My posting will be relatively infrequent for the next couple of weeks. I just returned from DC, where I finally got a chance to meet John Cochrane. He’s taken a position at the Hoover Institute. Although we disagree on sticky wages, we have uncannily similar views on a wide range of other issues, such as immigration, health care reform and financial system reform. I also got a chance to meet quite a few of the Mercatus scholars, and came away very impressed with the organization.
[BTW, the acronym for the new monetary program is POMP (Program on Monetary Policy.) My enemies are thinking, “I always knew Sumner was a pompous ass.” Or perhaps “pomp” indicates that it will eventually be regarded as the queen of the monetary policy programs.]
Over at Econlog I have a post on Krugman’s recent minimum wage column. Caroline Baum (you’ve probably seen her columns at Bloomberg, and elsewhere) responded to the column with a letter to the NYT. They didn’t print it, so I thought it would be a good idea to post it here. The rest of the column is her letter. I request that commenters be more polite than usual. I don’t mind obnoxious comments, but let’s please treat her as a guest—if you disagree, do so respectfully:
To the Editor:
In his July 15 op-ed, “Liberals and Wages,” Paul Krugman states definitively: “There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” In support of his no-evidence conclusion, he cites a widely discredited 1994 study by economists David Card and Alan B. Krueger.
So flawed was the study – it relied on telephone surveys of fast food restaurants in neighboring counties in New Jersey and Pennsylvania after New Jersey raised its minimum wage – that Card and Krueger were forced to redo it. Using official employment data the second time around instead of a telephone survey, they re-published their findings in 2000, claiming similar results to the first study.
Economists who have reviewed the body of literature on the effect of an increase in the minimum wage have criticized both the methodology and the results of the second Card/Krueger study. David Neumark and William Wascher, both widely respected for their work in the field, cite the vastly different patterns of teenage employment in the two states that pre-dated the study, disqualifying Pennsylvania as a good “control” group. They also find that the depressing effect of a minimum wage hike on employment occurs with a lag, not within Card/Krueger’s short-term time frame. (Neumark and Wascher’s study can be found here: http://www.nber.org/papers/w12663.pdf.)
What’s more, unlike a randomized controlled trial for a new drug, Card and Krueger have no way of measuring what would have happened to fast-food employment in New Jersey absent a minimum wage increase.
It is disingenuous for Mr. Krugman to ignore the wide body of evidence demonstrating that an increase in the minimum wage deprives entry-level workers of an opportunity to enter the workforce. Instead he relies on the findings of an outlier study that contradicts basic economic theory. An increase in the price of any good or service, including labor, results in a decrease in demand for it.
No one will argue with Mr. Krugman’s point that paying workers a higher wage and providing good benefits increases employee loyalty. Businesses choose to do it all the time. Henry Ford didn’t double his workers wages to $5 a day in 1914 because he wanted them to buy Model T’s. He paid his workers more because he wanted to reduce turnover on the assembly line, which proved to be a hard, unappealing line of work.
When the government mandates a floor on wages, many low-margin businesses can’t absorb the higher costs and raise their prices. Even high-margin businesses pass the cost along to their customers.
The New York Times does a disservice to its readers when it allows a Nobel prize winning economist to dissemble to make a political point. Progressive economists may argue in favor of a minimum wage on compassionate grounds, but they all understand the economics of supply and demand. The non-partisan Congressional Budget Office reported last year that raising the federal minimum wage to $10.10 an hour from the current $7.25 would eliminate 500,000 jobs nationwide. (Currently 29 states have minimum wages higher than $7.25.)
And yes, a higher minimum wage is great for those who keep their jobs. But it’s an impediment to those starting out in the workforce.
Mr. Krugman is entitled to his own opinion; after all he writes opinion pieces. But he is not entitled to his own facts. As an opinion writer myself for three decades, my work is always fact-checked for accuracy. Perhaps the Times should make accuracy in support of opinions a priority.
West Tisbury, Mass.