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Whatever happened to Card & Krueger?

A week ago Keith Hennessey put up a post responding to Obama’s call for a higher minimum wage in his SOTU:

“A minimum wage increase precludes employers from hiring, or from continuing to employ, those workers whose productive value to the firm is worth less than the new minimum wage. Like any price ceiling or price floor a minimum wage restricts supply, and an increase in the minimum wage restricts supply more. Raise the minimum wage and you will eliminate jobs for the lowest-skilled workers in America.”

In critiquing Obama for oversimplifying and failing to cite evidence, Hennessey became a hypocrite. The traditional economic model does predict that a rise in minimum wage will decrease the supply of jobs, but there is plenty of evidence (like Card & Krueger) that this prediction does not hold true in real life.

Let me say that Hennessey’s post isn’t so bothersome to me, but rather gets at a deeper problem I have with a particular contradiction in conservative economic policy. Lately I’ve really started to feel that conservatives’ response to a higher minimum wage conflicts with their view that we should forfeit the protections of market regulation for the benefit of faster growth. Growth has not been the higher tide that lifts all boats. People are struggling in poverty despite growth in the economy and growth in worker productivity (see figure below from CEPR study). The dichotomy being set up here is one where either 1) we use government intervention to correct the underpaying labor market or 2) economic growth brings about prosperity to all workers all on its own. Well, I have news for you: the second story doesn’t hold a very close resemblance to history.

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Workers have not seen their increased productivity, longer workweeks and more tech-enabled efforts translate into benefits. Yes, the minimum wage is only one of many tools the US government has for intervening in the labor market, yet it is one that will easily improve livelihoods, not cost anything to the federal government (something this deficit-spending panicked city will appreciate) and reaffirm the American ideal that hard work can in fact lead to socioeconomic transformation.

Sorry for the meandering course of this post, but let me finish off with one or two thoughts. The labor supply market is not a zero-sum game. Arguing that minimum wages kill jobs is akin to committing the ‘lump of labor’ fallacy. Let me explain:

In a policy thought experiment, allowing an immigrant into the country raises unemployment by one would-be-worker. Either the immigrant is unable to compete with Americans already completing work, or the immigrant is able to wrestle a job away from someone who then becomes unemployed. Therefore, allowing immigration increases unemployment.

The evidence, of course, shows that this conclusion does not true. In fact, the immigrant brings consumption needs with her as well as job supply needs. The money she injects into the economy by consuming local food, education and other goods/services expands the economy, which can support more jobs.

One can see a minimum wage in the same light as immigration, a higher wage means that a service provider can only afford to pay 5 instead of 6 workers due to the higher marginal cost of labor. However, if each of those 5 workers puts their additional (the $1.75 difference between $7.25 and $9) consumption to the economy (note that economists often assume that poor people, those most likely to be paid the minimum wage, spend most if not all of their income on consumption goods), then the overall demand in the economy rises and jobs are created.

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Disclaimer: Yes, you can disagree with someone on an issue and yet totally respect his/her wisdom on other subjects. Keith Hennessey is a very smart person, way smarter than me. I still disagree on this subject.

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2 thoughts on “Whatever happened to Card & Krueger?

  1. Good post! I am in agreement much of the presumptions made about the minimum wage rise fail to take into account much of the empirical evidence which disputes the theory. If the rise is carefully thought through and not too high it could indeed have many benefits especially in terms of inequality.

    • good point. one of the other issues I have with Hennessey’s point of view is the claim that a 80 dollar raise is the same in theory as a 2 dollar raise. Magnitude does matter. The minimum wage interacts with many other labor and other economic policy like the EITC and other parts of the tax code. Sometimes taking an extreme example is useful for explaining something, but in this case i think doing so really detracts from a deep and necessary conversation…

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