Category: Economics
Does the minimum wage put people out of work?
Steve Landsburg imparts much wisdom on the minimum wage; read Brad DeLong as well. Steve writes:
How do we know what was in all the unpublished research about the minimum wage? Of course we don’t know for sure, but here’s what we do know: First, the big published studies were no more statistically significant than the small ones. Second, this shouldn’t happen if the published results fairly represent all the results. Third, that means there must be some important difference between the published and the unpublished work. And fourth, that means we should be very skeptical of what we see in the published papers.
Now that we’ve re-evaluated the evidence with all this in mind, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.
The work of Card and Krueger has emphasized the puzzle of why minimum wage boosts don’t cause a big downturn in employment. They offer up a complicated story about labor market monopsony.
My take:
On this issue (and many others) I’ve been much influenced by my colleague Gordon Tullock. Gordon notes that the government can make an employer raise nominal money wages, but can’t stop him from turning off the air conditioner. [A more optimistic scenario is that the employer invests in creating a higher-productivity job.] Surely just about every job out there can be made worse, one way or another, in a way that saves the employer money.
So the scenario is now simple. The government boosts the minimum wage. Low-wage workers earn more. Few lose their jobs. Workers sweat more too, one way or another. Few are much better off.
Addendum: There is a neat twist on this argument, drawing on the idea of an intra-family externality. Let’s say you hold the “traditionalist” view that the poor don’t work hard enough for their families. If Tullock’s mechanism is operative, you might then favor increasing the minimum wage. The end result would be more sweat at a higher money wage.
Kerry v. Bush on fiscal policy
Tyler’s earlier post (below), making the point that we should look to winning coalitions not promises to predict a candidate’s fiscal policy, is characteristically cogent (i.e. I agree!). Tyler is too easy on Bush, however, when he says “The high domestic spending of Bush I take as a sign of perceived political weakness (“we need to buy more allies”), rather than a reflection of Bush’s ideology.”
True, Bush did not seem to have much of a mandate in 2000, but he was quickly accepted by the American public, his popularity skyrocketed after 9/11 and he faced a Republican House and Senate. In fact, the Bush administration has been successful at promoting it’s agenda including the big tax shift, the Iraq war and the prescription drug plan. Remember that the drug plan was not something that Bush simply failed to veto, he actively bent Republican arms to get that bill passed. The issue has not been too little power but how the administration’s considerable power has been exercised.
Would Kerry be more fiscally irresponsible than Bush?
Virginia Postrel says yes; read more here. Paul Krugman suggests Kerry will repeal the tax cut [tax shift, more accurately] to spend more on health care, rather than trying to restore a balanced budget (my words, not his). Can these two luminaries, not always in total agreement, be wrong?
No doubt, if you look at what Kerry says, it sounds like he will spend more than Bush. But the ever-perceptive Jane Galt reminds us that, well…politicians are liars! (Just don’t let on you heard it here…)
I look less at what politicians say, and more at what kind of coalition they would have to build to rule. The high domestic spending of Bush I take as a sign of perceived political weakness (“we need to buy more allies”), rather than a reflection of Bush’s ideology. So in part it depends on what a Kerry victory would look like. But here are a few reasons to think Kerry might be more fiscally responsible:
1. The Republicans will still probably control the House and maybe the Senate too, check out the odds. The political benefits from spending are less, the less you control the content of that spending.
2. The Republicans become more fiscally conservative in opposition.
3. Kerry’s supporters hate Bush, most of all, for what is perceived to be his “Texan-evangelical-grammatically challenged-frat boy” symbolism [just for the record, I don’t buy this picture]. Kerry can appease his base on these symbols fairly easily, just by showing up for work. I doubt if many Kerry supporters are expecting or requiring that a Kerry candidacy would bring a significant movement toward the left on economic policy, above and beyond repealing some of the tax cuts. The left hates Bush so much they would become captives of the center, if Kerry held the presidency. The left would have nowhere else to go (advice to the left: be careful how much Bush hatred you show!)
4. Kerry would be under constant pressure to show that he is “tough” on foreign policy. This will limit his ability to make domestic spending commitments. And if he does well on foreign policy, and appears suitably in charge, he could get reelected without much using spending to buy domestic support. If he is weak on foreign policy, will lots of spending really help him?
5. If Bush is re-elected, it affirms that a Republican can get away with jacking up domestic spending. Such a precedent is worrying for the longer run, not just for Bush’s second term.
6. Have many Presidents moved closer toward their original ideological base in their second terms?
That’s enough raw unfounded speculation for one day. But no, it is not obvious to me that Kerry would be less fiscally responsible than Bush. It’s a judgment call, but let’s not obsess over what candidates say when campaigning. Don’t forget, it was Bush who campaigned on a platform of fiscal responsibility and no nation-building.
