The Passing of Paul Samuelson

Paul Samuelson, Nobel laureate in Economics, passed away earlier this week leaving an enduring legacy on the field. David Henderson, writing for the Wall Street Journal in, "Why Everyone Read Samuelson" describes that legacy in brief. In part he writes,

Three years after World War II drew to a close, a young professor at MIT published "Foundations of Economic Analysis." Its mathematical approach to economics would revolutionize the profession. And its author, Paul Samuelson, would go on to earn many awards and honors, culminating in 1970, when he won the Nobel Prize in economics—the second year it was awarded. Samuelson died on Sunday at the age of 94.

His influence has been profound, but the mathematization of economics has been a mixed blessing. The downside is that the math hurdle in leading U.S. economics programs is now so high that people who grasp the power of economic concepts to explain human behavior are losing out in the competition to mathematicians.

The upside is that Samuelson sometimes used math to resolve issues that had not been resolved at a theoretical level for decades. As fellow Nobel laureate Robert Lucas of the University of Chicago said in a 1982 interview, "He'll take these incomprehensible verbal debates that go on and on and just end them; formulate the issue in such a way that the question is answerable, and then get the answer."

Samuelson had a standard view of the impact of the minimum wage which he described in his textbook.

One of the best and punchiest statements in the 1970 edition was his comment about a proposal to raise the minimum wage from its existing level of $1.45 an hour to $2.00 an hour: "What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?"

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Carden and the Minimum Wage

(HT Cafe Hayek) Art Carden (Forbes.com, "Repeal the Minimum Wage,") presents the plurality opinion of economists when he calls for a repeal of the minimum wage; in a survey, 46.8% of economists favored repealing the minimum age, 1.3% favored lowering it, and 14.3% favored letting it die on the vine but not changing it (see my post).  Students seem surprised to learn that most economists don't like the minimum wage, but a little economic analysis demonstrates its shortcomings.  I have inserted references to the graph, "The Minimum Wage and Unemployment" into Carden's article. 

In July, the federal minimum wage rose from $6.55 per hour to $7.25 per hour(I assume that $6.55 was the equilibrium wage)...

This is a standard application of basic economic principles. Demand curves slope downward (Demand), which means that people wish to buy more of something as it gets cheaper and less of something as it gets more expensive. Supply curves slope upward (supply), meaning people are willing to do more of something as the rewards increase and less of something as the rewards decrease. In competitive markets, minimum wages create unemployment: While they draw more people into the labor market ( point A), they reduce the amount of labor companies wish to hire (point B).

In the complex American labor market, these effects may be difficult to identify, but a comprehensive survey research on minimum wages by David Neumark and William Wascher finds that minimum wages do, in fact, reduce employment. As Neumark argues in a Wall Street Journal article, the best estimates suggest that this past summer's minimum wage increase will likely destroy approximately 300,000 jobs that would otherwise be filled by teenagers and young adults (the distance between points A and B). For example, summer camps cut back on hiring in response to the weakening economy but also in response to the coming increase in the price of labor.

The price mechanism is an impersonal method of hiring.  Once the supply of labor exceeds the demand, some other mechanism must be employed.  To often this it involves prejudice. 

Under-employment among young black males and low earnings among older black males are perennial problems explained in part by the minimum wage. Minimum wages and other regulations on the labor market lock a lot of younger black males out of the labor market, which means they do not acquire as many skills as they would if they were employed. When they are older, therefore, they earn less. In the 1960s, Milton Friedman said that the minimum wage is a crime against black Americans.

There is some evidence that this is the case in the most recent Employment Situation Summary released by the Bureau of Labor Statistics. The change in the unemployment rate for all workers between July and August was 0.3 percentage points (from 9.4% to 9.7%) while the change in the unemployment rate for "Black or African American" workers was double that--0.6 points (from 14.5% to 15.1%).

For workers classified as "Hispanic or Latino Ethnicity," there was a 0.7 percentage point increase in the unemployment rate (from 12.3% to 13%). Between August and September, the Hispanic/Latino unemployment rate recovered slightly, while the unemployment rate for black workers increased again, from 15.1% to 15.4%. Workers in these categories might be disproportionately affected by the economic downturn, but they are also disproportionately affected by the minimum wage increase.

