AMERICAN INSTITUTE FOR ECONOMIC RESEARCH - Phillip W. Magness - OCT 12, 2021 -
We may conclusively establish that the monopsony scenario of the minimum wage was directly anticipated and discussed by economists for decades before Card and Krueger’s paper.
The selection of economist David Card as co-recipient of the 2021 Nobel memorial prize for Economics has, curiously, revived an old story about a war of words from another laureate. According to this account, James M. Buchanan – the winner of the 1986 prize – allegedly denounced Card for finding empirical results that contradicted basic economic theory about the minimum wage.
We’ll get to that story in a moment, but first let’s look at the background.
David Card’s many scholarly distinctions include a 1994 study of minimum wage policies in the fast food industry. In that study Card and his co-author Alan Krueger used the different minimum wage rates in the neighboring states of New Jersey and Pennsylvania to run what was essentially a natural experiment. They surveyed fast food establishments near the borders of the two states to see if the higher minimum wage rate in New Jersey caused an increase in unemployment among fast food workers (conventional economic theory about price floors says that it should, all else equal). Contrary to this expectation, Card and Krueger “found no indication that the rise in the minimum wage reduced employment” in the New Jersey fast food industry. And so began a legend of a feud.
Card and Krueger’s paper was intentionally narrow and nuanced in its claims. They only studied a single industry, and did so with a telephone survey that collected self-reported data from the restaurants they called. They concluded by noting that their findings were “difficult to explain with the standard competitive model” of the minimum wage “or with models in which employers face supply constraints (e.g., monopsony or equilibrium search models)” – findings that lend themselves to a call for further investigation. Despite Card and Krueger’s heavy use of qualifiers to limit overly broad generalizations of their findings, academics and politicians who already had an ideological disposition toward the minimum wage did exactly that. A myth was soon born that Card and Krueger had “disproven” conventional textbook economic theory where the minimum wage was concerned, showing instead that minimum wages work as their supporters claim.
Fast forward to 1996. President Bill Clinton had just announced a legislative push for a nationwide minimum wage hike as part of his domestic agenda going into an election year. As Congress debated the proposal, the Wall Street Journal surveyed a group of economists about the profession’s consensus on the wisdom or unwisdom of minimum wage laws.
One of the respondents was James M. Buchanan. Buchanan answered with a colorful quip:
The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.
And so the story was born. Had Buchanan actually called Card and Krueger “a bevy of camp-following whores” on account of his disagreement with their natural experiment’s findings?
The claim has popped up from time to time before, but the announcement of Card’s prize breathed new life into it. Bloomberg’s Noah Smith used the opportunity to declare that “James Buchanan — who himself won the Econ Nobel in 1986 — simply laughed at the result,” allegedly insulting Card and Krueger in the process. “Of course, Buchanan is completely wrong,” he continued, invoking the monopsony model of the minimum wage – which holds that under certain highly specific conditions of labor market concentration, a minimum wage can indeed lead to an increase in employment.
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