In a powerful post 2.5 years ago, "Eureka! Economic Illiteracy as Mental Substitution," co-blogger Bryan Caplan takes one of Daniel Kahneman's most-powerful insights in his Thinking, Fast and Slow and applies it to the economic illiteracy that we see in students. Of course, it applies much more generally than to students.
Kahneman's point is that when asked a tough question, most people will substitute a question that they find easier to answer. The problem is that they think they answered the question asked--and they didn't. One of Bryan's examples, when he applies Kahneman's insight to economics, is the minimum wage. Here is a question that economists often ask:
Does the minimum wage help low-skill workers?
And here's the question that people often substitute:
Would I be happy if employers gave low-skilled workers a raise?
I thought of that while watching this Mary Poppins video that makes the case for a so-called "living wage," that is, a government-enforced wage of over $10 an hour. In the video, Mary Poppins quits because she's having trouble making ends meet at the current minimum wage of $7.25 an hour. If she were to get just a $3 an hour increase, she says--actually she sings--she would be happy, or happier, on that job. The children whom she's taking care of look forlorn when they realize that they will not have their beloved Mary Poppins taking care of them.
What question is this video answering? It purports to be answering the question: "Should the minimum wage be raised by $3 an hour?"
But the actual question being asked and answered is a very different one: "Would Mary Poppins be happier and stay on the job, and would the kids she's taking care of be happier, if their parents paid Mary Poppins an extra $3 an hour?"
The second question is much easier for most people to answer. If the kids' parents paid Mary Poppins an extra $3 an hour, Mary Poppins would be happier and stay on the job, and, therefore, the kids would be happier.
I often see a similar substitution in discussions of the minimum wage. In 2006, when the federal minimum wage was $5.15 an hour, I wrote an op/ed here or here in the Wall Street Journal making the case against the minimum wage. One letter writer to the Wall Street Journal, Robert A. Steinberg responded:
As a small businessman, my costs were very adversely affected when I lost an employee and had to train a new employee. Any person hired at $5.15 an hour is not apt to stay very long. The employee that earns more than the minimum wage will stay longer and be more productive.
Notice that he was answering the question: "Should I pay more than the current minimum wage of $5.15 an hour?" and his answer was yes. But Mr. Steinberg thought he was answering the question, "Should the minimum wage be raised?"
Here was my answer:
In his response to my criticism ("If Only Most Americans Understood," August 1) of the minimum wage, Robert A. Steinberg (August 16) literally made up three quotes that he claimed were from my article--and then went on to attack his fabricated quotes. He then states that when he faced with a minimum wage as a teenager, "there was no shortage of jobs at the minimum wage for myself and my friends." His statement would be relevant only if I had claimed that the minimum wage would put all youths out of work. I made no such claim.
Finally, Mr. Steinberg argues that increasing the minimum wage will help businesses by reducing turnover. He cites his own experience as an employer. But employers are free to raise wages and they have the right incentive to make the tradeoff between wages and turnover. Is Mr. Steinberg really saying that he was so careless than he never considered raising wages to reduce turnover until the federal government made him do so?