The minimum wage reduces employment, especially among low-skilled workers for whom the minimum wage is most binding. That remains the consensus view but note that holding the consensus view does not preclude thinking that the decrease in employment is small relative to the increase in the wages of those who remain employed. If the employment effect is small, however, it is also important to understand why it is small – the policy implications of monopsony, which I think implausible, are quite different from the implications of the the idea that other aspects of the labor-contract adjust in response to enforced changes in wages (i.e. the converse of the hot water argument). See also Tyler on this.

When I discuss minimum wages in class I tell my students that one of the best ways to get a high-paying job is to get a low-paying job and work your way up. The minimum wage can put the least employable out of work and have permanent negative effects when training and work skills not acquired in youth are difficult to accumulate later on. I think the theory makes sense but until recently it had not been extensively investigated.

David Neumark and Olena Nizalova look at the how exposure to the minimum wage in the past impacts workers today. They find that teenagers who grow up in states with a minimum wage that is significantly and consistently higher than the federal minimum have lower earnings and work less a decade or more later when those workers are in their late twenties. The negative effects are larger for blacks, for whom the minimum wage tends to be more binding.

To generate variation, Neumark and Nizalova use data on minimum wages by state relative to the Federal minimum. The data is more aggregated than I would like and the variation by state only picks up in the late 1980s so there is less data than meets the eye. In theory, there is nothing special about the minimum wage as the driving factor that pushes people out of the work force, unemployment brought about by bad economic conditions should have similar effects. Thus, I wish that they had discussed the literature on hysteresis and unemployment. Welfare could also pull people out of the work force. I’m not fully convinced that they adequately control for economic conditions although they do use some clever techniques to try to address some of these issues. Nevertheless, my priors are supported so this must be a good paper! More seriously, Neumark and Nizalova are to be credited with opening the question of the long run effects of the minimum wage.

The bottom line? If you don’t work at McDonald’s when you are a teenager, don’t expect to manage a McDonald’s when you are middle-aged.

Addendum: Thanks to John Thacker and others who pointed out that one of my sentences, now fixed, was difficult to parse if you hadn’t read the paper – which sort of defeats the purpose of the blog, doesn’t it?

Wouldn’t it be fun to endow a prize like the X-Prize or the space elevator prize I discussed yesterday? I’m surprised that more rich people don’t do this. Of course, we have the Nobel and similar prizes but these are awarded for general achievement in the past and as such are unlikely to exert a significant incentive effect. Foundations can last a long time but there is a history of foundations, for example the Ford and Carnegie Foundation, spending money in ways that their founders would not approve. If you fund a prize, however, you can specify the conditions for success reasonably precisely and for that reason the money is more likely to be allocated in a way close to what you would have wished. Furthermore, if you set the prize up so that the seed money is invested in the market until it is won you can almost be guaranteed that one day the prize will be won and you will be thanked for your contribution to humanity.

As noted, I like the space elevator idea but I think that if I had a few million to spare I’d endow a cryonics prize. This is the sort of research which seems doable, has a big payoff but for which there is virtually no serious funding. I’d endow the prize with a series of staggered awards, so much for succesfully reviving a rat after 1 week, so much for a rabbit after 2 months, so much for a pig after 5 years. The Grand Prize? That would be for reviving me.

Shares in a Bush win are trading around 58-59 at Tradesports but only 53-54 at the Iowa markets. Could some of you please arbitrage this to prevent the gang at Crooked Timber from crowing about inefficient markets? Thanks.

Addendum: Many thanks to all the sharp MR readers who remind me that the Iowa market is for the popular vote share while the Tradesports markets is for the actual winner. I’m still a little surprised that the spread has widened recently but it is true that the price difference does not necessarily represent an arbitrage opportunity. Long Term Capital Management anyone?

Depending on your point of view you can draw one of two conclusions from this paper: A Comparison of the Cell Phone Driver and the Drunk Driver. Here is the abstract:

We used a high-fidelity driving simulator to compare the performance of cell-phone drivers with drivers who were legally intoxicated from ethanol. When drivers were conversing on either a hand-held or hands-free cell-phone, their braking reactions were delayed and they were involved in more traffic accidents than when they were not conversing on the cell phone. By contrast, when drivers were legally intoxicated they exhibited a more aggressive driving style, following closer to the vehicle immediately in front of them and applying more force while braking. When controlling for driving conditions and time on task, cell-phone drivers exhibited greater impairment than intoxicated drivers. The results have implications for legislation addressing driver distraction caused by cell phone conversations.

The abstract is truthful, but as you can see from this quote further on in the paper, the authors spun the lede in the more politically correct direction.

When drivers were conversing on a cell-phone, they were involved in more rear-end collisions, their initial reaction to vehicles braking in front of them was slowed by 8.8%, and the variability in following distance increased by 24.5%, relative to baseline. In addition, compared to baseline it took participants who were talking on the cell phone 14.8% longer to recover the speed that was lost during braking.

By contrast, when participants were legally intoxicated, neither accident rates, nor reaction time to vehicles braking in front of the particpant, nor recovery of lost speed following braking differed significantly from baseline.

Draw away. Here is #1 and #2 in this series.