On the "Minimum Grade"

Yesterday, Don Boudreaux of "Cafe Hayek" posted this satirical piece comparing the minimum wage to a "minimum grade."  Boudreaux paints a (mildly) post-apocalyptic picture of a Fair Academic Standards Act that establishes a minimum grade for students in school. The debate that ensues between "Paul Rand" and "Bernie Franken", among other borderline humorous composite characters on either side of the divide, is one over whether students "deserve" such scores, what the effects will be on education, etc.

Of course, in short, the treatise is to be read "the minimum wage is bad and those who advocate its use don't understand economics", but I was left with another impression. This piece was simply an example of an economist who is totally willing to see past fact and scientific arguments in confirmation of his own (possibly flawed) view of the issue. Arguments of this type are to be expected of comment trolls and sophomoric Randian anarcho-capitalists who read "Anthem" and decide that "government is bad", not PhD-holding economists. Such a gross simplification of this issue is  indicative, to me at least, of a general misunderstanding or intentional misrepresentation of the issue at hand. Additionally, dismissing evidence to the contrary of the neoclassical result as "several studies, by prominent professors of education at Ivy League universities" in a slight undertone of mockery throws out the process of academic discovery that should be the object of any professional economist.

It saddens me to see the confirmation bias in my (future) profession. Of course this itself is a generalization of what are a limited set of observations, but judging from the opinions of many others at the beginning of their career in economics, I'm certainly not alone.

I'm sure plenty of readers of "Cafe Hayek" laughed at such a satirical treatment of the minimum wage issue. I certainly did, though I was laughing at the sheer ridiculousness of his argument. 

Keeping up with the Field (For Undergrads)

One of the most challenging aspects of the slow and difficult tread toward the land of grad school and advanced study is, in my opinion, getting exposure to an appropriate number of fields in an undergrad curriculum. I'm currently in my last semester at a small liberal arts college, at which the Econ department is relatively small. 

After reading Freakonomics during my Freshman year I, like many others, decided that behavioral economics was the way of the future. Years later, I still hold that opinion, but my understanding of behavioral models is somewhat more elevated and not due to my attendance in any such course. Some students have the luxury of attending a larger institution where "Psychology and Economics", "Behavioral Economics", or some other such course may be offered. I envy you. However, for a number of us, taking such courses is simply not an option ( I did end up taking Game Theory during my sophomore year, but this certainly does not capture everything that one may see in behavioral studies, even if it is requisite for such study). 

Thus I found myself trolling various blog posts and econ websites for info (see here, here, and here).

But even knowing more information about a particular field does not tell someone how research in this field is performed. So, to keep up with (wonkish) info in a couple of sub-fields, I've taken to skimming through the lists of papers registered each week with IDEAS, which is hosted by the Federal Reserve Bank of St. Louis. Of course, with only an undergraduate education (and depending on how much math that has included) many of these papers are somewhat inaccessible to us. But a simple scan and, perhaps, a dive into an interesting paper will give you an idea of what's going on. I know that my current research interests and goals have definitely been shaped by a semi-regular perusal of these works. 

For the subscription link to the neuroeconomics NEP mailing list, see this. For all others, check out the above link.

An interesting side note...

The papers discussed here don't really have much to do with the debate on the policy effectiveness of the minimum wage, but they are interesting nonetheless.

The psychological effects of changes to the reservation wage I assume would make it quite difficult to return to the would-be equilibrium if opponents of the MW had their way.

Evidence on the Minimum Wage

Brad Plumer at wonkblog presents a great summary of this paper by Schmitt at CEPR on why the classical result on the adverse effect on unemployment by raising (or establishing) a minimum wage may not be true. Some of these reasons seem somewhat intuitive, but one in particular is giving me pause:

5) Employers can respond by becoming more efficient. If minimum-wage workers suddenly cost a bit more, perhaps businesses will react by trying to squeeze more productivity out of them. Schmitt notes that there’s some evidence that this happened in fast-food chains in Georgia and Alabama. Managers started requiring better attendance and asking their employees to take on extra duties in response to a minimum-wage hike.

