Must-Read: Jared Bernstein: Models of the Minimum Wage

Must-Read: The economics of the regulation of natural monopolies tells us that such entities reduce utility by artificially restricting what they produce in order to improve their terms-of-trade and profits–and that one tool to deal with this is rate regulation. The Card-Krueger and other evidence on low-wage employment suggests the same rationale for the minimum wage:

Jared Bernstein: Models of the Minimum Wage: “We can introduce some ideas… that comport a bit more with reality…

…In the low-wage labor market… workers/employers are not that responsive in terms of employment to changes in wages (dlog(emp)/dlog(wage)=small number like -0.1 to -0.3, or something…). When you draw inelastic supply and demand curves, you end up predicting a lot less unemployment…. If this model is more accurate, significant estimates of job loss effects are hard to pull out of the data. Which they are…. [The world is] trying to tell us something about low-wage workers and their employers’ tempered responsiveness to increases in the wage floor…. There’s [also] a model… [of a] a monopsony labor market…. The monopsony model may sound arcane—the classic example is the one-company coal town–but it may not be too much of a reach to conclude that the low-wage labor market in a given town or city works kind of like this…. The competitive model as conventionally drawn is misleading. Economic models vastly simplify… can yield some insights…. But at the end of the day… when the theory doesn’t match the evidence, trust the evidence.

November 19, 2015


Brad DeLong
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