Has Card Been Misinterpreted?

January 5, 2007 8:22 AM by Roger Garrison

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.

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What Does Inflation Targeting Mean?

October 26, 2005 7:45 AM by Roger Garrison

Although Ben Bernanke has pledged to ensure a continuity between the Greenspan policies and his own, he differs in several important respects, including his endorsement of "inflation targeting." Greenspan has always been against it. But Bernanke's idea of "inflation targeting" is in need of some deconstruction. Bernanke is an advocate of inflation targeting. We should understand this to mean that Bernanke is a deflation-scared inflationist. FULL ARTICLE

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From the Manhattan Experiment to the discovery of Pluto!

August 26, 2005 11:54 AM by Roger Garrison

Compare these two paparagraphs---the first from todays WSJ and the second from my review of Bob Woodward's Maestro:

Mr. Greenspan has often reached outside economics to hone his insights, at times drawing on history, physics, Mozart and even Sherlock Holmes creator Arthur Conan Doyle for inspiration. In 1999, he tackled a key economic mystery with an analogy to the discovery of the planet Pluto. Scientists inferred Pluto's existence from the unexplained behavior of Uranus's and Neptune's orbits, he told colleagues that year. Similarly, he inferred from the fact that both the inflation rate and unemployment were falling that productivity growth must be much higher than economists had thought.

We learn [from Bob Woodward's Maestro]that Greenspan studied the theory of relativity and regarded his hypothesis that productivity had increased as analogous to Einstein's hypothesis that light would bend (p. 151), that his research staff considered their assignment to measure the change in productivity as "the economist's equivalent of the Manhattan Project" (p. 173)

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