What about Card and Krueger?

Many of you have been asking this question.  Robert Waldmann reports:

…what about Card and Krueger. Empirical estimates of the effect of the minimum wage on employment suggest that the effect is very small. One famous study by Card and Krueger showed a positive effect of an increase in the minimum wage. The logic used by Card and Krueger to understand how this could happen suggests that things are different now.

Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly. If they are forced to pay the higher wage, their desired level of employment will be lower, but that level is the sum of employment plus vacant jobs. A binding minimum wage can reduce the number of vacant jobs by more than it reduces the sum of employment plus vacant jobs. Thus more employment.

I think this is not relevant to the current situation. There are very few vacant jobs. Quit rates are low. According to their logic, the effect of the minimum wage on employment depends on the unemployment rate. The evidence of a small effect is almost all from periods of unemployment far below 10%. I don't think it is relevant to the current situation.

Waldmann makes other excellent points in his post, which is on the minimum wage more generally.  I would add that there are many good critiques of the original study and the most plausible belief is still the traditional result, namely that minimum wage laws have a (slight) negative effect on employment.

Comments

I don't think I'd have to go beyond this quote:

"Why did I go from minimum wages to overall wages? Clearly, a cut in minimum wages –which only apply to some workers — can raise the employment of those workers at the expense of other workers. But the advocates of a cut are claiming that they can raise overall employment. The only way that can happen is if a reduction in average wages raises employment."

To believe Krugman's analysis is incorrect. Why does he think that a minimum wage worker is taking something away from another worker? Anecdotally, when I found a very cheap lawn guy, I hired him. When he stopped showing up, I did it myself. I didn't pay up for the other guy whose services I thought were not worth the cash flow. I think these folks just don't think the way that the actual decision makers in an economy think, unless they are the decision makers when they are (consulting to) the government.

Bill, I appreciate the comments. But what if I saved the money? It seems like Krugman is THE guy who would be worried about that.

I must be missing something because we do have high unemployment. Have we all just unwittingly hired more foreigners?

I don't know how to describe it, but it is really irritating that somehow I've been secretly recruited to enact monetary policy by my individual purchase decisions.

Bill, I'd be willing to bet that you don't agree with Bill Woolsey.

What if demand is viscoelastic?

Or we could simply end the debate on the minimum wage by passing one of these ludicrous 15 dollar an hour living wage proposals and then watch the unemployment rate go through the roof.

When less than 2 percent of the labor force is paid the min wage it becomes difficult to quantify it's real affect. We need a min wage that is through the roof, well above the bottom floor market wage in order to discern it's effect. We dont have an area of the country where that is the case.

Bill,

It was a question. It's not a new word, but it may be new to apply the concept to economics. To me it is obvious things don't happen instantaneously even if all actors are rational. This concept seems foreign to professional economists.

Personally, back to the anecdote, I didn't spend the money elsewhere, I need a lawn guy. It will take me some time to find one. I didn't fire the guy, he fired me I guess, so it's not a perfect analogy but it makes the point.

It's funny what we disagree on what is and isn't dynamic. You can't have everyone go bankrupt because they can't pay medical bills. If everyone can't pay medical bills, the doctors will charge less.

There is only excess capacity if you want to make the same things (houses, etc.) that we were making before. I've pondered a kind of "employee on retainer" concept so workers could be freed up to work on a bubble but could keep other skills fairly current for the inevitable recalculation. We already have it, it's called your network, but a formal tool would be nice.

These arguments are almost pointless, but they sure are fun!

Being a skeptic on whether a minimum wage increases unemployment is much like being a skeptic on whether increased human CO2 emissions increases temperature.

The theoretical basis is far stronger for the traditional sides (increase unemployment, increase temperature), and the proposed mechanism for the standard effect is quite obvious. Skeptics argue that in practice the predicted results don't show up, and generally don't have as good of an explanation for why the laws or CO2 emissions would have so little effects. There are repeated disputes about methodology and statistical methods use, and skeptics seize upon the arguments of the smaller, but still present, number of researchers who agree with them. In both, people argue that publication bias affects the results.

Tyler generally leans towards both conventional theories as the most likely explanation.