My main problem with this point is that it only works with the assumption that managers/firm owners are not already operating at the highest efficiency level. If it is true that employees could be more productive than they are under the current (or unchanged) wage regime, I would assume that a manager would allow this only to capitalize on some non-income related aspect of retaining workers, such as an abstraction of an efficiency wage. In this way, managers may currently be allowing workers to work at a less than optimally productive rate to incentivize longer stints of employment, saving the cost of training or hiring a new worker.

This would make some sense only if the demand for such low-skill workers were sufficiently high or working in a competitive market. However, if we are to simultaneously take stock in the monopsony model of these types of positions, this certainly isn't the case.

At the heart of the matter is the notion of whether managers and those firms hiring minimum wage employees are actually maximizing profits currently. The IZA paper with the link in Plumer's quote above provides some interesting evidence that such adjustment channels are being used, but I think it would be worthwhile to test profit maximizing behavior in various minimum wage regimes. Ozimek propounds a randomized minimum wage to take effect in various states for about an 8 year period, after which time the policy would be reassessed and allowed (or disallowed, depending on the results of the natural experiment) to continue. Recognizing the seeming harshness of such a policy, he says:

It may seem callous to put the fates of workers in the hands of random chance, but this is the most surefire way to make sure the minimum wage isn’t causing unemployment.

It's odd to me that Ozimek ignores the most obvious alternative: actual laboratory testing. After all, experimental macroeconomics is not unheard of.

Minimum Wage War or "Make up your collective minds!"

The recent policy updates on the federal minimum wage has led me to some relatively sleepless nights (referred to as "minimum wage blackholes" hereafter) as I've trolled the econ blogs for information and commentary. For the full text of Obama's State of the Union, see this.

In our Econ 101 courses, we are taught (maybe not directly) that such policies are a "bad idea", that binding price floors create artificial shortages which, in the case of the labor market, creates unemployment. The logic is simple: a minimum wage increases the cost of hiring one more employee, presumably above their level of productivity (assuming such productivity is reflected in equilibrium wages). This increase in labor costs would lead an employer to hire fewer workers, thus increasing unemployment.

At face value, such a policy would hurt exactly that population which it was intended to help. Lifting some minimum wage workers out of poverty comes at the cost of putting others into poverty. The effect is a redistribution of income, but not in the traditional way; it redistributes income from the poor to the poor.

A student who stops after getting an A in Econ 101 would claim vehemently that this is terribly policy (I did this myself when my phone lit up with a Politico update on the SOTU address). But is this really the case?

Tyler Cowen basically says yes, but others (Paul Krugman) say absolutely not.

So, as students of economics, what are we to believe? Of course, such discussions and disagreements are going to happen as science progresses. But there is a reason we call it the "Dismal Science." It seems a symptom of economists (macroeconomists in particular) that they come to relatively few consensuses. Anyone doubting this can take a look at the relatively recent econ war on Ricardian Equivalence.

And so I am reduced to my minimum wage blackholes for the time being. Look out for more on this topic as I continue to lose sleep...

About

This is my attempt to chronicle my thoughts and what not at the close of my tenure as an Undergrad Economics major. I'll try to keep my commentary on really technical subjects to a minimum because, let's face it, I just don't have the skills or know-how to really say anything of practical use on such matters (an argument that can be made for basically any commentary I might offer, but I'll wave a magic hand over that for now).

I'm new to the blogosphere and, from what I can tell, there is a sizable surplus of sites. After all, who are these for? I'll be totally transparent and declare that, out of everyone who reads/ is involved with this blog, I'll garnish the most utility. I'm willing to wager that anyone who is interested in learning more about economics and reading useful insight will be better off reading Greg Mankiw's blog, Marginal Revolution, or the thoughts of Brad DeLong. That being said, I'll try to orient most of my postings in such a way as to provide some sort of benefits to an undergraduate audience. I certainly wish that I had a relatively constant stream of undergrad guidance and tips from someone who had "been there."

Hopefully some of you may find the contents useful.

Cheers!