The Curse of Econ 101 - The Atlantic - 1 views
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Poverty in the midst of plenty exists because many working people simply don’t make very much money. This is possible because the minimum wage that businesses must pay is low: only $7.25 per hour in the United States in 2016 (although it is higher in some states and cities). At that rate, a person working full-time for a whole year, with no vacations or holidays, earns about $15,000—which is below the poverty line for a family of two, let alone a family of four.
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A minimum-wage employee is poor enough to qualify for food stamps and, in most states, Medicaid. Adjusted for inflation, the federal minimum is roughly the same as in the 1960s and 1970s, despite significant increases in average living standards over that period.
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The United States currently has the lowest minimum wage, as a proportion of its average wage, of any advanced economy,
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On the other hand, two recent meta-studies (which pool together the results of multiple analyses) have found that increasing the minimum wage does not have a significant impact on employment.
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Think tanks including Cato, Heritage, and the Manhattan Institute have reliably attacked the minimum wage for decades, all the while emphasizing the key lesson from Economics 101: Higher wages cause employers to cut jobs.
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In today’s environment of increasing economic inequality, the minimum wage is a centerpiece of political debate
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The real impact of the minimum wage, however, is much less clear than these talking points might indicate.
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In 1994, David Card and Alan Krueger evaluated an increase in New Jersey’s minimum wage by comparing fast-food restaurants on both sides of the New Jersey-Pennsylvania border. They concluded, “Contrary to the central prediction of the textbook model ... we find no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.”
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Card and Krueger’s findings have been vigorously contested across dozens of empirical studies. Today, people on both sides of the debate can cite papers supporting their position, and reviews of the academic research disagree on what conclusions to draw.
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economists who have long argued against the minimum wage, reviewed more than one hundred empirical papers in 2006. Although the studies had a wide range of results, they concluded that the “preponderance of the evidence” indicated that a higher minimum wage does increase unemployment.
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The argument against increasing the minimum wage often relies on what I call “economism”—the misleading application of basic lessons from Economics 101 to real-world problems, creating the illusion of consensus and reducing a complex topic to a simple, open-and-shut case.
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The profession as a whole is divided on the topic: When the University of Chicago Booth School of Business asked a panel of prominent economists in 2013 whether increasing the minimum wage to $9 would “make it noticeably harder for low-skilled workers to find employment,” the responses were split down the middle.
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The idea that a higher minimum wage might not increase unemployment runs directly counter to the lessons of Economics 101
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In short, whether the minimum wage should be increased (or eliminated) is a complicated question. The economic research is difficult to parse, and arguments often turn on sophisticated econometric details. Any change in the minimum wage would have different effects on different groups of peop
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At the other extreme, very large employers may have enough market power that the usual supply-and-demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers
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In the above examples, a higher minimum wage will raise labor costs. But many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families.
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In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs.
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why higher wages boost productivity: They motivate people to work harder, they attract higher-skilled workers, and they reduce employee turnover, lowering hiring and training costs, among other things
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If fewer people quit their jobs, that also reduces the number of people who are out of work at any one time because they’re looking for something better. A higher minimum wage motivates more people to enter the labor force, raising both employment and output
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Finally, higher pay increases workers’ buying power. Because poor people spend a relatively large proportion of their income, a higher minimum wage can boost overall economic activity and stimulate economic growth
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Even if a higher minimum wage does cause some people to lose their jobs, that cost has to be balanced against the benefit of greater earnings for other low-income workers.
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Although the standard model predicts that employers will replace workers with machines if wages increase, additional labor-saving technologies are not available to every company at a reasonable cost
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Nevertheless, when the topic reaches the national stage, it is economism’s facile punch line that gets delivered, along with its all-purpose dismissal: people who want a higher minimum wage just don’t understand economics (although, by that standard, several Nobel Prize winners don’t understand economics
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A recent study by researchers at the Cornell School of Hotel Administration, however, found that higher minimum wages have not affected either the number of restaurants or the number of people that they employ, contrary to the industry’s dire predictions, while they have modestly increased workers’ pay.
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Low- and middle-income workers’ reduced bargaining power is a major reason why their wages have not kept pace with the overall growth of the economy. According to an analysis by the sociologists Bruce Western and Jake Rosenfeld, one-fifth to one-third of the increase in inequality between 1973 and 2007 results from the decline of unions.
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With unions only a distant memory for many people, federal minimum-wage legislation has become the best hope for propping up wages for low-income workers. And again, the worldview of economism comes to the aid of employers by abstracting away from the reality of low-wage work to a pristine world ruled by the “law” of supply and demand.