So you think you know game theory?
Who is Julia Hall Bowman Robinson?
In fact she is the mother of evolutionary game theory. (No, that is not like being The Mother of All Wars.)
Who is Emile Borel?
Some easier questions are available too, including biograhies of the top game theorists and a good introductory guide to game theory concepts. I’ll be happier with game theory when Tom Schelling wins the Nobel Prize; in the meantime I use game-theoretic mechanisms in my thinking just about every day. It is hard to believe that game theory was a fringe topic as recently as the 1970s.
Why our world is not efficient
Dear Prudie,
I recently attended a bridal shower for a young lady who’s engaged to my cousin. I had never met the bride before and was looking forward to meeting her and her family at the shower. When we were all there, the hostess handed out envelopes to all of the guests and asked each person to address the envelope to herself, in order to receive her thank you note. As I had received my invitation in the mail, I could only assume that she already had my address. I was shocked at this rude gesture, which said to me that the bride couldn’t be bothered to write a thank you note after I had found the time to attend her event and purchase a gift. Is this a normal event at bridal showers, or am I just being picky?–Wondering
“Why didn’t we do that?” was all I could think. But alas, here is Prudie’s response, and no she doesn’t cite the Coase Theorem or the notion of who is the least cost avoider.
Addendum: Hey you linkers, I was joking.
Is New Zealand backsliding?
Re the railways, the government has actually bought up only the track, while new private sector owners now own and run the operating company. It is probably a little unfair to suggest that the purchase was the (direct) result of widespread voter dissatisfaction – Tranzrail, the previous private sector owner, had almost ended up in liquidation. Without that trigger, this government would have had no great appetite for getting back into ownership of railways. Also, there is at least a case that the lines should always have been separated from the operating business.
As for whether rail should exist in New Zealand, I think that is still an open question (although, like everyone, I was surprised at what the original bidders paid at privatisation in 1993). The issue is not about passenger services, except, maybe commuter lines in Wellington – the population is too sparse for economic inter-city services – but about a limited network for freight needs (mainly bulk dairy and forestry). The very sparseness of the population, and the rugged terrain, also makes good quality roads a challenge to justify/maintain.
As for Air New Zealand, perhaps one can say only two things for the defence. First, late 2001 was the worst time to be relying on new operators to provide longhaul airline services (recession and 9/11) and, sensibly or not, almost any government in the world would have done the same thing at that time. And second, at least so far it looks to have been a good deal financially – Air NZ was sold for more than the government bought it back in 2001, and its market value is now above the latter price. As for the Qantas deal, the curent NZ government has actually been quite supportive of it, but the transaction was blocked by competition authorities on both sides of the Tasman (concerned about extreme market dominance on NZ domestic routes and most (non-auckland) trans-tasman routes.
Idea futures inside the corporation
Read this week’s Time magazine:
Once confined to research universities, the idea of markets working within companies has started to seep out into some of the nation’s largest corporations. Companies from Microsoft to Eli Lilly and Hewlett-Packard are bringing the market inside, with workers trading futures contracts on such “commodities” as sales, product success and supplier behavior. The concept: a work force contains vast amounts of untapped, useful information that a market can unlock. “Markets are likely to revolutionize corporate forecasting and decision making,” says Robin Hanson, an economist at George Mason University, in Virginia, who has researched and developed markets. “Strategic decisions, such as mergers, product introductions, regional expansions and changing CEOs, could be effectively delegated to people far down the corporate hierarchy, people not selected by or even known to top management.”
Here is an example:
Eli Lilly, one of the largest pharmaceutical companies in the world, which routinely places multimillion-dollar bets on drug candidates that face overwhelming odds of failure, wanted to see if it could get a better idea of which compounds would succeed. So last year Lilly ran an experiment in which about 50 employees involved in drug development – chemists, biologists, project managers – traded six mock drug candidates through an internal market. “We wanted to look at the way scattered bits of information are processed in the course of drug development,” says Alpheus Bingham, vice president for Lilly Research Laboratories strategy. The market brought together all the information, from toxicology reports to clinical results, and correctly predicted the three most successful drugs.
What’s more, the market data revealed shades of opinion that never would have shown up if the traders were, say, responding to a poll. A willingness to pay $70 for a particular drug showed greater confidence than a bid at $60, a spread that wouldn’t show if you simply asked, Will this drug succeed? “When we start trading stock, and I try buying your stock cheaper and cheaper, it forces us to a way of agreeing that never really occurs in any other kind of conversation,” says Bingham. “That is the power of the market.”
