Minimum Wages and Economics

Tim Harford writes on the minimum wage:

The UK minimum wage took effect 16 years ago this week, on April 1 1999. As with the Equal Pay Act, economically literate commentators feared trouble, and for much the same reason: the minimum wage would destroy jobs and harm those it was intended to help. We would face the tragic situation of employers who would only wish to hire at a low wage, workers who would rather have poorly paid work than no work at all, and the government outlawing the whole affair.

And yet, the minimum wage does not seem to have destroyed many jobs — or at least, not in a way that can be discerned by slicing up the aggregate data. (One exception: there is some evidence that in care homes, where large numbers of people are paid the minimum wage, employment has been dented.)

The general trend seems a puzzling suspension of the law of supply and demand. One explanation of the puzzle is that higher wages may attract more committed workers, with higher morale, better attendance and lower turnover. On this view, the minimum wage pushed employers into doing something they might have been wise to do anyway. To the extent that it imposed net costs on employers, they were small enough to make little difference to their appetite for hiring.

An alternative response is that the data are noisy and don’t tell us much, so we should stick to basic economic reasoning. But do we give the data a fair hearing?

At its best, economics is a fruitful dialogue between theory and empirical (data) work.  All economic models are, by nature, simplifications.  One of the judgments we have to make is whether some of the simplifcations we've made are inappropriate.  Testing our models against the data helps us do that.

The first tool an economist will reach for in trying to analyze a market is supply and demand; in that context, a minimum wage is a price floor, which creates an excess supply of labor (i.e., unemployment):

(the equilibrium wage and quantity of labor are labelled with superscript e's, and the m's mark the minimum wage and corresponding amount of labor).

We like supply and demand because it is simple and works well in many context; but the labor market is one case where its simplicity can lead us astray.  As Paul Krugman recently put it:

[B]ecause workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.

Indeed, some empirical research has demonstrated that minimum wages do not have the effects implied by the supply and demand framework.  This NYT Magazine piece by Annie Lowrey summarized David Card and Alan Krueger's classic paper on the subject and some of the subsequent dispute.

Economic News on TV

A nice bit of parody, "Every TV News Report on the Economy in One"

STEM versus Liberal Education?

In a Washington Post column headlined "Why America's Obsession with STEM Education is Dangerous," Fareed Zakaria writes:

This dismissal of broad-based learning, however, comes from a fundamental misreading of the facts — and puts America on a dangerously narrow path for the future. The United States has led the world in economic dynamism, innovation and entrepreneurship thanks to exactly the kind of teaching we are now told to defenestrate. A broad general education helps foster critical thinking and creativity. Exposure to a variety of fields produces synergy and cross fertilization. Yes, science and technology are crucial components of this education, but so are English and philosophy. When unveiling a new edition of the iPad, Steve Jobs explained that “it’s in Apple’s DNA that technology alone is not enough — that it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our hearts sing.” 

There is much to agree with in the case he makes for liberal education, but the way he (and the Post's headline writers) frame it is problematic.  We don't face a tension between science, engineering and mathematics and liberal education; science and mathematics are part of liberal education, and engineering should be too.

Zakaria is right that liberal education is concerned with "critical thinking and creativity."  To be effectual, these require a set of intellectual tools to understand the world around us.  Liberal education as it is practiced does fairly well through the humanities and social sciences of expanding students' capacities to think about the human and social world.  But the social world is shaped by the physical and biological, the mechanical and computational.  And here I worry we aren't doing such a good job - we seem too ready to declare that we're not "math people" (and, it mostly follows from this, not science or engineering people).  Doing so early in a child's academic life means that they will later find many areas closed off to them.  At the college level, we accommodate this with science for non-scientist courses - every college has its "physics for poets" and "rocks for jocks."   Some of them are likely fantastic classes, but there is a worrying asymmetry - we don't seem to feel a need to offer "poetry for physicists" or "social theory for biologists".  To some extent, this reflects what we're given - too many of our incoming students have already "tracked" away from serious studies in math and science (or turned off to them).  But it raises a question of the seriousness of our commitment to science and math as a real part of liberal education.

The importance of science and math in liberal education is not just in knowing "stuff," or "how stuff works" - though I think knowing stuff, and how it works, is often underrated - but in learning other modes of thought which can extend our mental capacities and give us another perspective.

While Zakaria picked up on our current STEM-mania (much of which is misguided, even on its own terms), and his column's headline puts science and liberal arts in a false opposition, his real target - a narrow vocationalism - is a valid one.  Economic insecurity and the wage premium for college graduates have helped entrench the belief that a college degree is some sort of golden ticket. This is a far too circumscribed view: a good education should enhance one's working life (regardless of how remunerative) - but it should also enrich our lives as citizens and people.  That is, it should help us, as Keynes put it, to "live wisely, agreeably and well."  We would be better able to do this if we took science and math education a little more seriously.

Update (3/31): At Forbes.com, Union College's Chad Orzel has a nice response - "science is essentially human" - to Zakaria's piece.

Krugman: Not Down With T.P.P.

Naughty Curmudgeony by nature, Paul Krugman - whose Nobel prize is mainly due to his important work in international trade theory - disses the Trans-Pacific Partnership:

I’m thumbs down. I don’t think the proposal is likely to be the terrible, worker-destroying pact some progressives assert, but it doesn’t look like a good thing either for the world or for the United States, and you have to wonder why the Obama administration, in particular, would consider devoting any political capital to getting this through.

