Topic: Trade and Immigration

Challenging the NEA: Priceless

To quote the old Mercedes Benz airbag commercial: “Some things in life are too important not to share.”

The National Education Association’s national convention begins today at the Orange County Convention Center in Orlando, FL. Outside, the Evergreen Freedom Foundation (a Washington State think tank) is parking a truck with a billboard highlighting some of the expenditures the NEA listed on its 2004 federal financial disclosure forms. 

The billboard is too important (and good) not to share:

You can read about the case Evergreen is making against the NEA (both in the court of public opinion and soon the U.S. Supreme Court) here and see some of the truck’s other displays here.

If teachers gain the freedom to decide how their own paychecks are spent, it will in no small part be due to the folks at Evergreen.

Have You No Respect for the Law (of Demand)?!

The law of demand is a bitter pill for defenders of labor market price controls. Noted economic theorist Matt Yglesias has grown weary of appeals to “Economics 101” in the minimum wage debate. “After all,” Yglesias writes, “there’s a reason they offer more economics classes and you don’t get your degree after taking just one.” His American Prospect colleague Ezra Klein says of the law of demand that “It’s a good guideline, but it’s got no end of exceptions.” The minimum wage, of course, is one those exceptions.

They’re both right in general, if not about the minimum wage in particular. There are more economics classes, and they do teach exceptions. However, let’s not imagine that there is some advanced economic class in which you learn that the law of demand is false. (Well, no doubt there is somewhere. There is contradiction-friendly “paraconsistent logic,” after all.)

To use Yglesias’s misapplied example, Econ 101 principles do not stand to higher-level economics in the way that Newtonian physics stands to relativity and quantum machanics: as a useful, but literally false, simplification of reality. Economic laws are not strict laws of nature, codifying ineluctable relationships of necessity, and they do not pretend to be. So counterexamples are not ipso facto falsifying, and the law of demand is never replaced with a better, more empirically adequate, law. The law of demand is very, very empirically adequate as it is: It captures a ubiquitous regularity of human behavior that is abundantly comfirmed every moment of every day, and without which there would be no science of economics.

But it is just a regularity, like people flinching involuntarily when they hear a sudden, loud sound. It doesn’t have to happen, but it’s pretty surprising when it doesn’t. (“Is he deaf? Paralyzed?”) And when it doesn’t, there’s need for some special explanation.

Economic laws, like the principles of all the “special sciences,” are ceteris paribus generalizations: generalizations that are true other things being equal. Econ 101 lays out the basic laws and explains what follows from them ceteris paribus. Later, students learn about cases when other things are not equal – when there are exceptions to the generalization. So, it is always possible to argue that the law of demand does not apply in this or that kind of circumstance. A certain necessary auxiliary condition, which is almost always present, may be absent in a certain kind of case, causing the regularity to break down. But then, in order to predict an exception to the regular pattern, you need to cite the absence of the relevant auxiliary condition (e.g., “He can’t hear; that’s why he didn’t flinch”). I hope Yglesias is not also tired of Philosophy of Science 101.

Now, let’s note two things. First, you will be utterly hopeless in reliably identifying exceptions to a ceteris paribus law when you never grasped its logic in the first place. Exhortations to mind your Econ 101 generally aren’t exhortations to stop being so darn advanced. They are exhortations to actually comprehend the principles upon which advancement depends. And, second, the fact that a law is ceteris paribus does not mean you can deny its applicability whenever you want to. Political convenience tends not to be an appropriate auxiliary condition. You can’t wave your hands and just hope that a good argument is in some upper-level textbook you haven’t read.

If you want to say that a wage floor is not going to throw some low-wage workers out of their jobs (or prevent them from getting jobs), you’ve got to say, in a principled way, why not. The burden is on those who predict an exception to an immensely reliable regularity. The most popular principled explanation for the failure of minimum wage increases to create unemployment is a story about monopsony conditions for low-wage labor, i.e., imperfectly competitive labor market conditions in which there is a single buyer of low-wage labor (or a colluding band of buyers), that is able to set wages that workers have little choice but to accept. A simple model (Econ 101, even!) shows that under such conditions, an increase in the minimum wage, within a certain range, could even increase employment and raise efficiency.

Card and Krueger’s famed statistical work on minimum wage, which wage-increase advocates wave around as if it were proof of the Resurrection, tells a kind of very complex monopsony story. They recognize, unlike many of the people who abuse their findings, that their statistical results on minimum wage hikes, in isolation from further theory, can at best establish that other things were not equal at a certain place and time (e.g., fast food restaurants in Pennsylvania and New Jersy in the mid-1990s). This provides no basis for predicting the effects of future minimum wage increases unless it is accompanied by a principled theory of what general features of the situation were not equal.

