Thus, you can’t simultaneously be for higher minimum wages and for wage subsidies. That is cognitive dissonance. Or, inconsistency. Or wishful thinking. And very common.
He is commenting on a post from Tyler Cowen. My thoughts:
1. Greg Mankiw likes to point out that a higher minimum wage is like a combination of a subsidy to labor supply and a tax on labor demand. A wage subsidy does away with the tax on labor demand, which is why Mankiw prefers it. An occupational licensing fee strikes me as a tax on labor supply.
If labor demand is inelastic, that means that large changes in labor costs are accompanied by small changes in workers employed. If labor demand is elastic, that means that small changes in labor costs prompt large changes in labor demand.
If labor demand is inelastic, then a higher minimum wage will raise labor income. Think of employers just absorbing the cost (although that is only one possible reason for inelastic labor demand). But if labor demand is inelastic, then a wage subsidy will not raise worker income. Think of employers as just pocketing the subsidy (again, assuming that this is the reason by which labor demand is inelastic).
If labor demand is elastic (the more likely case, in my view), then a wage subsidy will work to increase labor income, while a higher minimum wage will fail.
2. Cochrane’s point is that economists sometimes argue for one policy that works with high elasticity of labor demand and another policy that works with low elasticity of labor demand, without apologizing for the inconsistency. An example that I have used is arguing for a higher minimum wage (which works with low elasticity of labor demand) and for more immigration (which will depress wages if there is low elasticity of labor demand). Tyler uses that example as well.
3. Tyler’s point is that if you think that labor demand is inelastic, then occupational licensing requirements, acting as a tax on labor supply, will not affect employment very much. Again, I am inclined to think that labor demand is elastic, so I think that occupational licensing requirements do adversely affect employment.
I think that on the immigration issue and the occupational licensing issue, economists of all stripes prefer to implicitly make the elastic-demand assumption. On the minimum-wage issue, economists on the left prefer to implicitly make the inelastic-demand assumption. On the immigration issue, some conservative economists prefer to implicitly make the inelastic-demand assumption. I think that libertarian economists tend to implicitly make the elastic-demand assumption in all cases. So at least we are consistent.
I’m convinced, the elasticity of labor demand is the key variable. As an outsider from the applied sciences I’m also left scratching my head. If you are promoting a specific solution to a problem (any field, not just economics), it follows that you should: 1. make your key assumptions explicit, 2. make your expected outcomes explicit, and 3. modify your assumptions/expectations based on empirical data and/or feedback.
Why aren’t economists at the point where the only issue is the amount of error in the empirical data?
How is it that in three centuries or so of economic analysis we still don’t know whether labor demand is elastic or inelastic? It seems the obvious answer is that there is not one answer for the entire economy. Labor demand is elastic in some activities, inelastic in others. Thus any given policy will help some workers and hurt others, and the same with employers. Thus the outcome of any policy is to pick winners and losers, which in our system will always boil down to political considerations.
Thank You!
Another obvious factor is “over what time period?”
The demand for gasoline was highly inelastic with regard to price over very short periods of time in 1973 immediately after the “first oil shock.” when the price of petroleum suddenly quadrupled. That same price elasticity of demand gradually changed as people got more fuel efficient cars, moved closer to work, and made hundreds of small discretionary adjustments.
The Grump Economist’s discussion of the minimum wage is worth reading, here.
https://johnhcochrane.blogspot.com/2019/04/meer-on-minimum-wage.html
But the goal is not “one answer” or one policy, the goal is better outcomes. We categorize different types of labor and different industries, is it unreasonable to measure elasticity in each category the way we measure average wage, revenue, and profit?
The categories you refer to are not fixed and static. Anyone with enough training in economics should develop the habit of imagining all imaginable substitutions in both supply and demand.
Cochrane said it better:
“Two talents of great economists are to recognize that averages hide big differences among people, *and to imagine all the avenues of substitution* and unintended effects of a regulation.”
Workers move between industries even as old industries fade and new ones emerge. Computers substitute for checkout clerks. Consumers facing high energy bills insulate their houses and adjust their thermostats. Some of these are easy to anticipate, others are harder.
You wrote:
>> “We categorize different types of labor and different industries”
Yes, I agree, and the categories are useful. There is a lot of slippage in the long run.
But we have quotes/opinions from four very smart libertarian economists all agreeing that a core problem is that most/all labour policy prescriptions start with an implicit assumption about labor demand elasticity. The potential complexity/imprecision of this measure is irrelevant if no attempt is even made to validate the most basic coarse grained implicit approximations.
“We have no confidence in our ability to model elasticity” is a plausible claim; its just the first time I’ve heard this argument being made. “We dropped the ball on elasticity” seems more likely.
