Economics

Minimum Wage Fallacies

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minimum wage

The New Republic has an excellent article by a Stanford doctoral student in economics that argues against the fallacies of minimum wage proponents:

The first fallacy is that changes in the minimum wage do not affect the behavioral response among firms and individuals. The second fallacy is that higher wages will force companies to innovate in order to reduce costs. Both these arguments overlook some very basic, but informative, economic principles.

The first overlooks the fact that wages are designed to compensate workers for productivity. When wages are distorted, they affect the profit-maximizing decisions that businesses make. The textbook prediction, which is generally supported in the data, is that higher minimum wages reduce employment since companies restrict the number of workers they will hire. These adverse effects are especially likely given the pace of technological change and automation.

The second overlooks the fact that there are effective and ineffective ways to stimulate innovation among businesses. The idea that making hiring more costly will spur innovation is tantamount to requiring companies to reduce the size of their physical presence so they become more productive. While these types of distortions may prompt a small fraction of companies to innovate, misallocation more generally is a major factor behind cross-country differences in productivity.

Given that many advocates of a higher minimum wage do so in the name of equality, it’s notable that the author states, “My own ongoing research, which focuses on the link between such wage-setting mechanisms and company behavior, suggests labor-market distortions like raising the minimum wage can have other negative effects on workers, businesses and inequality beyond the overall impact on employment.” The reasons include reduced hours, reduced skill accumulation, and reduced investment in workers. Finally, the evidence suggests that “even in the best of worlds—where the minimum wage has no unintended side effects—it appears to only marginally reduce inequality.”

The whole thing is worth reading. Check it out.

 

Without a License

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Yes, I know permits aren’t exactly the same as licenses, but it’s funny nonetheless.

I’ve blogged about occupational licensing before, citing its negative impact on upward mobility. Now Richard Reeves at the Brookings Institution adds his voice to the critics. In a brief post, he lists four ways in which occupational licensing can hinder upward economic mobility:

  1. “Since state licensing laws vary widely, a license earned in one state may not be honored in another…This licensing patchwork might explain why those working in licensed professions are much less likely to move, especially across state lines…”
  2. “In many cases, people who’ve been imprisoned face a lifetime ban on obtaining an occupational license.”
  3. “Licensing requirements impose up-front costs. The actual licensing fees are often just the tip of the iceberg; many aspiring professionals must spend time and money attending the required trade school courses. These burdens fall disproportionately on people from lower-income backgrounds.”
  4. “Licensing can act as a form of “opportunity hoarding,” allowing those with resources and connections to benefit from the higher incomes flowing from these occupations, in part by preventing others from competing with them.”

Check it out.

Wealth, Poverty, and Politics: An Interview with Thomas Sowell

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This is part of the DR Book Collection.

Economist Thomas Sowell was featured once again on the Hoover Institution’s Uncommon Knowledge to promote his latest book Wealth, Poverty, and Politics: An International Perspective. The interview is a nice, if somewhat simplified overview of his main arguments. Poverty, he says, is the norm. Wealth is what needs to be explained. And wealth largely comes by means of productivity. Yet, why are some groups across the globe more productive than others? He delves into a number of factors, ranging from geography to culture (human capital) to politics. Both the conversation and book are enlightening.

Check out the interview below.

The Capitalist Welfare State

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The merits of the social democratic Nordic countries have once again become popular in American political discourse due to their praise by presidential candidate Bernie Sanders. This revival of the “U.S. vs. Sweden” debate reminds me of the following interview with Swedish economist Andreas Bergh:

Bergh presents a fairly clear view of the difference between what some have called the administrative state vs. the social insurance state.[ref]Understanding this difference has made me more open to welfare policies such as a guaranteed basic income (mainly as a replacement of current policies): an idea put forth by libertarian thinkers such as F.A. Hayek and even Milton Friedman via a negative income tax.[/ref] For those interested in his research–which is quite relevant to the current political climate–check out his aptly titled blog The Capitalist Welfare State.

