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David Card and the minimum wage myth

Summary:
From Lars Syll Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory’s competitive model — have increased relative to Pennsylvania. However, when ‘Nobel prize’ winning economist David Card and his colleague Alan Krueger gathered information on fast food restaurants in the two states to check what employment effects the minimum wage really have — using a basic difference-in-differences approach — it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream theory we had an anomalous case of a backward-sloping supply curve. Lo and behold! But of course — when facts

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from Lars Syll

David Card and the minimum wage mythBack in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory’s competitive model — have increased relative to Pennsylvania. However, when ‘Nobel prize’ winning economist David Card and his colleague Alan Krueger gathered information on fast food restaurants in the two states to check what employment effects the minimum wage really have — using a basic difference-in-differences approach — it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

David Card and the minimum wage mythThe inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition 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.

James M. Buchanan in Wall Street Journal (April 25, 1996)

Lars Pålsson Syll
Professor at Malmö University. Primary research interest - the philosophy, history and methodology of economics.

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