Australia has a higher labor force participation rate than the USA but also much higher minimum wage rates. One difference between the two, of course, is that Australia is a nation-state with meaningful national borders. Another is that the Australian immigration system is designed to support local economies and prioritizes skill shortages. Similarly, Australia maintains different minimum wage rate levels by age, skill level, occupation, and location. But all that of course requires a talented and competent government elite and economists capable of non-binary thought which are unfortunately non-existent in the USA.
Or is Australia is the close to the size of the continental United States has a population less than Texas and they about 7.5% of the US population. So Australia getting about 150 – 200K is similar to the US getting 1.5M – 2M immigrants every year from a poulation stand point. (And Australia getting more immigrants from India forgets more US immigrants are coming from Asia than Mexico and Central America.)
Cochrane notices logical inconsistency in political beliefs. The explanation is that people mainly want their team to win and the other team to lose, and the analytic arguments are just rationalizations. And before you start patting economists on the back for being calm and reasonable and non-tribal, the opposite is true. They are entirely tribal and intensely so, they are just better at rationalizing it.
Trump has governed like a traditional conservative, but culturally, and tribally, he’s a giant middle finger to the center-left cosmopolitan tribe. Mankiw + Cowen are probably very close to the Trump Administration on analytical policy terms, but they are enraged by the giant middle finger to their tribe, and they act accordingly.
Mankiw’s official announcement of leaving the Republican party was telling. He was a John McCain Republican and now he fully supports Biden (presumably Obama too?) and Buttigieg and Klobuchar and Yang. In other words, he switched from being a progressive, center-left Republican to a progressive, center-left Democrat. This makes sense; if I were a progressive, center left Republican, I would have switched parties in 2016, too.
Tariffs and trade wars are not traditionally conservative. You are being very selective in your comparison.
Reagan and both Bush Presidents enacted lots of tariffs and tariff sanctions as well.
Abraham Lincoln had the military physically destroy railroad tracks to stop trade.
You, clearly, are the one being selective in your comparisons.
Rhetorical perhaps, but here is part of Reagan’s 1988 State of the Union address:
Yep, that is just talk. Trump used to praise free trade and Adam Smith and free market economics quite a bit, I could dig up the quotes. Then he switched to calling himself “Tariff Man” and boasting of “trade wars”, but that’s largely a battle of political jabs…
Trump is still generally a very pro-free market sort of guy and has top staffers who support that. If you read Trumponomics, it’s clearly into free market economics.
Not actually what Mankiw said. He registered as an independent, and said one reason he did so was so he could vote for a more moderate democrat in the primary (which is as rational as a voter can be, since there most likely won’t be a Republican primary, let alone a competitive one; many Republicans are doing this as well, enough to drive up Gabbard’s polling noticeably in New Hampshire). Mankiw (and Cowen) certainly are seriously at odds with Trump policy-wise on trade, immigration, and government spending, so not as close as you’re suggesting.
Labor market is not open auction, yielding a consumable product like apples.
It is a two step process, workers do not lie on shelves, they find other jobs in the meantime. Each company keeps its own private collection of resumes.
Hopaulius has it right. If you leave a worker u hired the worker finds another skill, it is no longer the same worker. Hence the intense specialization keeps labor more inelastic then libertarian would indicate.
I see the opposite. Libertarians are what they are precisely because labor is inelastic and need freedom of trade.
Well, yes, consistency is desirable here and the analytic points are valid. That said, labor demand and supply in a given market either are or are not elastic — this is an empirical question and we ought to stay focused on answering that first.
Of course, different labor categories have different markets with different elasticities. But I would imagine there is a trend for more specialized (higher wage) labor to have lower elasticity, and less specialized (“low skill”, low wage) labor to be be more elastic. What I find very strange is the school of thought who argues for the monopsony model with low elasticity on the low end. This makes zero sense to me.
Let’s say I own a store front in a high end retail space. The labor cost of my cashiers in incredibly low relative to my overhead, such that an increase in labor cost would barely register as a blip. There really is no marginal labor cost idea in my business model. I need X workers to ring the register. Less and I won’t be able to operate. More and there won’t be any work for them to do and they might even get in the way.
However, the supply and demand of labor is such that I can pay a low wage and satisfy my needs. If I was forced to pay a slightly higher wage, it wouldn’t impact my bottom line much (its a small % of costs), it wouldn’t impact my competitiveness (others in the mall are likely subject to the same restrictions), and I would need the same number of workers to run the business at this higher wage rate so employment would be unchanged.
In fact I suspect that’s how a higher minimum wage would have worked in my old high school part time job. I think the primary impact of higher min wage would be that individuals and companies spent more time trying to sort through the low wage labor supply for better workers (fewer potheads, more that show up for shift on time) which would be easier to attract at a higher wage rate.