Category: Economics

Migration and Open Borders with Nathan Smith

In this episode, Nathan Smith discusses the economics and history of migration and migration restrictions. Nathan is an Assistant Professor of Business Administration: Finance and Economics at Fresno Pacific University and regular blogger at Open Borders: The Case.

We start the episode by discussing the economic impacts of Nathan’s own migration to Fresno. Students gain, as he adds to the supply of economics professors, other economists might lose from his competition in labour markets, people looking for parking near the University might lose, as he slightly reduces the supply of available parking spaces, and property owners gain from his demand for housing. In general, anyone Nathan transacts with gains from the transaction, while those who he competes with may suffer some slight loss.

The big slogan among open borders advocates is that a significant reduction in migration restrictions could “double world GDP.” Nathan’s own most recent estimates show about a 91% increase world GDP, mainly because people would move from places where they can earn very little (e.g. places with dysfunctional institutions) to places where they can earn quite a bit more (e.g. places with well-functioning  institutions, complementary factors of production, highly developed networks of specialization and exchange, etc.). There are complementarities between human capital and unskilled labour. For instance, great managers are more productive when there are many workers to manage, and the workers are more productive where there are great managers. (more…)

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Price Theory and the Minimum Wage

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The minimum wage is a contentious issue among economists, and yet it enjoys near-universal support among the public. In my view, public views of the minimum wage are simply the result of a lack of careful thought by most people. Daniel Kahneman’s theory that people, when faced with a difficult question, substitute a simpler question that they can easily answer, applies particularly well in this case. People answer the question of whether they would like people to earn more when the real question is whether government should mandate higher wages (I first heard this argument from Bryan Caplan on EconLog).

A purely empirical argument for or against the minimum wage is methodologically wrong-headed because empirics do not speak for themselves. Sound theory must be the economist’s first tool in understanding the effect of a policy such as the minimum wage.

Before we can understand something like the minimum wage, we must understand the role of prices in allocating factors of production to their various uses. The price of a factor signals to entrepreneurs that that factor is scarce, that it is needed elsewhere in the economy, and that the entrepreneur who can reduce his usage of relatively more scarce factors in favour of relatively less scarce ones can earn profits, while entrepreneurs who fail to do so earn losses. I give the example of a sandwich shop during an oil boom; the high price of labour caused by the oil boom leads the sandwich shop to substitute away from labour in various ways.

The oil boom in my illustration is irrelevant to the story. The sandwich shop would adapt to an increased price of labour no matter what caused it. If the cause is a minimum wage law, the people no longer employed making sandwiches are involuntarily unemployed rather than finding employment in some other industry.

Minimum wage opponents sometimes get into trouble when they draw supply and demand curves to illustrate the impact of the price floor. The problem with this is that supply and demand diagrams come with built-in assumptions that do not hold true in the case of labour markets. Low-skilled labour is not a homogeneous quantity being sold in a centralized market. The simple supply-and-demand story does not capture all the effects of the minimum wage. For instance, firms substitute between different sorts of workers affected by the minimum wage. In addition, the other terms of employment contracts can change in response to a minimum wage law, such as training and benefits.

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The post Price Theory and the Minimum Wage appeared first on The Economics Detective.

Price Theory and the Minimum Wage

The minimum wage is a contentious issue among economists, and yet it enjoys near-universal support among the public. In my view, public views of the minimum wage are simply the result of a lack of careful thought by most people. Daniel Kahneman’s theory that people, when faced with a difficult question, substitute a simpler question that they can easily answer, applies particularly well in this case. People answer the question of whether they would like people to earn more when the real question is whether government should mandate higher wages (I first heard this argument from Bryan Caplan on EconLog).

A purely empirical argument for or against the minimum wage is methodologically wrong-headed because empirics do not speak for themselves. Sound theory must be the economist’s first tool in understanding the effect of a policy such as the minimum wage.

Before we can understand something like the minimum wage, we must understand the role of prices in allocating factors of production to their various uses. The price of a factor signals to entrepreneurs that that factor is scarce, that it is needed elsewhere in the economy, and that the entrepreneur who can reduce his usage of relatively more scarce factors in favour of relatively less scarce ones can earn profits, while entrepreneurs who fail to do so earn losses. I give the example of a sandwich shop during an oil boom; the high price of labour caused by the oil boom leads the sandwich shop to substitute away from labour in various ways. (more…)

Subscribe to Economics Detective Radio on iTunes, Android, or Stitcher.

The post Price Theory and the Minimum Wage appeared first on The Economics Detective.