What do mainstream economists think about the minimum wage?

A third think it's bad, while slightly less than a quarter think it's fine. Or so it seems according to David Colander. In the update of his 1987 analysis of "The Making of an Economist" (original one with Arjo Klamer; subscription required) David asked graduate students what did they think about several economic issues (a short version here; the book here). I have some doubts about David's new overall conclusion about the state of the profession, in particular his views on how the profession has changed (see for example my debate here), but there are several interesting points raised by the replies given by the graduate students of 6 mainstream programs. One is related to their views about the minimum wage.

The table (from the book) shows the views then (1987) and now (2005), by publication dates, on whether the minimum wage increases unemployment among young unskilled workers. The evidence seems to suggest overall there is not much of a change, with 34% back then and 33% now agreeing with the conventional neoclassical proposition. But a small change suggests that more economists believe that the minimum wage does NOT lead to unemployment now, from 18% to 23%. In Chicago the percentage of graduate students holding a conventional view fell from 70% to 56%. Only Harvard seems to go in the opposite direction. MIT shows the biggest increase among those that disagree with the conventional view (from 11% to 30%).

There are several problems with the conventional mainstream (marginalist) story about the effects of minimum wages. The capital debates actually are relevant here too. There is no reason to believe that firms will hire more workers when the price of labor falls, exactly for the same reasons that hold for capital. The principle of substitution does not necessarily work, and there is no relation between the intensity of the use of a factor of production (labor) and its remuneration (real wage). Put in simple terms, there is no reason to hire workers, even if their wages are lower, if there is no demand for your products.

But the reasons for the change in views, small as they are, are not related to the logical flaws of the mainstream model. I don't even think it is solely the increasing evidence since the publication of Card and Krueger's analysis (here; discussed here too), about the absence of a negative effect of minimum wage increases on employment, that has been the driving force in these changing views. My guess is that income inequality has played a role in the willingness of mainstream students to reject the conclusions of the theory they are taught. But in order to really know why, we would need another survey.

Milton Friedman on economic development and the 'Brazilian Miracle'

The Hoover Institution has made available (h/t Robert Leeson) online the Economics Cassette Series, which "was a 215-tape, subscription-based series produced by Instructional Dynamics Incorporated (IDI) between 1969 and 1978. The biweekly series was composed of interviews with Milton Friedman during which he commented on current economic events, and thus was a sort of companion to Friedman's Newsweek columns."

There are many interesting nuggets for those interested in the history of ideas, and in particular about the current economic problems of that period. In one of the talks he suggests that a precondition for economic growth is low inflation. Not much evidence to support that actually. The famous paper by Bruno and Easterly argued that inflation below 40% a year has no evident effect on economic growth. At any rate, you can check here his discussion of the Brazilian Miracle. For him the Military dictatorship instituted political stability (and he said that there was, at least for an external observer like, a great deal of freedom; he goes on a rant comparing Franco and the Brazilian dictatorship favorably against the Soviet Union), and tight monetary control (no discussion of the wage repression policy in explaining stabilization, but he does discuss 'monetary correction', indexation, which led to inflationary inertia, in very positive terms), and that's, to a great extent, what explains the Brazilian Miracle.

In all fairness, for him the Brazilian Miracle, and also the Japanese Miracle before that, was based on access to external technology, without the cost of developing the technology.There are other fascinating things he says, like how unemployment is caused by the high minimum wage, which was not a problem in Brazil since less people depended on the minimum wage (also evidence for that is flimsy at best; see famous study by Card and Krueger here). Note that soon Friedman's papers and almost everything he wrote will be searchable on the Hoover website.

Minimum Wage and Unemployment: The Brazilian Experience

The State of the Union address last week raised the possibility of increasing the minimum wage, and a debate on the effects of this ensued. Krugman, among others, has quite correctly pointed out that there is no evidence for positive effects of a higher minimum wage on the rate of unemployment. In other words, a higher minimum wage should not lead to a higher level of unemployment. The classic paper on the subject was written long ago by Card and Krueger.

Below I show the recent evidence (2003-2012) on the relation between minimum wage and unemployment rate in Brazil. As it can be seen, minimum wages almost doubled in real terms (left axis; black line), while unemployment (right axis; grey line), in this case for the Metropolitan area of São Paulo, dropped dramatically (source IPEA Data).

In the Brazilian case, in which median income has not grown too much, the increase in the minimum wage, together with the expansion of the Bolsa Familia, has been one of the reasons behind the improvement in income distribution during the Workers' Party administrations. This suggests that a higher minimum wage is also an instrument for better income distribution. So it seems that the evidence for an expansion of the minimum wage is quite strong, not just in the US.

PS: Note that this does not mean that a higher minimum wage solves all the problems, or that in the case of Brazil the doubling of its value has led to a marked improvement in income distribution. At this point, as shown below, the real minimum wage is at the same real level that it was during the late 1960s to early 1980s period.

Historically, the highest levels of the real minimum wage in Brazil were in the second Vargas and the Juscelino Kubitschek administrations, even though higher inflation implied that the real value was more volatile (also, growth was back then more or less double the average rate of growth of the last decade).