Has Card Been Misinterpreted?
Here's an interesting excerpt from an interview with David Card by the Minneapolis Fed's Region (December 2006).
Is Card making the Austrian point that the perfectly competitive model (a.k.a. the simple supply and demand model) does not explain what actually goes on in labor markets? Has the infamous Card and Krueger really been misinterpreted?
Region: Your research on the effects of raising the minimum wage, much of which was compiled in your book with Alan Krueger, generated considerable controversy for its conclusion that raising the minimum wage would have a minor impact on employment.
Have you continued to conduct research on the impact of raising the minimum wage? And do you have an opinion about “living wage” legislation and the petition that's been circulated recently with 650 or so economists calling for an increase in the minimum wage?
Card: I haven't really done much since the mid-'90s on this topic. There are a number of reasons for that that we can go into. I think my research is mischaracterized both by people who propose raising the minimum wage and by people who are opposed to it. What we were trying to do in our research was use the minimum wage as a lever to gain more understanding of how labor markets actually work and, in particular, to address a question that we thought was quite important: To what extent does the simplest model of supply and demand actually describe how employers operate in the labor market? That model says that if an employer wants to hire another worker, he or she can hire as many people as needed at the going wage. Also, workers move freely between firms and, as a result, individual employers have no discretion in the wages that they offer.
In contrast to that highly simplified theoretical model, there is a huge literature that has evolved in labor economics over the last 25 years, arguing that individuals have to spend time looking for job opportunities and employers have to spend time finding employees. In this alternative paradigm a range of wage offers co-exist in the market at any one time. That broader theory is, I think, pretty widely accepted in most branches of economics. The same idea is used to think about product markets where two firms that sell very similar products may not charge exactly the same price. The theory explains a lot of things that don't seem to make sense, at least to me, in a simple demand and supply model.
For example, what does it mean for a firm to have a vacancy? If a firm can readily go to the market and buy a worker, there's no such thing as a vacancy, or at least not a persistent vacancy. During the early 1990s, when Alan and I were working on minimum wages, it was our perception that many low-wage employers had had vacancies for months on end. Actually many fast-food restaurants had policies that said, “Bring in a friend, get him to work for us for a week or two and we'll pay you a $100 bonus.” These policies raised the question to us: Why not just increase the wage?
From the perspective of a search paradigm, these policies make sense, but they also mean that each employer has a tiny bit of monopoly power over his or her workforce. As a result, if you raise the minimum wage a little-not a huge amount, but a little-you won't necessarily cause a big employment reduction. In some cases you could get an employment increase.
I believe that that model of the labor market is correct. There are frictions in the market and some imperfect information. It doesn't mean that if we raised the minimum wage to $20 an hour we wouldn't have massive problems, if we enforced it. Realistically, of course, the U.S. is never going to enforce a draconian minimum wage, nor is one ever going to be passed. However, our results don't mean that minimum wages in other economies couldn't have some effect.
I think economists who objected to our work were upset by the thought that we were giving free rein to people who wanted to set wages everywhere at any possible level. And that wasn't at all the spirit of what we actually said. In fact, nowhere in the book or in other writing did I ever propose raising the minimum wage. I try to stay out of political arguments.
I think many people are concerned that much of the research they see is biased and has a specific agenda in mind. Some of that concern arises because of the open-ended nature of economic research. To get results, people often have to make assumptions or tweak the data a little bit here or there, and if somebody has an agenda, they can inevitably push the results in one direction or another. Given that, I think that people have a legitimate concern about researchers who are essentially conducting advocacy work. I try to stay away from advocacy of any kind, but that doesn't prevent people from being suspicious that I have an agenda of some kind.
I'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.
I also thought it was a good idea to move on and let others pursue the work in this area. You don't want to get stuck in a position where you're essentially defending your old research. I certainly think it's possible that someone will come up with credible research documenting a situation where raising the minimum wage has a significant employment effect. I rather doubt we will see that right now because minimum wages are fairly low, at least in northern California where I live. My guess is that small raises in the minimum wage won't have much of an effect.
