Corcoran on procedures and the minimum wage

Regular reader Kevin Corcoran sent me another email that deserves to be posted as a separate blog post. Here it is:

This morning I decided to re-read Ludwig von Mises’ book Theory and History: An Explanation of Social and Economic Evolution. (I know it’s considered bad manners to show off my crazy, party-hard lifestyle like this, but hey, it’s the weekend and I like to indulge.) I first read it about 20 years ago, and thought it might be worth repeating because I suspected it. It was worth watching I would be able to understand and relate to it better this time.

Mises begins by defending the idea of ​​methodological dualism—the idea that the study of social sciences such as economics requires a fundamentally different approach than that of the physical sciences. He points out that the physical sciences offer regularities and predictability not readily available in the social sciences. He wrote “stones always react in the same way to the same stimuli under the same conditions; We can learn something about these regular patterns of reaction, and we can use this knowledge to direct our actions toward specific goals… A stone is a thing that reacts in a certain way.” However, Mises argues, physical science And there is an important difference between the subjects studied by the humanities—the subjects of the social sciences. “Men react in different ways to the same stimulus, and the same man may at different times react differently from his previous or subsequent behavior. It is impossible to group men into classes whose members always react in the same way.”

Ms. does not think this means that the social sciences are incapable of making any kind of predictions—only that these predictions are only vaguely defined and partially known. In his words, “This does not mean that future human actions are completely unpredictable. They can, in a certain way, be expected to some extent.” But this partial understanding and vague predictability make the endeavors of applied social science fundamentally different from other applied sciences.

I think one lesson we can take from this as economists is to temper the specificity of our predictions for policy change. For example, when asked what to expect from a mandatory wage floor, many economists (I count myself guilty) have a knee-jerk reaction to simply say “increased unemployment.” [DRH note: I always say “reduce employment” because of how unemployment is measured. To be unemployed in the official statistics, you must be out of work and looking for work. The minimum wage law may discouraged those whom it puts out of work, to the point where they don’t bother looking.] But we also understand that this is only one of many ways employers can respond. Employers may cut jobs or otherwise refrain from creating new positions. But they often can and do respond in other ways. They can spend hours. They can reduce benefits. They can make less effort to provide a pleasant work environment. I thought back to 2014 when the minimum wage was being raised in the SeaTac area of ​​Washington, and described the experiences of some workers who “benefited” from that wage increase:

“Are you happy with a $15 wage?” I asked the full-time cleaning lady.
“It sounds good, but it’s not good,” said the woman.
“Why?” I asked.
“I lost my 401k, health insurance, paid vacation and vacation,” she responded. “No more free food,” he added.
The hotel fed him. Now, he has to bring his own food. Also, no overtime, he said. He worked extra hours and received overtime pay.
What else? I asked.
“I have to pay for parking,” she said.
I then asked the part-time waitress, who was part of the catering staff.
“Yeah, I got $15 an hour, but all my tips are a lot less now,” she said. Before the new wage law went into effect, her hourly wage was $7. But his tips added up to more than $15 an hour. Yes, he got free food and parking. Now, he has to bring his own food and pay for parking.

Such experience is overlooked when economists are too quick to predict unemployment. And when given as unemployment The A situation like the one described can be ignored, rather than describing the predicted cost of a binding wage floor as one of several ways employers can respond. Skeptics might look around, see that technically no jobs have been lost, and conclude that economists are wrong to warn about the costs and tradeoffs of such wage-setting. It would be more accurate, and more honest, for economists to say, “There are a lot of different ways that the labor market can adjust. Here are a few different ones. I don’t know which employers will respond in which way, and neither do the advocates of this policy. But these increased costs have to be borne by somebody. will, and although the legal incidence of cost overruns is on the employer, most of the economic cost will be borne by the employees, whatever those costs may be.” [DRH note: As I have often put it, employers adjust on many margins.] Granted, it doesn’t make for a flashy sound bite for talk radio, but it has the virtue of being true.

Here is David R. Contains a biography of von Mises in Henderson, ed. Concise Encyclopedia of Economics And the picture above is by von Messrs.

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