Immigration: No Laughing Matter

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Comedian Steve Gerben has a new talk entitled “On Increasing Immigration” that is funny, informative, and to some extent moving. If you wonder why some people advocate for (more) open immigration,[ref]I’ve blogged about immigration here at Difficult Run before multiple times.[/ref] but prefer your academia presented in an entertaining fashion, then Gerben’s talk is for you. Check it out below.

Education & Inequality: Roland Fryer Lecture

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Recent Clark medalist Roland Fryer gave a fascinating lecture for the inaugural Buchanan Speaker Series event at George Mason University towards the end of last year. The topic was “Education, Inequality, and Incentives.” Fryer has done impressive work on education, heading the Education Innovation Laboratory at Harvard University. The need for education reform is real. In the conclusion of his lecture, after pointing out the long-term effects for children who got into the Harlem Children’s Zone (i.e. 5x reduction in pregnancy for girls and 3x reduction in incarceration for boys), he movingly says,

Do know how frustrating that is for a guy like me who grow up in these [low-income] neighborhoods? It’s almost maddening. It’s the lottery. We’re by random coin flip deciding who is going to have a 5x lower probability. And no, we don’t do it directly because that’d be mean. We do it indirectly by not doing what we know works. We talk about “no-excuses” schools. It’s time to have a no-excuses society. What other excuses do we have? We’ve seen the stuff from charters, we’ve seen the stuff from meta-analysis, you put it into the traditional public schools, the test scores go up. When the test scores go up using similar interventions, we get better social outcomes! What else!

…These are our children. It’s not a philosophical debate anymore…I got lucky. People look at me a lot and say, “Well, see! It can happen.” Well, shit, you can also drive a car with your feet, but it doesn’t make it a good idea…We know what works…The question is do we really have the courage and will to do it. Or deep down do we really not think this is possible.

See the lecture below to see what works.

Deflecting Asteroids: The AEI-Brookings Poverty Report

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The American Enterprise Institute and the Brookings Institution have come together to produce a report on reducing poverty. Recognizing the increase in child poverty with in the U.S., the group recommends multiple policies to combat it, including:

  • Promote marriage as the most reliable route to family stability and resources.
  • Promote delayed, responsible childbearing.
  • Promote parenting skills and practices, especially among low-income parents.
  • Promote skill development, family involvement, and employment among young men as well as women.
  • Expand opportunities for the disadvantaged by improving their skills.
  • Make work pay better than it does now for the less educated.
  • Expand both work requirements and opportunities for the hard-to-employ while maintaining an effective work-based safety net for the most vulnerable members of our society, especially children.
  • Make more jobs available.
  • Increase public investment in two underfunded stages of education: preschool and postsecondary.
  • Educate the whole child to promote social-emotional as well as academic skills.
  • Modernize the organization and accountability of the educational system.
  • Close resource gaps to reduce education gaps.

The project is based on three core values:

  1. That all Americans should have the opportunity to apply their talents and efforts to better themselves and their children, regardless of the circumstances of their birth;
  2. That all Americans have a responsibility to provide for themselves and their families to the best of their abilities before asking others for help;
  3. That all Americans are entitled to a basic level of security against the vicissitudes of life and, in a nation as rich as ours, to a baseline level of material well-being.

Perhaps even more interesting than the data and policies is the backstory of the project. It was ultimately the brainchild of social psychologist Jonathan Haidt (who has been mentioned frequently here at Difficult Run) known as The Asteroids Club. He explains, “The metaphor was that American political life consists of each side pointing to real threats, real asteroids hurtling toward the Earth, but neither side is willing to turn its head for a moment to look at the other side’s perceived asteroid. If we could at least acknowledge that the other side’s concerns are valid, maybe we could help each other deflect our asteroids.” You can see him describe the origin and results of the project below.

This is what our political system needs and Haidt’s successful project provides me a little hope.