Comments (12)
Yancey Ward
I have always thought that the minimum wage proponents have completely misinterpreted the original work, however, that is the fault of the authors who had seemingly refused to enter into the discussion engendered by their work.
It is amazing how tenaciously and dishonestly the proponents hang their arguments on the rather obvious observation that an employer might fill vacancies, if they have them, by raising their offerred wage- and government bureaucrats are going to know exactly how and when to raise the minimum to increase employment when individual employers are clueless about their own situations? Please!
Published: January 5, 2007 9:45 AM
Alan Dunn
I am a proponent for the "self-imposed minimum wage".
Meaning that every individual should have the right to choose what wage they are willing to work for and that every employer should have the right to offer whatever wage they are willing to pay.
What I am against though is governments who "think" they are free market orientated and yet enforce taxes, issue money by fiat, and skew government spending towards industries that give them the greatest personal gain.
Then again, if I were an employer who couldnt afford to pay the federal minimum wage I'd consider either closing down or restructuring my business.
Cheers
Published: January 6, 2007 10:48 PM
Mark Brabson
Alan Dunn:
I would do what many other intelligent business owners have done. I would hire illegal aliens.
1. I can pay them any wage I damn well please.
2. I don't have to pay unemployment taxes on their wages.
3. I don't have to pay Medicare or S.S. on their wages.
4. I don't have to pay overtime premiums.
Leave it to the Federal Government to create an entire employment market for illegals via labor laws.
Published: January 6, 2007 11:47 PM
Sam
Aha, Mark Brabson, you in your article have dismissed that crank myth that workers are 'paid according to their productivity'. It was quite nice to read on the LewRockwell site about the Scholastics and how they said instead that workers are only paid according to their immediate needs and if the workers don't like they can go elsewhere. Oh, and of course, the employer isn't obliged to pay more just because the worker is married with children.
Published: January 7, 2007 8:30 PM
Björn Lundahl
China, Hong Kong and Sweden
China is still a very poor country. Productivity is very low so wages are, therefore, also very low. Productivity and wages goes hand in hand. For an example, go to;
http://www.rieti.go.jp/en/china/02083001.html
Once, a long time ago, I was in Hong Kong*, and wages there were among the highest in Asia. Real wages increased about 10% per year, for the reason that productivity per hour work increased that much. Unions were very weak and had no influence, but wages increased anyway, because of competition between employers. As productivity increases, cost per employee gets lower and, therefore, the demand for labour increases and wages goes up. Productivity goes up for the reason that increased savings leads to ever higher capital investments per employee. That is the recipe for high wages and all Western countries have gone through that process.
Wages and living standards in China are higher than ever, but compared to the western countries, extremely low. In poor countries the average worker wants to work more hours than the average workers wants to do in the Western countries. Why? Isn’t that obvious? If your wage barely can support your family, life will be easier if you can work and earn more. We must remember that. Japan, Taiwan, South Korea, Hong Kong and Singapore once were very poor countries and today are better off, China also, will in the future, be richer and the living standard higher. Working hours will then be a lot shorter. There is no “short cut” for a higher standard of living and for a shorter working week. Many companies are “forced” by market forces to invest in countries like China. Consumers have a tendency to buy the cheapest goods and if they are not produced in those countries where they are produced for the lowest costs, they can’t compete. It is no point in accusing businesses for being greedy, they are, but so are we consumers.
Today, Hong Kong is even richer than Sweden. Hong Kong has accomplished in a much shorter time a higher GNP per capita and also a higher life expectancy than Sweden. The Swedish economic growth rate was also higher relatively to other countries when the economy was more free market oriented in the period before 1970. Sweden has also avoided two world wars.