My take: The idea has most promise when lack of information is the relevant corporate problem. Look for this to be used when corporations must make high upfront investments, as in the drug development or music industries. Other times companies know what must be done, but simply cannot muster the will to do it. Perhaps then idea futures are useful to make this fact “common knowledge.”
The bottom line? Getting kicked out of The Pentagon was the best thing to ever happen to this innovation.
Here is the full story, and kudos to my colleague Robin Hanson, who set the whole thing in motion.
Addendum: Here are additional sources on the initial controversies.
Where are tax disincentives highest?
It is common wisdom that universalist welfare states have especially high work disincentives. But matters are not so simple:
Just as the high-budget countries often have lower marginal tax rates at the top of the income spectrum, so too they can have lower marginal tax rates at the bottom, with high marginal tax rates only across the broad middle range of incomes [see further below for an explanation]. If that is true, then the debate over work incentives needs to be redirected. The net effect on labor supply and GDP may depend on something never researched, namely whether work and productivity respond more sensitively to marginal tax rates in the middle range or at the ends. If the response is greater in the middle range, then the welfare state indeed reduces work and GDP. But if conservative fears are correct in emphasizing that the supply of effort is most fragile at the two ends of the income spectrum, then it is possible that the pattern of marginal tax rates in the high-budget welfare states discourages work less than the pattern prevailing in low-budget countries.
That’s from Peter Lindert’s excellent Growing Public: Social Spending and Economic Growth Since the Eighteenth Century, which integrates readable economic history with public policy implications.
Now why might this be true? Keep in mind that some of the very features of universalist welfare states lower some marginal tax rates. The more universalistic the welfare state, the less likely that benefits will be means-tested. And of course “means-tested benefits” is just another name for a high marginal tax rate at some level. If you lose your benefit as you earn more, that is one reason not to work more or harder.
Here is a previous MR post on Lindert’s work.
Neuroeconomics and the sexes
Neuroeconomists let people play economic “games” while hooked up to MRI scanners. Here is one recent result:
The cingulate cortex, which processes both emotions and abstract thinking, becomes especially active after one player betrays the other by cutting back on how much he shares–as if the brain, or at least this crucial part of it, is “hypertuned” to detect betrayal. Quartz has also seen intriguing differences between men and women in the scanner. Men’s brains tend to shut down after they’ve made their decision, awaiting a reply from the other subject. But women don’t relax so easily; they show continued activity in at least three areas–the ventral striatum (the brain’s center for anticipating rewards), the ventral medial prefrontal cortex (which is involved with planning and organizing) and the caudate nucleus (a checking and monitoring region, sometimes associated with obsessive-compulsive disorder). Women, says Quartz, seem to obsess more over whether they did the right thing–and how the other subject will react to them [emphasis added].
There’s one other intriguing discovery coming out of this work, which has even the scientists baffled: with approximately 85 percent accuracy, the subjects, separated by the distance from Los Angeles to Texas, can guess whether they’re playing against a man or a woman. They appear to be picking up on subtle clues in the interactions that the scientists themselves haven’t identified.
Here is a recent MR post on neuroeconomics, citing the same link of relevance. This page offers a good introduction to neuroeconomics, including home pages for the authors cited above. Here is a course reading list for a neuroeconomics class. Here is a long essay on neuroscience and economics.
Markets in everything, once again
Try the latest, simulated dating. They set you up for a “date,” but in reality you meet with a dating coach. You pretend to be interested, then you are given tips for how to do it right in the real world. That will be $275 please, in case you are too chicken to ask your friends for help. Plus you pick up the tab.
Here is a related book about how to judge the first impressions you make on other people. And “Football Hunk” offers ten tips for guys.
Here’s another quirky match-making service:
In New York, there’s Dinner in the Dark, which arranges meals in a pitch-black bar and restaurant. Waiters equipped with night goggles are the only ones who can see – leaving clients to fumble with their utensil-free dinner while getting to know their prospective matches, from the inside out. Candles are lit during dessert, when clients see who is sitting next to them.
Adverse selection anyone?
Market in Everything
I think most of these are “art” but this market in everything makes for entertaining reading. Here are some of my favorites. For legal reasons, if you want the product, you will have to go to the website for the seller’s email.
Guilty? Innocent? It’s all the same to me. For a fee of 500 pounds a time I will lie to the police about your whereabouts, and for 2000, I will perjure myself in court, and swear a testimony to a fictitious scenario of your choice. Easiest to contact me in advance of crime, and establish the deal. Emergency alibis also available.
For a price, I will think of you and only you every time I commit acts of self-love during a time period. I will picture you in my mind, and pretend that all pleasurable touches come from your hands…I will breathe your name heavily. I will lust after you. I will dream of you. I will long for you. …During each time period, I vow to commit acts of self-love to orgasm, at the very least, once per day, no matter what.
