end up in situations where just about nobody loses their job and a lot of money get distributed differently.

You can certainly make an argument that people making minimum wage can stimulate the economy with their extra money in ways their employers wouldn't have but I've never heard that used to justify a minimum wage increase.

Rebecca C. Brown said...

I'm asking about emperical evidence, not theories. Are there any data correlation higher minimum wages with flagging medium- or long-term economic output?

Kevin said...

The Minimum Wage doesn't have much to do with Output. It DOES hypothetically have something to do with employment. As the Wage goes up, supposedly Employment goes down. In reality this doesn't happen, and the effects are mostly distributional. said...

The Minimum Wage doesn't have much to do with Output. It DOES hypothetically have something to do with employment. As the Wage goes up, supposedly Employment goes down. In reality this doesn't happen, and the effects are mostly distributional.

Inaccurate. The minimum wage sets a price floor on labor. As a result the average cost of all labor goes up. Simple suppply and demand; when the price of a commodity goes up, quantity demanded goes down. in this case, the commodity is labor - when demand for labor goes down we call that unemployment. Fewer workers means output per worker must increase if overall output is to remain the same.

We're already seeing this happen.

Tommaso Sciortino said...

The problem with standard econ 101 thinking: it ignores everything you'll learn in other econ classes.

I find your belief that employers are preemptively firing workers in expectation of minimum wage increases to be... "eccentric". You would do well to research the issue. If you haven't heard of Card and Krueger you should probably look into it:

"Economic models and assumptions
For most of the 1970s and 1980s, the literature exploring the link between minimum wages and employment largely consisted of time-series analyses that suggested statistically significant negative employment effects resulting from minimum wage increases (given their small magnitude, discussed below, the economic significance of these early findings is subject to debate). These findings served to confirm the simple competitive model of the labor market.

Such a model inherently assumes that employers have perfect information about all employees and prospective hires, and hiring and firing is entirely without cost. Similarly, job-seekers have perfect information about all prospective employers, and there are no costs associated with job loss and unemployment. The model further assumes that workers and employers have essentially unlimited access to other employment and hiring options. All of these assumptions lead to a labor market in which firms can hire as many workers as they please at a given market rate (over which they have no sway or control). According to such a model, if employers lower wages by one cent, then all workers will instantly quit. By this same logic, employers receive no benefit from paying a wage higher than the barest minimum necessary to hire workers. In this idealized world, a binding minimum wage (that is, a minimum wage higher than the equilibrium market-clearing wage) will necessarily lead to a decrease in employment.

This model is based on the assumption that low-wage workers can withhold their labor if they are not paid a sufficient amount. This is clearly a flawed vision of the labor market, especially for adults working in the low-wage labor market (the majority of those affected by a minimum wage increase). The reality is that low-wage workers must work to survive, and they must accept whatever wages they can negotiate via their limited bargaining power. But even this highly simplified model appeared to fit the empirical data (later research—see Bernstein and Schmitt (1998)—revealed the econometric flaws in these early time-series models). In the early 1990s, however, empirical studies began to appear that called into question this conventional wisdom."

Kevin said...

Economic output is primarily determined by the Federal Reserve and the interest rate. So when I say that the minimum wage has little impact, I mean that the Fed is long experienced at correcting for those effects.

The real question is distribution.

Tod said...