Wednesday, June 2, 2010

Unitended Consequences #6

Often some economists (notably Dan Klein) will poll other economists about their perception of the empirical reliability of some of our standard microeconomic theories. One of those standard theories involves the imposition by the government of price floors. Following the standard logic, I don’t remember any economists that I knew that didn’t correctly anticipate the effects of the deregulation of the airlines. Prior CAB regulation had acted like a cartel-agency, keeping fares artificially high. These high prices resulted in as surplus of airline capacity, with the airlines attempting to cheat on the cartel by inducing travelers through non-price benefits: Grand pianos serenading the passengers in flight, wonderful free gourmet meals, and one airline even offering a “pub” in route across the country. After the price floors were removed, real airline fares dropped, by so did the artificial devices designed to ration the surplus: the grand pianos, pubs, and tasty food disappeared almost as fast as you can say “Would you like some peanuts between here and Chicago?”

For reasons I’ve never fully understood, a sizable minority of economists (at least publicly) claim that this economic model doesn’t work the same way in our other great national experiment in price floors: the minimum wage laws. Economists who apply the model consistently will predict that minimum wages either a ) are non-binding, and so are irrelevant; or b) are binding and lead to a reduction in jobs, increased unemployment, and the creation of “winners and losers” among the suppliers (job seekers) who must compete in a market with a surplus of labor. Our former colleague David Macpherson told our class on Compassion that his research indicated that the surplus rationing device was often associated skills, meaning that the winners from the minimum wage were disproportionately middle-class teenagers --- not at all the struggling low income single Mom that is usually portrayed as the beneficiary.

However, some economists disagree. They will argue that the minimum wage is binding, but that increases in it will have very small “quantity” effects, meaning little increase in unemployment, little of the skills rationing studied by Macpherson, but large across-the-board wage benefits for the working poor. A standard rejoinder to that position is, “Well, if there are no important quantity effects, why not raise the minimum wage to $200 an hour?” That question is usually treated as rhetorical if not sarcastic by economist supporters of the minimum wage, and it may be both, but it’s also to the point. If supporters of the minimum wage won’t countenance the idea of a $200 minimum wage, it’s pretty obvious that’s because that at some point the job-killing effect does kick in, and supporters of the minimum wage then have a burden of suggesting when ‘higher” is “too high.” $9.00 an hour? $12.00 an hour? $40.00 an hour?

[Recall from one of my previous posts on the Progressive Movement, one of the original justifications for the minimum wage among some Progressives was precisely that it would create unemployment—unemployment among groups of people that the Progressives thought should be unemployed.]

Now comes the June 1 Wall Street Journal with word that reminded us that with the 2007 minimum wage increases Congress (after some unfavorable publicity that I remember from the time) dropped the traditional exemption of American Samoa from the minimum wage. As a result, the minimum wage there went up proportionately more than here on the mainland: $3.25/hour then, $5.25/hour now, up to $7.25 by 2015. As the Journal reports “Job losses have followed the way that any economics 101 student would expect.” The StarKist workforce has gone from 3,000 to 1,200. Chicken of the Sea closed its operations, unemploying another 2,000. Unemployment in American Samoa is now around 30% of the workforce, up from 10% in 2003. So, my question is, maybe it is true that supporters of this law didn't intend to cause this unemployment, but can we really say that it was "unexpected"? And if it wasn't really unexpected, can we say that it was unintended (a nice question for some people I know in Philosophy Departments).

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