Worried that the day to mark your passing is going to be an Eleanor Rigby type affair? Fear not, for 20% of your estate (or £1000, whichever the greater) plus travel and overnight accomodation expenses, I will pretend to have known you, deliver a stirring eulogy, and then get drunk at your wake.
I will sell you immortality for only £12 plus £2 booking fee. There is a full refund for dissatisfied customers.
Thanks the MetaFilter for the link.
Taxes for everything?
The cost of a nose job could soon be nothing to sneeze at in New Jersey.
People who have unnecessary cosmetic surgery in the state will soon have to start paying a 6 percent tax for their procedure if Gov. James McGreevey signs a budget that was passed last week by the state Legislature.
It will be the first time a tax has ever been placed on a surgical procedure in America.
Here is the full story. CAT scans and MRI procedures will be taxed as well.
If you think that “beauty competition” is a zero or negative sum game, such taxation might seem like a good idea. More likely, absolute increases in beauty make everyone better off. To paraphrase my friend Bryan Caplan, would it simply be a “wash” if every woman in the world suddenly looked thirty years older?
I am also disturbed by the privacy aspect of this legislation. Imagine the government looking through your medical records to see if your surgical procedures were for medical or aesthetic reasons.
Good news from Japan?
It is well known that Japanese government debt stands at very high levels; according to one estimate debt was 161% of GDP as of March 2003. For purposes of comparison, here are some figures.
The little-known good news, if you can call it that, is that most of these debts are inter-governmental in nature. For instance the central bank holds a large quantity of Japanese governmental debt. After making the appropriate adjustments, the Japanese public sector owes net consolidated debts of 62% of GDP. This is lower than the OECD average.
An additional estimate suggests that Japan must increase its tax rates by three to nine percentage points, to make good on its obligations. Note that Japanese taxes are currently second lowest in the OECD, after South Korea. The worst case scenario is that Japan must increase its tax rates to Western European levels.
Here is the researcher’s home page. The page promises that the relevant paper will be available shortly. The 26 June to 2 July issue of The Economist offers a good summary of the paper; the author also argues that Japanese demographic problems are not as serious as is often believed.
My take: OK, it seems fair enough to cancel out inter-governmental debt: “they owe it to themselves.” But why stop there? Remember the old Keynesian line?: “We owe it to ourselves”. Why not cancel out debt altogether? The most important statistic is not the final debt level, rather the estimate of how big a tax increase will be needed to restore fiscal order. Note that Western Europe “gets away” with its current levels of taxation only because the rest of the world does not follow suit. So the worst case scenario is nothing to be complacent about.
But overall the cited result cheers my heart. I’ve been bullish on Japan for a long time. As catatastrophic economic problems go, a bad banking system is something you can fix, albeit slowly.
Abortion Politics
The Wall Street Journal and the American Spectator have sunk to an embarassing low with the publication of an Levine, Trainor and Zimmerman (1996), find just this. LTZ estimate that restrictions on Medicaid funding of abortions reduced the number of abortions but the number of pregnancies fell even further so the number of births actually went down not up.
Putting things the other way, compensating behavior means that abortion liberalization will reduce the number of births by less than the number of abortions. Five states legalized abortion in 1970, prior to Roe v. Wade (Alaska, California, Hawaii, New York, and Washington). Levine, Staiger, Kane and Zimmerman (1999) estimate that births in these states fell by 5% more than in states that had not legalized abortion. Applying this number to today’s rates they estimate “a complete recriminalization of abortion would result in 320,000 additional births per year.” Since there are about 1.3 million abortions a year, only about a quarter of all abortions represent a net reduction in births.
The reduction in births, even though considerably smaller than than the number of abortions, is not distributed randomly across the population so abortion policy can have an impact on things like crime and teenage pregnancy but the number of Democrats and Republicans has got to be one of the least interesting consequences.
Hat tip to MemeFirst for alerting me to the article.
Two days with Milton Friedman
I just had the pleasure of spending two days in the company of Milton and Rose Friedman. Milton remains jovial and sharp at the age of 91; Rose spoke less but beamed throughout.
I asked Milton the following two questions, he gave me permission to quote him:
1. TC: Is inflation coming back? MF: “Eventually, but not anytime soon.”
2. TC: Have low interest rates been a bubble? MF: “No.”
Milton’s best anecdote concerned opposition to the idea of a free society. He sees businessmen and academics as the two biggest problems, albeit for opposing reasons. Businessmen want freedom for all other people, only not for themselves. Then they want various subsidies, tariffs, privileges, etc. Academics want freedom for themselves, but not for other people.