David Card and the minimum wage myth

18 Oct, 2021 at 22:07 | Posted in Economics | 2 Comments

David Card - WikipediaBack 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 economic theory’s competitive model — have increased relative to Pennsylvania. However, when ‘Nobel prize’ winning economist David Card and his colleague Alan Krueger gathered information on fast food restaurants in the two states to check what employment effects the minimum wage really have — using a basic difference-in-differences approach — it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

buchC6The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.

James M. Buchanan in Wall Street Journal (April 25, 1996)

2 Comments

  1. So, prices are arbitrary, inflation is a power play, and indexation solves the economic problem?

    • Also, if you search “galaxy rotation curves”, do you see observations of stars doing the equivalent of water running uphill, because they pull against gravity very significantly more than Kepler’s third law predicts?
      .
      And if you observe mountain streams do you regularly see oxbows, rapids, confluences, etc. where lots of water is flowing uphill?
      .
      How does water get up a tree trunk, unless it can flow uphill?
      .
      Also, isn’t https://dwmackenzie.substack.com/p/economics-nobel-prize-winners-disagree interesting, showing that as Lars repeatedly reminds us, any study has variables that aren’t included and confound results?


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