Bryan Caplan  

Identificationists Beware

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$15 minimum wages methodologically excite Noah Smith:

Sometimes people ask me where I stand on economic policy. Am I a free-marketer or an interventionist? I tell them that I'm an identificationist. 

In statistics, "identification" just means separating two groups in order to tell if a treatment works. You give Group A the pill and you give Group B a placebo, and you see if Group A does better than Group B. In laboratory experiments this is usually possible to do. In the real world, it's a lot harder -- you have to wait for a policy to bring about a difference between two areas that are roughly comparable. 

This is why I'm so happy about the $15 minimum wage that is being phased in in cities such as Los Angeles, Seattle, and San Francisco. We're about to find out if minimum wage laws really have big negative effects on the economy.

But how convincing will these experiments really be?  If I were sympathetic to the minimum wage, I would say, "The worst the experiments will show is that high minimum wages hurt employment in individual cities.  That wouldn't be too surprising, because it's easy for firms and workers to move in and out of cities.  The experiments will shed little light on state-level minimum wages, and essentially no light on federal minimum wages.  Identificationists like Noah are looking for their keys under the streetlight because it's brighter there."

Are these bad arguments?  They are if you only embrace them after you incorrectly predict no change in employment.  But minimum wage supporters can and should precommit to them today.  Contrary to Noah, these city-level experiments barely speak to the debate that's raged in economics for decades.

The good news, though, is that there's a lot more relevant evidence on the disemployment effects of the minimum wage than Noah admits.  It just hasn't been suitable framed.


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COMMENTS (13 to date)
ThomasH writes:

I understand why Professor Caplan thinks that the demand curve for low skilled labor slopes downward and agree that a minimum wage will "cause unemployment." That is why I agree that an increase in the EITC is a better policy for transferring income to low income workers than the minimum wage.

But that does not settle the minimum wage issue. Rather the issue is how do we value the amount of income lost by those who loose jobs because of the minimum wage and by consumers who pay higher prices and by enterprise owners who will have lower profits compared to the income increases among those who do not loose jobs? That's why estimates of the size, not just the sign of the elasticities of demand for low income labor are important. The lower the elasticity, the less the loss of output and the less the loss of income by people loosing jobs.

Zero Aggression writes:

A trade is voluntarily agreed to between two people: labor in exchange for money.

How is that anybody else's business? How does a policy "work" if a third party - The State - barges in and prevents them from making the agreement they want to make?

Are laws against such peaceful activity even moral?

Lewis writes:

I don't understand how this could be identified at all at the city level. A city-level minimum wage will not raise unemployment much as long as rents are high. Some unskilled workers will simply not be able to afford to move there and others will move back to wherever they came from without a job. Some businesses who would hire unskilled workers will simply lose out in the real estate market to businesses who rely on more-skilled, higher wage workers.

Noah Smith is a pseudo-intellectual. I don't think he has done any research himself. I think he has about an undergraduate level of understanding on the topics he writes about.

ThomasH writes:

@Lewis

I think that a response to a city minimum wage could be estimated, although probably not with an unemployment rate for the reasons you point out. The larger point is that even correctly measured for a city, the results would only be applicable to other cities and hardly at all to the question of the costs and benefits and to whom of a nationwide minimum wage increase.

Maniel writes:

The minimum wage, a law against working (if one can’t provide the requisite value), pushes the young, poor, and unskilled into the underground economy where the “War on Drugs” clears a path to crime and prison. Even a rudimentary knowledge of economics helps us to see that such laws are not benign. Fortunately, there are “studies.” As a Mark Twain update might have it, “there are lies, damned lies, and studies.”
@zero: concur.

Roger writes:

If the argument is that this is a poor way to test effects, then I would agree. I also agree that those lobbying for the higher minimum wage do not have a mindset of experimentation. They already have their mind set on the tactic and any consequential arguments on the effects on recipients is beside the point.

This is about power and coalition size, and the relationship between power and program benefits is probably inverse. The worse it goes, the more it empowers the party making the proposal. (By the way, this relationship is true even if not conscious).

That said, I think there is much to be said for social experimentation as a dominant mindset or heuristic. Let's set up betting markets on expected results of various social experiments of proper size and scale.

To be more specific, we should be establishing quantifiable predictions on what we expect to happen. Let's then put money behind these ideas (or arbitrary game points) and start to learn via feedback.

Nathan W writes:

Perhaps some minimum wage firms will set up shop just outside the current bounds of LA. But what would that prove?

Tom West writes:

As a supporter of minimum wage, I have to say that $15 seems quite a ways above the level where the cost of the disemployment effects outweigh the gains from more money in employee's pockets.

Still, it will be interesting to see how big the disemployment effects actually are at such a high minimum wage.

Floccina writes:

IHMO people think of minimum wage employers wrong. I think of them as sopping up the excess labor of people who cannot find better jobs. We treat them like pariahs but they are doing something we want. Most minimum wage workers want better jobs on which they could be more productive but there are not enough of those jobs.

bignurse writes:

"We're about to find out if minimum wage laws really have big negative effects on the economy."

If you frame the debate as "will San Francisco tank as a result of minimum wage?" and then SF (as I suspect) does well in spite of minimum wage, you can claim that minimum wage is a success. However, what if SF could have done even better by having higher employment in the absence of a high minimum wage? Unfortunately, we will never be able to answer that, so we will be stuck with the unjustified triumphalism of minimum wage proponents.

Gene Marsh writes:

Wouldn't it be correct to say that on the city, state, and federal level there have been hundreds of individually legislated minimum wage increases over the last hundred years?

Thousands if we count other countries?

How many more until we have a sample size sufficiently large to identify the slew of economic catastrophes we know must have resulted from this incessant meddlng?

LD Bottorff writes:

The goal is to drive the low-skill workers out of the cities and into the rural areas where they will take their votes and give them to the party that cost them their jobs.

Gene Marsh writes:

"According to a CNN exit poll in 2008, those making less than $15,000 a year made up 13 percent of the population but just 6 percent of voters."

DNC I: How can we drive our voters out to rural areas, where we can strand them far from polling places, without buslines or other forms of transportation?

DNC II: If we can get that minimum wage raised I think we've got a shot.

DNC I: What about Bottorff?

DNC II: You think anyone's gonna believe him?

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