“You Can’t Use Media If You Want To Understand the World”

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So says statistician Hans Rosling in the Swedish Deadline interview below. Modern journalism often distorts our perception of the world, making many believe that we are headed to hell in a handbasket. But we’re not. Rosling explains to his skeptical interviewer that most countries are “in the middle” in terms of prosperity and the people of these countries “go to school, they get vaccinated, and they have two child families.” The overpopulation scare is nonsense, according to Rosling, because “the number of children in the world has stopped increasing[ref]This happens when people become more prosperous.[/ref] because most people use contraceptives.”[ref]Whether we should be happy that the population has stopped growing is another matter. Of course, there is the factor of abortion. However, both the support for and practice of abortion may be waning in the U.S. The American pro-life movement has made some progress in the last 20 years.[/ref] In response to the claims of “war, conflicts, chaos,” Rosling points to Nigeria’s “fantastic election,” the 2014 election in Indonesia, and India’s elimination of tetanus. The problem, in Rosling’s view, is that news outlets “only show a small part and call that “the world.”” When challenged as to what evidence provides the base for his worldview, Rosling’s concluding remark is priceless: “I use normal statistics that are compiled by the World Bank and the UN. And that’s not controversial. This isn’t something to discuss. I am right and you are wrong.”

If you haven’t seen Rosling’s site Gapminder, you should. Check it out.

Subsidies Increase Tuition: Exhibit B

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“Ladies and gentlemen of the jury, I offer you Exhibit B…”

In July of last year, I wrote about a study that found subsidized loans to be the culprit behind rising tuition. Now, a newer study comes to similar conclusions:

With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks— which consist mostly of changes in financial aid—account for the lion’s share of the higher tuition. Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks (column 7), net tuition only rises by 16%.

These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition (pg. 36).

“Remarkably,” writes economist Alex Tabarrok, “so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.” This just provides further evidence that “the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true.”

Education, IQ, and Mating

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I’ve written about assortative mating and income inequality before, pointing out that the more educated tend to marry each other and therefore increase their economic earnings. Ronald Bailey at Reason weighs in on the discussion, adding to the mix evidence that shows assortative mating isn’t just about education, but intelligence. Quoting a 2015 study, he writes,

For example, if spouses mated randomly in relation to intelligence, highly intelligent women would be just as likely to mate with men of low as high intelligence. Offspring of the matings of women of high intelligence and men of low intelligence would generally be of average intelligence. However, because there is strong positive assortative mating, children with highly intelligent mothers are also likely to have highly intelligent fathers, and the offspring themselves are likely to be more intelligent than average. The same thing happens for less intelligent parents. In this way, assortative mating increases additive genetic variance in that the offspring differ more from the average than they would if mating were random. The increase in additive genetic variance can be substantial because its effects accumulate generation after generation until an equilibrium is reached. 

He concludes, “To the extent that intelligence is correlated with socioeconomic status, assortative mating will further exacerbate trends to greater income inequality.”

University of Washington professor Tony Gill once shared a thought experiment he employs in his classes during a Facebook discussion:

Most students are for higher marginal taxation on the rich (defined as the dollar amount of people who have a wee bit more than them).

I propose centrally planned sorting by either IQ or socio-economic status (noting some studies that show how IQ might have a hereditary component and how IQ might be related to long-term income potential). I also note that we tend to marry people who are educationally and socially close to us (e.g., people meet at Harvard or in the same upscale neighborhood bars). Some of us use mail order catalogues, but we usually get a box on education to check.

Students freak out. First, they say that this has never been done. Then I note how arranged marriages are not an uncommon fixture in history. Then they say it isn’t possible because of data concerns, and I remind them about all those tests they took in 3rd, 7th and 11th grade and their “permanent record,” not to mention all the income data the IRS has on their parents.

Then they squeal that this isn’t right because it limits their freedom to do what they want. And then I say, “Oh, so now you’re worried about centrally-planned limits on freedom, eh?”

So, next time you get the social justice itch to redistribute wealth, ask yourself the following:

  • Are the adjectives smart or intelligent used to describe your spouse? Are they some of the reasons given as to why you love them?
  • Did you meet your spouse at college?
  • Would it have a negative influence on your choice to date an individual if they were a waiter/waitress, barista, fast food employee, Walmart cashier? (And not one who is working there part-time while they go to school.)
  • Would you date someone you thought was uneducated?

If you answered “yes” to the first three and “no” to the last, congrats: you’ve officially contributed to income inequality.