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David Card and the minimum wage myth

Lars Syll

Back in 1992, the U.S. state of New Jersey raised the minimum wage by 18% while Pennsylvania, its neighbour state, left its minimum wage unchanged. The level of unemployment in New Jersey should – according to the main- stream economic theory’s competitive model – have increased relative to Pennsylvania.

However, when ‘Nobel prize’ winning economist David Card [professor of economics at the University California, Berkeley – Ed] 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 difference-in-differences approach) it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. So, counter to the mainstream theory, we had an anomalous case of a back- ward-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.

Prof David Card (credit: source article)
[Lars Syll then provides a quote from a well-known neoclassical economist and “zealous advocate of the market order”, whose remarks below characterize the current parlous state of main- stream economics, and whose views fly in the face of the empirical findings of economist David Card and others – Ed]

According to James Buchanan (Wall Street Journal, 25 April 1996):

“ The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behaviour 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 could increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even a 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. “

Source: Real World Econ Rev, 19 Oct 21 david-card-and-the-minimum-wage-myth/

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