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The problem with Empirical Economic Research
Posted by: Jon Henke on Wednesday, August 02, 2006

Donald Boudreaux writes at TCS Daily that, while the theoretical case that the minimum wage produces unemployment is solid, empirical evidence about the effect of the minimum wage is difficult...
The evidence is indeed imprecise. Some empirical studies — most famously one published in 1994 in the prestigious American Economic Review by David Card and Alan Krueger — find that on at least some occasions raising the minimum wage might actually increase employment of low-skilled workers. Other studies — for example, this 2004 one by David Neumark and Olena Nizalova — find that the higher the real minimum wage, the worse are the employment prospects of low-skilled workers.

Empirical research in economics is notoriously difficult because wages, prices, unemployment rates, product qualities, and all other data of the social sciences are, as Friedrich Hayek said, "complex phenomena." Having so very much constantly going on in the real world, having no laboratory in which reliably to isolate more than a handful of these phenomena at any one time, and unable to read directly the minds of the many persons whose perceptions and choices combine to generate social outcomes, empirical researchers can easily overlook or misread important variables.
To his complexities, let me add one more that is equally problematic in evaluating economic policies. Whereas, in most sciences, the problem can be isolated and the test, "Before VS After", in economic problems, that is not the case.

An economic effect — be it an increase in the minimum wage, a change in tax levels, or the effects of free trade — must be evaluated "After VS Otherwise".

That is, to determine the effects of, e.g., an increase in the minimum wage, one cannot look — as Card/Krueger did — at the conditions before and after the minimum wage was increased. One must evaluate the conditions after the minimum wage was increased versus what conditions would have been at the same point in time in the absence of the minimum wage increase. This is somewhere between exceedingly difficult and impossible.
 
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This is somewhere between exceedingly difficult and impossible.
On the national and state scale this is certainly true, but you might be able to get good data doing pilot projects on a local level. It shouldn’t be too hard to find two towns with similar populations, locations, industries, etc. Then raise the minimum wage in one for a trial period and see what happens. As long as you have a sufficiently large town, you might actually get some good data out of it.

Granted local programs have effects that don’t occur in larger regulatory systems (like people can easily cross the town line to avoid some laws they don’t like), but this is an experiment. If you see relocation to avoid the legislation, then it is adversely effecting some groups.
 
Written By: Jeff the Baptist
URL: http://jeffthebaptist.blogspot.com
I don’t think anyone would seriously argue that raising the minimum wage to say - $20 an hour - would not cause unemployment. Of course it would (and it would also increase black market employment).

The matter is entirely one of degrees. A small minimum wage increase might see its effect swamped by the background noise of regular economic acitivity and thus wouldn’t be noticeable.
 
Written By: John F. Rogers
URL: http://therapysessions.blogspot.com
John,

I think that is exactly Jon’s point.
 
Written By: Lance
URL: http://www.asecondhandconjecture.com
Russ Nelson, the "Angry Economist" has commented a couple of times about the difficulty of evaluating the effects of the minimum wage. In general, he says that the data is characterized by too much "noise", and a researcher cannot really isolate the results purely attributable to changes in the minimum wage.

Apologies to Russ if I have mischaracterized his thoughts on it.

http://angry-economist.russnelson.com/

—-Tom Nally, New Orleans
 
Written By: Tom Nally
URL: http://
I’ve think there is a natural minimum wage.

In my labor market it seems that you really need to pay $8.00/ hour to get someone who can follow instructions reasonably well, speak up if something unexpected is going on, and will show up semi regularly. If you raise the minimum wage form $5.15 to $7.99, there will be not much effect on employment. Maybe McDonalds will hire fewer kids but I think they boost people who show up regularly to jobs over the minimum wage quickly.

Once you get over this natural minimum wage, you will see effects on either employment, prices or both.

If I’m right, that means all of the hubub in congress has just been so much hot air, and the arguments on both side have been only to play to one base or the other.

The minimum wage hasn’t been over the natural minimum wage in my lifetime. Perhaps one of the senior citizens on this site can tell us if it made any difference in the ’30s.


 
Written By: cindyb
URL: http://
What kills me is that there are still people out their that are trying to do these studies. When it comes to studying less politicized large complex phenomena, like, say meteorology, no one tries to deploy 500,000 weather balloons in an attempt to demonstrate that warm air actually holds less moisture than cold air. And any meteorologist that tried to would be laughed out of the field—unless, of course, there was some popular political theory requiring just such a phenomenon.

This is why, in my opinion, we have entire scientific establishments focused on co2 as a cause global warming even though water vapor traps more heat per unit and is up to 115 times more prevalent in the atmosphere. And just like minimum wage proponents, as their case gets more and more difficult to sustain, greenhouse theorists have scaled back their predictions to reside fully within the noise, making their hypothesis virtually impossible to rebut.

yours/
peter.
 
Written By: Peter Jackson
URL: http://www.liberalcapitalist.com
An economic effect — be it an increase in the minimum wage, a change in tax levels, or the effects of free trade — must be evaluated "After VS Otherwise".
One could say the same thing about political/military actions, such as the invasion of Iraq.

It’s impossible to say for certain what conditions would be now absent an invasion. It is of course interesting and sometimes illuminating to speculate on such matters, as what-if or alternate history stories do, but to claim certain knowledge (as Howard Dean does) that X would never have occurred if action Y had never been undertaken is empty demagoguery at best.

I don’t mean to hijack the thread, just wanted to point out the amusing similarity.
 
Written By: Robby
URL: http://
The matter is entirely one of degrees. A small minimum wage increase might see its effect swamped by the background noise of regular economic acitivity and thus wouldn’t be noticeable.
True, but then it wouldn’t do much good would it? And even if it was a big increase that somehow did not lead to unemployment (perhaps because of a rapidly booming economy), It would certainly lead to higher prices, thus negating itself.

It really is a stupid idea, but thankfully it also doesn’t do all that much harm
either.
 
Written By: kyle N
URL: http://impudent.blognation.us/blog
In my labor market it seems that you really need to pay $8.00/ hour to get someone who can follow instructions reasonably well, speak up if something unexpected is going on, and will show up semi regularly. If you raise the minimum wage form $5.15 to $7.99, there will be not much effect on employment.
If the employment market is already driving the wages up, then why raise the minimum wage? Wages are already being adjusted freely by the buyers and sellers of labor, no need for government to interfere.

But that’s not the point to Jon’s post.
 
Written By: Steverino
URL: http://steverino.journalspace.com/
Raising the minimum wage is simply political theater. I remember as a kid that minimum wage sucked in California, but I had friends in Arkansas who could move out of their parent’s house on the same wages!
 
Written By: Harun
URL: http://
I remember as a kid that minimum wage sucked in California, but I had friends in Arkansas who could move out of their parent’s house on the same wages!
And here we see the real problem with the national minimum wage, the costs to create the same standard of living vary nationwide.

I’m not overly fond of the minimum wage. It seems to be a government regulation that doesn’t do anything the market won’t do for you. But I also doubt the current increase is going to cause a lot of problems for most of the country. In my market, getting somewhat skilled labor costs $7-8 per hour. They aren’t raising the wage above what many workers are already earning. McDonalds, Walmart, and some building contractors may be in trouble, but the rest of the job market will do fine. I’m guessing most urban and suburban job markets are fairly similar to my own (at least until you get to cheaper living in parts of the midwest and west).
 
Written By: Jeff the Baptist
URL: http://jeffthebaptist.blogspot.com
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