Nobel Prize for Economics: the problem of the minimum wage is not resolved

Nobel Prize for Economics: the problem of the minimum wage is not resolved
Nobel Prize for Economics: the problem of the minimum wage is not resolved

Nobelist David Card youtube UC Berkeley

Par Frank Shostak.
An article from the Mises Institute.

This year’s Nobel Prize in Economics went to David Card, University of California, Berkeley, Joshua Angrist, Massachusetts Institute of Technology, and Guido Imbens, Stanford University. According to the Nobel Committee, the laureates made an important contribution to determining cause and effect from observational data.

For example, how does the imposition of a minimum wage affect employment? To answer these types of questions, economists rely on observational data, but this poses a fundamental identification problem: the underlying cause of any correlation remains unclear.

If we observe that the minimum wage and unemployment are correlated, is it because a minimum wage causes unemployment? Or because unemployment and low wage growth at the bottom of the wage distribution lead to the introduction of a minimum wage? Or because of a myriad of other factors that affect both unemployment and the decision to introduce a minimum wage? One of the main concerns of the structural equation approach is that in order to establish a causal relationship, the proposed structure must be correctly specified. .

According to most commentators, increasing the minimum wage will hurt the labor market by increasing unemployment. In a study in the 1990s, economists David Card and Alan Krueger looked at a minimum wage hike in New Jersey by comparing fast food restaurants in that state and an area bordering Pennsylvania. They found no impact on employment.

By modifying randomized controlled trials (RCTs), our Nobel laureates in particular Ingrist and Imbens, allegedly solved the problem of determining causation from the data. For the purposes of this article, we will not discuss the details used by award winners to establish cause and effect from the data.

Can historical data tell us how the economy is working?

Note that the so-called data that analysts use is a display of historical information.

According to Ludwig von Mises in Human action (pp. 41-49) :

History can teach us no general rule, no principle, no law. There is no way to extract a posteriori from historical experience theories or theorems concerning human conduct and policies.

Also, in The Ultimate Foundation of Economic Science (p. 74) Mises argued that:

What we can observe is never more than complex phenomena. What economic history, observation or experience can tell us are facts like these: during a definite period of the past, miner John in the coal mines of Company X in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from assembling such and similar data to any theory regarding the factors determining the height of wage rates.

In natural sciences, if a scientist can isolate various facts, he does not know the laws which govern them.

All it can do is make assumptions about the “real law” that governs the behavior of the various particles identified. However, he can never be certain of the “true” laws of nature.

On this point, Murray N. Rothbard wrote:

Laws can only be hypothetical. Their validity can only be determined by logically deducing the consequences, which can be verified by appealing to laboratory facts. However, even if the laws explain the facts and their deductions are consistent with them, the laws of physics can never be absolutely established. Because another law may be more elegant or able to explain a wider range of facts. In physics, the postulated explanations must therefore be mortgaged in such a way that they or their consequences can be tested empirically. Even in this case, the laws are valid only provisionally, and not in an absolute way. .

However, in economics we do not need to make any assumptions because we can determine the essence and significance of the behavior of individuals.

For example, it can be observed that they are engaged in a variety of activities. They can do manual labor, drive a car, walk the street, or eat in a restaurant. The essence of these activities is that they all have a purpose.

In addition, we can establish the meaning of these activities. Thus, manual labor can be a way for some people to earn money, which in turn enables them to achieve various goals such as buying food or clothing.

Dining out at a restaurant can be a great way to build business relationships. Driving a car can be a way to reach a particular destination. Individuals operate within a framework of means and ends, they use various means to achieve their goals. We can also establish from the above that people’s actions are conscious and intentional.

The knowledge that human action is conscious and intentional is certain and not provisional. Anyone who tries to object to this is in fact contradicting himself, for he is engaged in the deliberate and conscious act of arguing that human actions are not conscious and intentional. The various conclusions drawn from this knowledge of conscious and intentional action are also valid.

The theory that human action is conscious and intentional is self-sufficient, regardless of what the so-called data shows.

It goes without saying that the established theory does not require any statistical verification. Unlike the natural sciences, in economics we do not make assumptions. We know the essence of things, that is, human action is conscious and intentional. In economics, it is therefore not necessary to formulate a hypothesis and then test it.

Since economics is about conscious and intentional human actions, we can establish that causation emanates from human beings and not from outside factors. For example, individuals do not react mechanically to changes in their personal income. Each individual does it according to their goals.

Minimum wage and unemployment

Since everyone’s ultimate goal is the maintenance of their life and well-being, a businessman is unlikely to pay a worker more than the value of the product that the worker generates. If a worker generates $ 10 worth of business per hour, the entrepreneur will not pay more.

If the minimum wage is set at $ 15 per hour when the worker can only generate a value of $ 10 per hour, then it is illegal for the company to pay the worker less than this minimum wage. In such a scenario, the company would be forced to fire the worker, because employing him at $ 15 an hour would jeopardize the profitability of the company.

A study that uses advanced quantitative methods and concludes that raising the minimum wage is harmless to the labor market is questionable. Such a study implies that individuals do not seek to improve their lives and well-being.

Note that there is no need for quantitative studies to establish that increasing the minimum wage will lead to higher unemployment. All it takes is a logical discussion that most human beings could follow.

Conclusions on Nobel Prizes

Contrary to popular thought, we do not evaluate a theory by its correspondence with the data as such, but on the contrary, we evaluate the data by means of a theory.

The purpose of a theory is to provide the essence of the subject of investigation. It is like a road map that provides information about a particular location while ignoring various non-essential factors. Thus, it tells the reader how to reach point B from point A. However, the map does not provide various details, such as surrounding trees and houses.

There is no need for statistical verification to establish the effect of the increase in the minimum wage on unemployment. A simple logical analysis shows that an increase in the minimum wage will undermine the labor market.

Since economics studies conscious and voluntary human actions, we can establish that causation emanates from human beings and not from outside factors.

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