For some information about Hong Kong, go to;
http://www.answers.com/hong+kong?gwp=11&ver=2.0.1.458&method=3
And for some information about Sweden, go to;
http://www.answers.com/sweden?gwp=11&ver=2.0.1.458&method=3
Free enterprise in action, just look at all those symbols of creativity and wealth, I really feel sorry for the people in the People’s Republic of China, go to;
http://my.tdctrade.com/photolib/hk/0100063L.jpg
If China, 50 years ago, had chosen the same path which it is now following, living standards in today’s China would probably be about the same as it is in Hong Kong. The Communist religion was really encouraging long working days and low wages in China.
Some information about rising wages in China, go to;
http://www.businessweek.com/the_thread/economicsunbound/archives/2006/03/rising_wages_in.html
Björn Lundahl
Göteborg Sweden
• Hong Kong is a free port with no tariffs and exchange controls and is probably the most free market oriented region in the world.
Published: January 8, 2007 1:58 AM
Sam
I beg to differ Björn Lundahl, productivity would determine the maximum payment for a worker's produce, but in reality workers have to (or are supposed to in a free market) bargain their labour against other workers just as grocery stores have to compete against other grocery stores. And just as a business cannot expect a garuanteed income for just 'being open' nor can a worker expect a certain wage for just 'being employed'. Just as a business can attract customers through lowering its prices so can a worker get hired over another via opting for a lower wage. Hence when business are out there competing prices goes down, so when there are plently of workers wages go down. Just as businesses find their incomes affected by supply and demand so too do workers (in a free market anyway).
Published: January 8, 2007 4:06 AM
Peter
But Sam, whoever suggested otherwise? Of course wages are affected by supply and demand, just like other prices, and "equal" marginal value product ("equal" -> "would equal, in the mythical evenly rotating economy") - supply of and demand for labor in any particular industry are affected by productivity, you see! You say "productivity would determine the maximum payment for a worker's produce", but it's equally correct to say "productivity would determine the minimum payment for a worker's produce" - else he'd be better off in another line.
Published: January 8, 2007 6:44 AM
Sam
But Peter if A is working at some place sweeping floors and cleaning windows and B comes along and says that he'd do the same job for half the wages how is that anything to do with productivity? It's more like a business operator willing to deliver the same product for less. Hence the overall output of clean floors and windows wouldn't make a difference here. But using a business analogy we'd say that B is running at twice the efficiency if he could produce the same for half the price. Hence workers, as I previously said, in a free market would be simply selling their labour. Therefore where there is labour competition wages should go down just as business competition should lower prices. Hence ideally workers should be theoretically then be working the most amount hours for the least amount of pay just as a business should deliver the most amount of goods at the lowest possible price thereby the economy would/should be running at maximum efficiency.
Published: January 8, 2007 8:08 AM
Mark Brabson
Sam:
My reference to "paying any wage I damn well please" refers to the fact that as illegals I don't have to follow Federal or State labor laws. It doesn't follow that the illegals necessarily need work for such wages. They can chase higher offers as can anybody else. As the over supply of illegal labor decreases, wages will inevitably come up.
Published: January 8, 2007 10:31 AM
Björn Lundahl
In a pure free market there would not be any business cycles (100% gold reserve money standard) and therefore no involuntarily unemployment because of those. There would be no involuntary unemployment at all, as wages would be determined by the market. Real wages would have a tendency, year after year, to increase. This because of increased capital investments per employee and, consequently, to increased marginal productivity of the worker.
Björn Lundahl
Göteborg, Sweden
Published: January 8, 2007 5:00 PM
Sam
In a perfect world, it might be argued that people could also be equally capable such that they'd be a owner or part-owner of a business rather than an employee per se. But of course in the perfect world anything's possible. ;D
Published: January 8, 2007 7:19 PM
Björn Lundahl
In an “imperfect” world, for example, the employee will, of course, sometimes receive a higher income and sometimes less than the value of his marginal product.
No one is assuming a “perfect” world and in this “imperfect” world no one would, of course, know what that would mean.
Björn Lundahl
Göteborg, Sweden
Published: January 9, 2007 1:59 AM