As Krugman points out, the importance of trade agreements is often overstated:

[A]lmost everyone exaggerates the importance of trade policy. In part, I believe, this reflects globaloney: talking about international trade sounds glamorous and forward-thinking, so everyone wants to make that the centerpiece of their remarks. (The same thing happens to an even greater extent when international money issues like the dollar’s role as a reserve currency crop up.)

While, as a professor of international economics, I have a vested interest in promoting "globaloney," I think he's right about this.  Although international trade certainly has a substantial impact on the US economy, the effects of these trade agreements are pretty marginal.

Another thing he points out is that, since tariffs are already low, the substance of trade agreements isn't really about trade, per se, but about other (arguably) trade-related issues, such as intellectual property protection.  As a net exporter of intellectual property-intensive goods, the US has a mercantilist interest in strong IP protection, but Krugman has an appropriate economist's skepticism of such arguments:

Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly – letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost. In that direct sense this introduces a distortion that makes the world a bit poorer.

Tyler Cowen points out a big non-trade related argument for the TPP that Krugman does not mention:

either this deal happens on American terms, or an alternative deal arises on Chinese terms without our participation.  For rather significant foreign policy reasons we prefer the former, and the pragmatic side of President Obama understands this pretty well. - See more at: http://marginalrevolution.com/marginalrevolution/2015/03/why-paul-krugman-is-wrong-to-oppose-the-trans-pacific-partnership.html#sthash.b5KbTNCP.dpuf

Either this deal happens on American terms or an alternative deal arises on Chinese terms without our participation.  For rather significant foreign policy reasons, we prefer the former and the pragmatic side of President Obama understands this pretty well.

Brad DeLong also responds with a set of counterarguments, including:

Paul Krugman says that the potential net gains from freer trade in services and (secondarily) agriculture as estimated by Petri, Plummer and Zhai of 0.5% of GDP “seem high to him”. Suppose that they are half that. In a Pacific region whose GDP is now approaching $30 trillion/year, that is $75 billion/year. Capitalize that at 4%/year and we get a net addition to world wealth of $3 trillion. That is indeed a very small number relative to the wealth of the world both now and discounted into the future. But that is a rather large number compared to other things the U.S. government might do this year. So why not grab for it?

Of course, we have yet to actually get a deal...

Update (3/12): At the Washington Post, Autor, Dorn and Hanson argue for the TPP.

either this deal happens on American terms, or an alternative deal arises on Chinese terms without our participation.  For rather significant foreign policy reasons we prefer the former, and the pragmatic side of President Obama understands this pretty well. - See more at: http://marginalrevolution.com/marginalrevolution/2015/03/why-paul-krugman-is-wrong-to-oppose-the-trans-pacific-partnership.html#sthash.b5KbTNCP.dpuf

either this deal happens on American terms, or an alternative deal arises on Chinese terms without our participation.  For rather significant foreign policy reasons we prefer the former, and the pragmatic side of President Obama understands this pretty well. - See more at: http://marginalrevolution.com/marginalrevolution/2015/03/why-paul-krugman-is-wrong-to-oppose-the-trans-pacific-partnership.html#sthash.b5KbTNCP.dpuf

Mark Blyth to the Social Democrats

Jacobin magazine has Mark Blyth's thought-provoking speech to the German Social Democrats, in which he encourages them to act like social democrats:

When you ask for the content of what structural reform means, it seems to be a checklist of lower taxes, deregulate everything in sight, privatize anything not nailed down, and hope for the best. But are these policies not disturbingly American, if not Thatcherite? Indeed, isn’t this everything that the SPD is supposed to be against, and much of which the German public would never put up with?

Interesting...

"Structural reform" means lots of different things - some good and some bad - and whether "austerity" is appropriate depends on the circumstance, so I'm wary of blanket statements about either of those concepts, but I think he is broadly correct in the context of what is going on in Europe right now. The existence of the Euro, in conjunction with ECB policy, prevents necessary monetary and exchange rate adjustments that from taking place, and misguided moralism about debt may make a political settlement impossible.  It is this last point which is his target.

Trade-Related (?)

Economic theory provides a number of useful tools for thinking about tariffs, and these tend to frame economists' instincts when it comes to discussions about "free trade agreements."  However, in many cases, tariffs are already quite low (perhaps this is a rare success for economists' powers of persuasion...) and the main ingredients of trade agreements concern other things which are trickier to analyze.

One aspect of contemporary trade agreements that is coming under scrutiny in the discussions over the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) are provisions to protect foreign investors by allowing them to take disputes with governments to arbitration.  This Vox piece by Danielle Kurtzleben is a nice summary of the debate concerning these investor-state dispute settlement (ISDS) rules.

Another issue getting considerable attention in the TPP discussions is the fact that trade agreements typically do not deal with currencies.  As the Times reported, many in Congress are pushing for incorporating a provision to deal with "currency manipulation" into the TPP.

This is a tricky issue which cuts across economics' division between international trade - which uses microeconomic theory to analyze long-run equilibria - and open-economy macroeconomics, which is concerned with monetary and balance of payments issues (which are "short-run" but can have meaningfully persistent effects).  At an institutional level, trade policy is usually the purview of trade ministers (e.g., the US Trade Representative), while currency policy falls to central banks and finance ministers (i.e., the Treasury in the US).  Globally, trade has the WTO, while currencies have the IMF (which, unlike the WTO, does not have any enforcement mechanisms).

Simon Johnson and Jared Bernstein have written in favor of inserting a currency clause, while Edwin Truman argues the contrary.  Janet Yellen expressed concern about the potential for trade agreements to encroach on monetary policy, and Jeffrey Frankel noted that some of the loudest concerns about currency manipulation aimed at China (not currently a party to the TPP) are out of date.