Jason Abaluck on the minimum wage

Here is his critique of Bryan Caplan, noting that “Bryan” in Jason’s dialogue is of course not the actual Bryan.  (It is Jason’s somewhat imaginary view of how he thinks a dialogue actually ought to proceed, with satirical elements interjected, to show that Bryan’s account is too simple.)  It is a better analysis than what Bryan offered, but I am not altogether happy with it and I think it shows the same defects as Bryan’s treatment, albeit at a higher level of detail.

A few broad points:

1. Public choice considerations should be paramount!  To be clear, this could in principle favor minimum wages over alternative interventions, but if public choice considerations are not first and foremost this is more of a dialogue for a 12-year-old than a 13-year-old.

The reality is that America has one political party — currently in control of the Federal government — that is very much beholden to organized labor, an interest group that has a strong desire for a minimum wage that is too high.  Often they don’t get their way, but that is precisely because of the curmudgeons and their objections.  I fear a world in which minimum wage hike advocates really take over policy discourse, as they would end up serving the interests of organized labor, not economic optimization.

The true choice is between a minimum wage that is too low and a minimum wage that is too high.  I prefer the former.  An optimized minimum wage does not usually appear on the menu at all, and that should be one of the first points we teach.

As a side note, if you read anyone criticizing the “Econ 101” approach to minimum wage hikes, run the other way.  If only Econ 101 could spend more time on such public choice considerations.

2. Any policy decision is also a decision by governments to communicate particular economic lessons to the citizenry.  Which are the lessons carried by deployment of a minimum wage hike?

a. Price controls work.

b. A world of high wages, high prices, and doing stuff to “create jobs” is how to boost prosperity.  Therefore protectionism can make sense too, and we need to stuff the Davis-Bacon Act into every government bill we can, as has been done with the new climate projects.  Those are also forms of minimum wages.  And it is OK if infrastructure costs a lot to build, because that means high wages too.

Those lessons may not be what you intend, but those are what you will end up getting and indeed we have ended up getting them.  You do not get to teach voters the scope and limits of labor market monopsony models.  Instead, you get bad economic reasoning writ large.

2b. As a general observation, if an analysis does not cover #1 and #2 in some fashion, I don’t view it as very sophisticated.  It almost has to be misleading.

3. It should be stressed there is good evidence that we have alternative policies — namely investing in infants — that have pretty clear benefits for both distribution and efficiency.  In contrast, the efficiency benefits of minimum wages are murky.  So minimum wages probably are a dominated policy option, once we start comparing alternative methods of redistribution, as the thread suggests we do.  You could add the deregulation of hearing aids to that list, and literally thousands of other deregulatory options as well, noting many of them may involve some upfront costs and thus pursuing them does fall into the realm of analyzing trade-offs.

In the dialogue you also will read: “But as a starting point, we should note that redistribution *always* has a shadow cost, so we want to compare the minimum wage to other policies like a negative income tax that redistribute at some efficiency cost.”  I would stress that many redistributions have a shadow benefit, not cost.  And once you recognize that, minimum wage hikes, like many other “progressive” policies, suddenly look a lot worse in relative terms.  Why not focus your energies on those areas where distribution and efficiency move together?  Are we supposed to think that such areas are so few and far between?  If so, the pro-minimum wage hike view is truly a bleak and negative-sum one and let us all describe it as such.

4. How about some words on the interaction between the minimum wage and (still-welcomed) illegal immigration?

5. More narrowly, I would pick a few nits on the descriptive analytics.  For instance in this discussion “Someone has to pay for wage increases for inframarginal workers. The gain to min wage workers comes from capital holders, non min-wage workers and consumers who indirectly pay for wage increases.”  Might not some of the gains come from those who end up unemployed?  Maybe not a priori, but I worry when this is overlooked altogether.  There do seem to be some negative employment effects, even if you think they are overrated.  The discussion then follows: “Those groups will have higher income-today than non-wage workers.”  That doesn’t follow either.  Some of the distributional consequences from minimum wage hikes can be very bad for poorer teenagers, for instance.

The end remarks on feminism are I think simply a misrepresentation of Bryan’s actual views, and an example of the kind of thing that is not well expressed on Twitter (you can blame the same on Bryan too, to be clear, all the more so).

In general, when I am being served a more “sophisticated” take on minimum wage laws, I end up being disappointed every single time.


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