So much for value-free economics

12 Aug, 2018 at 15:28 | Posted in Economics | 1 Comment

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economics textbooks — have increased relative to Pennsylvania. However, when economists David Card and Alan Krueger gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream demand theory we had an anomalous case of a backward-sloping supply curve.

And, of course, all those non-ideological and value-free scientific economists out there were überjoyed and prepared to revise their theories …

jp-imgresI’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

David Card

1 Comment

  1. The level of the mínimum wage is not the only variable that matters in setting employment. Otherwise no one would be employed in the Bay área of San Francisco or Seattle. Other factors such as the sophistication and quality of work, the demand for the regional products that the new jersey people make matter too.

    In fact, One of the problems that the traditional (Ricardian) international trade theory has in this age of Globalization is that White collar engineering is now taught and practiced well in far out places like Bombay. So for an engineering firm in Chicago whose personnel make, say, on average $100K per year the temptation of closing Chicago and opening an office in India is all too real. There a similar skilled engineer makes, say, on average 20K per year;, so instead of having one guy on a proyect in the windy city he can have 3 guys in Bombay, finish the proyect 3 times faster and save 40K. This is a true story of 12 years ago.

    Bottom line, Donald Trump is right on this one; current trade agreements based on Ricardian inflexible comparative advantage axioms are out dated and are hurting the income distribution in the USA as the owners of the engineering firm are getting fat while its blue and White collar people are hurting.

    As for your loosing Friends, remember Winston Churchill’s famous quote: “You have enemies? Good; that means you stood up for something in your life”


Sorry, the comment form is closed at this time.

Blog at WordPress.com.
Entries and comments feeds.