Critical Debate in Economics
Critical debate within the field of economics has remained decisively split along an entrenched attachment to mathematical models and a constant demand for realistically applicable theories. As Leontief has so eloquently put it: “year after year iconic theorists continue to produce scores of mathematical models and to explore in great detail their formal properties; and the econometricians fit algebraic functions of all possible shapes to essentially the same set of data without being able to advance, in any perceptible way, a systematic understanding of the structure and operations of a real economic system”. As Tony Lawson points out following critical engagement with both sides of the methodological debate, a “significant reorienting” of modern economics is warranted in order to move away from methods of formalistic, closed system modeling for all occasions. While such conclusions contribute positively to the debate, one cannot help but point out the origins of this very problem he, among many others, is attempting to solve as a result of the unreliable and often too-complex results of ontological methodologies.
Image By Niklas Elmehed - From Left to Right: David Card, Joshua D. Angrist, Guido W. Imbens
Nobel Prize for Methodological Reform
However, this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, has been awarded for work which tackles this very issue, suggesting the possibility for a considerable reorienting, or at least new approach in the field of economics. From 1969 to the present, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded 53 times to 89 laureates. This year’s Laureates: David Card, Joshua Angrist and Guido Imbens have applied natural experiments (situations arising in real life that resemble randomized experiments due to natural random variations, institutional rules or policy changes) in order to analyze the labour market effect of minimum wages, immigration and education. In addition to discovering new results, they overcame the methodological concerns arising from the use of natural experiments through the creation of a framework, which has shown how cause and effect can be drawn from natural experiments.
Labour Market Analysis
It is, however, Card’s research employing natural experiments in the study of both the labour market and immigration which have provided the greatest insight, as well as the most significant divergence from preconceived notions within economics. In the early 1990s the general understanding was that minimum wages lead to lower employment due to the increased wage costs for businesses. This has only been reinforced by studies such as “The Unemployment Effects of Minimum Wages” by Fields which have shown that minimum wage causes unemployment, and that the higher the minimum wage, the more unemployment there will be. Similarly, Hamermesh’s study “Do labor costs affect companies’ demand for labour” has shown that increasing the minimum wage that employers must pay reduces the total amount of hours worked, and has the biggest negative effects on unskilled and minority workers (Hamermash, 2018). As such, it is clear that increasing minimum wage, despite the possibility of improved standard of living for workers and protecting them from exploitation also threatens to further existing inequalities. Such studies hold concerning implications, and are often cited during debates regarding raising minimum wages in countries around the world.
Image by Johan Jarnestad - Illustration of Card’s research
Card’s research, which investigated the effect of minimum wages on employment using a natural experiment in New Jersey, has shown that numerous other factors can influence how employment levels change over time, and that there is no proof of explicit, constant negative correlation between minimum wages and employment. His natural experiment used eastern Pennsylvania as the control group for New Jersey, where the minimum wage increased 19%. The focus on employment in fast-food restaurants, an industry where pay is low and minimum wages matter, showed that, contrary to previous research, there was no effect on the number of employees. Ultimately, the conclusion remains that the negative effects of increasing the minimum wage are significantly small. Expanding on this research, new studies have attempted to explain the absence of negative effects on employment through considering actions taken by companies in response to this increase. One possible explanation was the transfer of such costs by increasing prices, while another suggested that companies that dominate their local labour market can keep wages low, and thus an increased minimum wage would only act to incentivize workers, leading to employment. Thus, the conclusion remains: Rising unemployment can no longer be an excuse for an unlivable minimum wage.
Minimum Wage in America
The continual debate regarding rising minimum wages has played centerstage in the American political arena for months now. Established in 1938 under the Fair Labor Standards Act, minimum wage was introduced following immediate cuts; drafted at 40 cents an hour, it was pared down to a mere 25 cents by the time it became official legislation. Over the years, the minimum wage has increased 22 times, eventually landing at the $7.25 it currently is. Unfortunately, while this appears to be a considerable increase (2,800% to be exact) it does not provide a livable income in reality. The 2018 analysis by Pew Research points out that the $4.03 per hour minimum wage in January 1973 has the same purchasing power of $23.68 in 2018, reinforcing the clear fact that minimum wage must be increased. In fact, according to an analysis done by the Economic Policy Institute, June 16th, 2019 marked the longest period in the history of the US without an increase in the federal minimum wage and calls for an immediate increase in minimum wage in an effort to counteract the negative social effects of a barely livable wage. Such analyses reinforce the conclusion that steps must be taken in order to improve the lives of millions. CBO reports that a federal minimum wage of $15 per hour would enable nearly one-million people to escape poverty, and positively impact another 27 million.
Considering the research conducted by David Card, however, the hope does exist that the debate on minimum wage can finally take a positive turn. As previous studies claiming a constant negative correlation between minimum wages and employment will finally be pushed to the side, the question remains whether President Biden’s administration is able to take the necessary steps to increase the minimum wage or whether the possibility for change will be lost amid bureaucratic debate.
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Nora Nikoletta Nez, Journalist at Décryptage Citoyen International
November, 30th 2021
“Natural experiments help answer important questions” - more on Card’s, Angrist’s and Imbens’ research
The Budgetary Effects of the Raise the Wage Act of 2021: https://www.cbo.gov/system/files/2021-02/56975-Minimum-Wage.pdf
More on the methodological debate: https://ebookcentral.proquest.com/lib/warw/detail.action?docID=1020337
Cooper, D., 2019. Congress has never let the federal minimum wage erode for this long. Economic Policy Institute. https://www.epi.org/publication/congress-has-never-let-the-federal-minimum-wage-erode-for-this-long/ [2 November 2021].
Desilver, D., 2019. For most Americans, real wages have barely budged for decades. Pew Research Center. https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely -budged-for-decades/ [2 November 2021].
Lawson, T 2003, Reorienting Economics, Taylor & Francis Group, London. Available from: ProQuest Ebook Central. [2 November 2021].
Neumark, D. 2018, Employment effects of minimum wages. IZA World of Labor, Vol 6. doi: 10.15185/izawol.6.v2. [25 October 2021]
Smith, K., 2021. What You Need To Know About The Minimum Wage Debate. Forbes Advisor. https://www.forbes.com/advisor/personal-finance/minimum-wage-debate/ [2 November 2021].
The Nobel Prize. 2021. Natural experiments help answer important questions. https://www.nobelprize.org/prizes/economic-sciences/2021/popular-information/ [20 October 2021].
The Nobel Prize. 2021. Press release: The Prize in Economic Sciences 2021. https://www.nobelprize.org/prizes/economic-sciences/2021/popular-information/ [20 October 2021].