Their theory, in a nutshell, is: “Turnover costs, imperfect information, search frictions, commuting costs, and inertia generate short-run, and possibly long-run, monopsony power for individual firms.” This is not exactly a simple condition, likely to apply uniformly across a huge, diverse country. That an increased minimum wage might not cause unemployment in some places where certain conditions apply does not provide a strong argument for raising it everywhere. And the monopsony story, as far as I understand it, establishes only that there is a range up to which the wage floor could be raised without creating a disemployment effect. In order to use Card and Krueger to support an increase to $7, you would need to provide evidence that the federal minimum is not already at the top of that range, and that $7 will not exceed it. Maybe somebody has done this, but I haven’t seen it.

Card and Krueger’s empirical work would constitute some evidence in favor of their monopsony hypothesis. But how well does the evidence support the theory? For a taste just from the Cato archives, try Douglas K. Adie and Lowell Gallaway’s review of C&K’s book Myth and Measurement in the Cato Journal, or “Sense and Nonsense on the Minimum Wage ” by Donald Deere, Kevin Murphy, and Finis Welch, in Regulation Magazine. Yglesias cites a petition of economists in favor of raising the minimum wage. Probably more informative is this serious 2002 NBER research summary by UC Irvine economist David Neumark, in which he reports that “although there may be some outlying perspectives, economists’ views of the effects of the minimum wage are centered in the range of the earlier [than Card & Krueger] estimates, and many of the more-recent estimates, of the [significantly positive] disemployment effects of minimum wages.” That is, C & K’s position is an “outlying perspective.”

But consensus tennis is a very silly game. Better is Neumark’s analysis of the state of play (in 2002) regarding the C & K studies:

More recent studies have used panel data covering multiple states over time, exploiting differences across states in minimum wages. This approach permits researchers to abstract from aggregate economic changes that may coincide with changes in the national minimum wage and hence make difficult untangling the effects of minimum wages in aggregate time-series data.

Evidence from these “second generation” studies has spurred considerable controversy regarding whether or not minimum wages reduce employment of low-skilled workers, with some researchers arguing that the predictions of the standard model are wrong, and that minimum wages do not reduce and may even increase employment. The most prominent and often-cited such study uses data collected from a telephone survey of managers or assistant managers in fast-food restaurants in New Jersey and Pennsylvania before and after a minimum wage increase in New Jersey.

Not only do these data fail to indicate a relative employment decline in New Jersey, but rather they show that employment rose sharply there (with positive employment elasticities in the range of 0.7).

On the other hand, much recent evidence using similar sorts of data tends to confirm the prediction that minimum wages reduce employment of low-skilled workers; so does earlier work with a much longer panel of states. Moreover, an approach to estimating the employment effects of minimum wages that focuses more explicitly on whether minimum wages are high relative to an equilibrium wage for affected workers reveals two things: first, disemployment effects appear when minimum wages are more likely to be binding (because the equilibrium wage absent the minimum is low); second, some of the small or zero estimated disemployment effects in other studies appear to be from regions or periods in which minimum wages were much less likely to have been binding. Finally, a re-examination of the New Jersey-Pennsylvania study that I conducted, based on payroll records collected from fast-food establishments, finds that the original telephone survey data were plagued by severe measurement error, and that the payroll data generally point to negative employment elasticities.

That is to say, C & K’s findings have been challenged.

Meanwhile, studies continue to appear emphasizing the hazards of minimum wage laws. I find Neumark’s recent paper with Olena Nizalova especially unsettling. They find evidence that minimum wage laws discourage teenagers and young adults from acquiring the human capital they need in order to get better jobs and higher wages later in life. That is, minimum wage laws work to ensure that those who already have the fewest opportunities to develop their capacities, have even fewer still. They say this baleful effect is strongest for young blacks.

Progressives find grand, symbolic political importance in the minimum wage. But isn’t their most important concern the welfare and prospects of the poor?

Build a Wall around the Welfare State, Not around the Country

Most of the members of the conference committee on the immigration bill seem to have forgotten our own heritage.

Compared to the present, the United States had a higher rate of immigration just prior to World War I when we had no significant immigration controls (except against the Chinese) and no federal welfare programs. Most of these immigrants were from Ireland, Italy, Hungary, Poland, and other poor European countries; most spoke no English and had only crude manual skills. Many Americans from families who had been here for more than a few generations were prone to speak disparagingly about the status and prospect of the new immigrants. For all that, almost all of these new immigrants (including my grandfather) were work-oriented, family-oriented, no burden to others, and, within a generation, fully assimilated Americans.

Most current immigrants, other than being Hispanic, are very much like those who chose to make their future in the United States a century ago. The record of recent immigrants is impressive: a relatively high employment rate, a relatively low rate of birth to single mothers, and an unusually low incarceration rate. So far, the one major difference from prior immigrants is that the Hispanics are less education-oriented. Given the opportunity, there is every reason to expect them to be good workers, good neighbors, and fully assimilated Americans within a generation. 