In general people who are skeptical of one tend not to be skeptical of the other. However, only in the case of AGW do people insist on calling skeptics "deniers" and resulting to such ad hominem.

What about their second study? Their meta study of unemployment studies? You know, the one that really knocks theory on its butt?

I am referring to the the one that shows there has been significant publication bias in unemployment studies. The bias is to not publish studies that show no link between unemployment and the minimum wage.

Just read the first page and you will get the gist of what they are claiming.

This one:

http://emlab.berkeley.edu/~card/papers/ts-min-wage.pdf

Bill,

None taken. The internet is great. We don't have to jump to conclusions. I don't do this for a living. If some people think I do I'll take it as a compliment. That may sound self-congratulatory, but I pride myself on my humility.

As such, I'm not arguing models. Mostly because I don't know them. However, it's also because we know the models are wrong or imprecise enough to need some improvement. If Tyler is going to hand-wave, I'd be a fool to stake out a strongly held view ;)

Right now fast food chains are having record profits - especially in urban areas. Recessions tend to be good for them. Thus, I've always wondered if Card and Krueger's paper would have had different results if their study was not done during the recession. Increased demand in NJ could mask the effects of increased labor costs - especially since it seems that their sample was not representative of urban/rural differences across NJ/PA.

Anecdotally, when I found a very cheap lawn guy, I hired him. When he stopped showing up, I did it myself.

Why did he stop showing up?

Probably because the marginal costs plus long term costs of capital, et al, exceeded what you were paying. He is either "retired" or he is chasing all those higher paying jobs that dominate the labor market, and he would happily take the job of CEO for a million a year, convinced he can't do any worse than all the other CEOs.

If the CEOs were earning $10 an hour, his capital costs, et al, would be a lot lower and he could have kept showing up because his total costs were less than what you paid him.

Bill, it seems to me that the whole argument rests on some assumption about structure of production - something on the lines that if you raise minimum wage, people change their spending to prefer more goods that require less skilled labour, which will redirect remuneration from other production factors to the less skilled labour.....

Sure. That might happen. However, it seems to me rather unlikely....

Holy crap, I can't believe the lack of insight here.

Number one: price controls create shortages. Price supports create surplusses. Ever has it always been, and ever shall it be, without exception.

Number two: the minimum wage applies to very few workers, and it produces even less unemployment. It's hardly detectable given all the other reasons why someone might be unemployed. Thus, empiricism is not workable; don't even try (and thus goes Card and Krueger).

Number three: we could indeed crank up the minimum wage until there is significant unemployment. See point #1. If you have that much doubt about economic theory, then perhaps you need to be in a different field. Maybe try basket weaving?

It's not possible to argue with these points and still think you're an economist. If you're tempted to argue with me, then instead, become a better economist and you will realize that I am correct.

If minimum wage legislation lags behind real wages, then there would be no increased unemployment - but there would be no real increase in wages, either.

In the cases where minimum wage legislation has pushed up real wages, it's been in a very small subset of the workforce, and by a fairly small amount. The changes in employment due to the small change may not be easy to measure - especially when the economy itself is going up and down and industries are rising and falling in demand all the time and jobs are constantly in flux anyway.

The thing that worries me about minimum wage laws is that they would seem to make the economy more brittle in the sense that it has less ability to adjust wages downwards in times of recession. If the prevailing wage today is $7.00/hr, and the productivity of the $7.00 workforce drops such that they're only worth $5.00/hr, then absent a minimum wage their salaries could be reduced accordingly and they could keep their jobs. If a minimum wage is in place, and their productivity drops below the minimum wage threshold, you get more unemployment.

So even if an increase in the minimum wage doesn't affect current employment, it could be harmful if it restricts the economy's ability to adapt to changes in workforce productivity.

I am not convinced by the reasoning of this post. The Card-Krueger study was done on California and New Jersey minimum wage job market, and showed that a relatively modest increase in the mimimum wage did not decrease emlpoyment, at least not right away, but that it did increase wages.

I don't see the connection with The Russel Sage Foundation study, which was done in New York, Chicago, and California some number of years later. It is no surprise that employers will attempt to and succed in paying some workers less, as that study finds. That, however, does not impeach the results or conclusions of the Card-Krueger study.

Comments for this post are closed