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Glaeser on the Minimum Wage

In a previous post, I cited surveys of economists on the minimum wage.  The majority don't like it.  Edward Glaeser ("Coercive Regulation and the Balance of Freedom," Cato Unbound, May 11, 2007) the Fred and Eleanor Glimp Professor of Economics at Harvard University, responds to Daniel Klein, a professor of economics at George Mason University, ("Economics and the Distinction between Voluntary and Coercive Action, Cato Unbound, May 7, 2007).  Klein takes a doctrinaire approach; he doesn't like minimum wage laws because the are coercive.  Glaeser takes a more practical approach; they don't work well and that there are better alternatives for helping the working poor.

Daniel Klein has written an elegant essay arguing that minimum wage laws are coercive. He is obviously right. These laws threaten employers with state-sponsored violence if they have a contractual relationship with wages that are too low. To me, the most striking fact in the essay was that more than fifty percent of a survey of economists said that these laws are not coercive in any significant sense. That’s just silly...

The case against the minimum wage or other related restrictions on contracting does not, in my view, come from clear anti-coercion axioms or even maxims, but from other more technical reasons that have been emphasized for decades. If we want the state to redistribute income, we have sensible means for doing that like Friedman’s negative income tax or the Earned Income Tax Credit. These tax-based approaches are also coercive, but they can increase the choice set of the poor with less of a reduction in the freedom of others. Obviously, these tax-based solutions don’t restrict the set of available contracts and that is a great plus. The fact that American minimum wages are too low to create large-scale unemployment shouldn’t blind us to the fact that, across the Atlantic, far more aggressive minimum wages are accompanied by vast numbers of unemployed youths. The minimum wage is also bad redistribution policy because it imposes the costs of redistribution on the employers of the poor, and on their customers who will have to pay higher prices to make up for higher wages. If we want to redistribute income to the poor, then it is appropriate that everyone with resources pay, not just employers in sectors that employ the less fortunate.

A final reason to reject further increases in the minimum wage is that it gets the government into the business of setting prices, and this requires competence that seems far beyond the limits to government. The case for laissez-faire comes ultimately not from unbounded faith in the power of the market, but rather in a realistic appraisal of the limitations of government. Price-setting is a difficult task that is prone to enormous abuse. The historical track record of price and rent controls is pretty terrible. It seems like this track record should make us further recoil from further governmental incursions into setting prices.

By reminding us about the coercive nature of the minimum wage and other similar regulations, Daniel Klein also reminds us that the centuries of sagacious concerns about the abuse of government power also apply in this case. Perhaps we should use redistributive taxes that reduce the freedom of the wealthy to increase the freedom of the poor, but it is hard to think that the minimum wage is a good tool for redistribution.

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Minimum Wage

We recently covered the minimum wage in class, and I am providing more detail about the minimum wage and its impact by for students who are interested. In your text, Dr. Mankiw quoted a survey of economists conducted by Alson, Kearl and Vaughn and published in the American Economic Review in 1992 that noted that 79% of economists agree with the statement, "A minimum wage increases unemployment among young and unskilled workers."

Increases in unemployment are not the only problem. A mechanism other than the wage rate determines which low skilled workers will be employed and which will not, leading to discrimination as Dr. Sowell points out in a non-technical article.

David Neumark, perhaps the leading researcher on the minimum wage, speaks at the American Enterprise Institute on the impact of the minimum wage using his most recent research. Dr. Mankiw blogs on Neumark's findings at his blog. Dr. Neumark's research supports traditional findings, and concludes that an earned income tax credit would be a more efficient method of increasing income of poor, low-skilled workers.

Despite the drawbacks, a great many economists support regular increases in the minimum wage. A few years back, over 500 economists, including five Nobel Prize winners in Economics signed an petitoin adding their support for legislation to increase the minimum wage.

Klein and Dompe, in their Econ Journal Watch paper survey economists who signed the petition. They also do a great job of reviewing other surveys of economists on their beliefs about the minimum wage. Although I am doing disservice to the depth of the paper, the economists who signed the petition generally believe that the benefits of raising the minimum wage outweigh the costs. The benefits largely come in dealing with market imperfections that tend to benefit employers relative to employees.

In the Becker-Posner Blog, Dr. Becker expresses regret that so many economists including very good economists, signed the petition. He writes, "A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign."

In 2005, Robert Whamples surveys members of the American Economics Association, and finds that 46.8% would favor eliminating the minimum wage, 1.3% would decrease it, 14.3% would leave it at the same level, 38% would increase it by $.50 to more than $1 per hour.

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