The one major difference from a century ago that affects this issue is that the United States is now a substantial welfare state. Illegal immigrants appear to be net taxpayers to the federal government but net tax burdens to state and local governments, especially if they have children in school. 

The primary solution to this problem is to build a wall around the welfare state, not the U.S. nation-state. For new immigrants, access to social services could be limited to emergency health care. Access to public schooling could be limited to those children born in the United States. Access to the full range of social services could be limited, for example, to those who have four years of legal work experience, a record of full payment of taxes, and no felony conviction. 

A supplementary solution to this problem would be a federal transfer to those states and local governments with an unusual number of immigrants. This approach should substantially reduce the opposition to immigration by residents of the border states.

Building a wall around the country, in contrast, is unnecessary, futile, and offensive.

Minimum Wage Wizardry

Ezra Klein over at TAPPED, the American Prospect blog, takes William Niskanen to task for his opposition to the minimum wage below. “[W]hile reasonable people can disagree on the impact of minimum wage laws,” Klein writes, “it’s time they stopped.”

Wow! Why? What’s the debate stopper?! Klein says, “Just crosscheck this list of state minimum wage laws with this rundown of state unemployment rates.” Turns out that there is an inverse eyeball correlation between high minimum wage and high unemployment rates. QED? Well, no. This factoid might help Klein’s case if it wasn’t totally meaningless in isolation from auxiliary assumptions.

That pattern is perfectly consistent with Niskanen’s claim, which is, after all, just an application of the bedrock Economics 101 principle that if the price of something goes up, consumers will tend to buy less of it. In fact, Klein’s pattern might be evidence in favor of Niskanen’s claim. Here’s some more Economics 101 to explain why high minimum wages and low unemployment rates might be expected to go together.

A high unemployment rate indicates a significant oversupply of labor relative to available jobs. In that case, you expect the price of labor to be low, since it is so abundant. If there is already a minimum wage—a lowest legal price—high unemployment will tend to drive wages toward that floor. Let’s say it’s $4 an hour. Now, if there is already high unemployment, and you raise it to $5 an hour, lots of people will have to get a raise, since lots of workers are probably being paid something close to the lowest legal wage. Employers will not be able to afford to give all those people raises. So unemployment would increase further. Now, the effect is quite different in places that have low unemployment rates. In a tight labor market, wages will be higher. So fewer people’s wages will be near the price floor. And so if you raise the floor, fewer workers will be affected. If the labor market is tight enough, and almost no one is getting a wage even close to the floor, raising the floor a little may have no detectable effect at all—like a law mandating breathing.

Now, suppose legislators more or less understand this (or that key constituencies pressure them to act like they do). You’d then expect that states with high unemployment rates and low wages to be least likely to raise their minimum wage, since it would have a relatively large adverse effect for them. And you’d expect states with low unemployment and high wages to be most likely to raise their minimum wage, since it is least likely to make a difference for the worse. And so you end up with high unemployment states with low minimum wages, and low unemployment states with high minimum wages.

Now, I have no idea whether this reasoning in fact explains the pattern Klein observes. But then, neither does he. He’s just a victim of confirmation bias, seeing what he wants to see in an inkblot of ambiguous data. But the pattern he points to might be evidence in favor of the idea that minimum wages increase unemployment. Hardly a debate stopper, is it? Perhaps Klein will grant reasonable people the privilege to continue disagreeing.

It’s worth nothing that Klein admits “And yes, if you jack the wage up to $16 an hour, jobs will be lost. But up to $7 over a period of years?” So what weird science reveals the “no effect” point between $7 and $16? $16 an hour? Unemployment for sure. But not at $7! So what about $8? How about $12? $15.75?

Of course, a bump up to $7 will push fewer people out of the legal labor market than a bump up to $16. But why Klein thinks that a bump up to $7 will push zero people out, when he has already conceded the general point, is mysterious.

Voluntary Charity vs. Government Charity

Chris Edwards’ post on FEMA brought to mind a 2002 New York Times article, which I recently found on FreeRepublic.com. The article concerned fiscal shenanigans at the United Way, and FreeRepublic.com allowed readers to post comments. The following were representative:

“Why anyone would give money to (through) the United Way so they can skim their take is beyond me. Pick your favorite charity or cause, and give to them.”

“If anyone at work asks you to give through United Way, point them to the Salvation Army. The difference is like night and day.”

Pity we never see comments like:

Why anyone would give money to FEMA is beyond me. Pick your favorite charity or cause, and give to them.

If anyone at work asks you to contribute to Medicaid or Food Stamps, point them to the Salvation Army. The difference is like night and day.

As I told a (hostile) room of graduate social work students this morning, when charity is coerced, charities don’t have to try nearly as hard.

Long-Term Costs of a Minimum Wage

Greg Mankiw blogs an NBER study by David Neumark and Olena Nizalovaof on the minimum wage, including this finding by Neumark and Nizalovaof:

The evidence indicates that even as individuals reach their late 20’s, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.