Thursday, July 18, 2013

Where Matt Yglesias Should Have Stopped

In a post discussing minimum wage laws, Matthew Yglesias starts off by writing:
If there's one thing I've learned reading up on the economics research on the minimum wage it's that you can find empirical studies bolstering either side of the argument. 
Well, that's because, as Austrian economists point out,  you can't isolate single empirical factors in the world of economics. The world is too complex. The science of economics is a deductive science.

Yglesias' initial observation is correct, from empirical studies of the economy, you are likely to get contradictory results (because you can't isolate the factor under investigation).

Yet, Yglesias still goes on to use empirical data.
  I think the strongest case for a higher minimum wage comes not from recent empirical work but from history.
He then goes on to cite, get this, data from the 1960s:
Back in the 1960s the minimum wage was higher than it is today ($10.52 or $9.22 depending on which inflation index you use) yet overall wages and labor productivity were lower. And the unemployment rate was considerably lower in the 1960s than it's been in recent decades. Not just lower than it's been since the financial crisis, but lower in general than the unemployment rate of the Great Moderation years.

To be fair, Yglsias does ask what factors might be causing the difference:
So I think a natural question to ask is what's allegedly changed about the American economy over the past 50 years to give higher minimum wages a stronger disemployment punch?
But his statement does say that the 1960s is "the strongest case for a higher minimum". He says this even though he acknowledges the the conflicting empirical data and despite asking for why unemployment might have been lower during the 1960s. And further, he makes no case, at all, to explain why the lower unemployment rate in the 1960s had anything with the minimum wage. In fact, he does the opposite.

He touches on one important factor, monetary policy that might have been different in the 1960s:
For example, in the 1960s you perhaps had a monetary policy regime that was less tolerant of unemployment and more tolerant of inflation.
In other words, he is providing here a reason why the unemployment was lower in the 1960s, which had nothing to do with the minimum wage.

But, further, he misses thoroughly that the government dishes out a lot more to the unemployed today then it did in the 1960s. There is much more incentive to stay unemployed in the present era.

All this said, why doesn't Yglesias just go with the deductive observation that the higher you raise the minimum wage, the fewer people will be employed? Instead of playing mental gymnastics with empirical data, where it is impossible to isolate one factor over all time.  Yglesias should have stopped with his opening sentence and stopped with all the empirical contortions.


  1. I've never understood the proponents of minimum wages, "living wages" (whatever that is), and other euphemisms for wage controls.

    A really simple question: if the government mandates wages above those the market would provide, thus making employment more expensive, will we get more jobs or fewer? The question answers itself.

    But no. These people will resort to econometrics no one understands, hare-brained studies with faulty premises, or outright appeals to emotion in order to produce a pre-conceived conclusion.

    There is no intellectual honesty or integrity. Common sense must be discarded. This isn't economics; it's hocus pocus witchcraft dressed up as science. These people are shameless.

    1. Steve;

      The idea of raising the min wage is reducing immigration, since cheap imported labor for the benefit of the "capitalists" is obviously very important to them and the political regime (see the Amnesty bill, Gang of Eight, Ryan, Romney, McCain, Graham, Rubio and the D's.) Supporting open borders and no min wage would make that bunch quite happy--so one needs to think about not pleasing them rather then getting into bed with them.

    2. The very first minimum wage was enacted to prevent low paid blacks from taking construction jobs from whites. Not understanding the benefits of allowing the cheapest labor to complete any production has cost society much wealth.

    3. The problem, Mic, is that in the modern welfare state, so many costs from childcare/"education" to healthcare, can be transferred to the State and the methods of production can be lowered to the third world (factory farming.)

      I don't think the answer is raising the minimum wage, but no point in answering, or asking, the wrong question.