Garrett M. Petersen

Erdmann, Empiricism, and the Minimum Wage

Erdmann's MW and teen unemployment graph — Pre-trend lines are for period from 27 to 3 months before MW hike. MW Trend lines are for period from 3 month before to 27 months after initial MW hike. [Y axis = Teen Employment To Population Ratio]

Kevin Erdmann, over at Idiosyncratic Whisk, posted a graph similar to the one shown above,* demonstrating that the trend in the US teen employment rate after a minimum wage hike was lower in all but one case than the trend before the hike.

There have been many responses, but I would like to focus on one over at Angry Bear that captures the worst of the criticism.** The writer goes way over the top in criticizing Erdmann, saying that people who oppose the minimum wage “apparently believe that the business cycle never impacts teen employment or unemployment.” To read this article, you’d think think that the only opposition to the minimum wage came in blog-post form. Frankly, no empirical analysis coming from a blog (including Angry Bear) can offer anything but a prima facie case for or against some proposition. I don’t read Erdmann as claiming that his little graph is the final word on the minimum wage.

The Angry Bear post goes on to use some very questionable econometrics to show that the minimum wage doesn’t have a big impact on teen unemployment. The author doesn’t use the inflation-adjusted minimum wage in his graphs (and presumably in his regression) for reasons unknown, making them pretty irrelevant. He then naively regresses the teen unemployment rate against adult unemployment, a recession dummy, the teen population, and the minimum wage to find that (surprise!) the minimum wage doesn’t have a big effect on teen unemployment. For someone who criticizes others about omitted variables, this regression should be pretty embarrassing. That’s time-series data! You don’t just apply OLS regression to time-series data. OLS regression assumes uncorrelated error terms, and the fact that adult (and teen) unemployment last month is highly correlated with adult (and teen) unemployment this month destroys that assumption. (more…)

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Opaque Facts

Welcome to Night Vale

“Some mysteries aren’t questions to be answered, but just a kind of opaque fact—a thing which exists to be not known.” – Welcome to Night Vale: A Story About You

The above quote was in an episode of the excellent podcast Welcome to Night Vale. I love the term “opaque fact,” and it strikes me that economics is full of opaque facts, and that our distinctions between opaque facts and mysteries largely determine our views of markets.

People’s preferences are opaque facts. We can’t know other people’s preferences; the best we can do is observe their past actions to infer something about their past preferences.

Supply and demand curves are also opaque facts. We know that for some definite price of a good, sellers will attempt to sell and buyers will attempt to buy some quantity of the good in question. If we were all-knowing, we could draw curves representing every hypothetical amount of goods buyers and sellers would want to buy and sell if confronted with each possible price, and these would be the demand and supply curves. However, only one price and quantity are actually observed, and the curves themselves are not constant over time. Thus, we never see more than one data point of our supply and demand curves, so we can never derive their shape. Supply and demand curves are opaque facts, not mysteries we can solve with clever statistical analyses.

In my view, it is the people who have failed to recognize the opaqueness in all economic phenomena that have created the most harm. The Phillips curve is the most famous example: economists discovered a negative relationship between inflation and unemployment, assumed that this could be exploited, and encouraged governments to combat unemployment with inflation. They viewed the relationship between inflation and unemployment as a mystery, one that could be solved by sufficiently determined researchers and then added to human knowledge like Pythagoras’ theorem or the Earth’s gravitational constant. If they had exercised some humility, they might have realized that the relationship between inflation and employment is not a fixed, discoverable constant, but an opaque fact that can change with people’s beliefs.

The post Opaque Facts appeared first on The Economics Detective.

Opaque Facts

Welcome to Night Vale

“Some mysteries aren’t questions to be answered, but just a kind of opaque fact—a thing which exists to be not known.” – Welcome to Night Vale: A Story About You

People’s preferences are opaque facts. We can’t know other people’s preferences; the best we can do is observe their past actions to infer something about their past preferences. (more…)

The post Opaque Facts appeared first on The Economics Detective.