Views on the minimum wage show economics to be an inexact science

.The hallmark of a science is not just having refutable hypotheses, but also changing its view when data shows the theory is wrong. Economics is often accused of not being a science. A good test case to see if that is true is the minimum wage. Basic economic theory suggests if you fix wages at above their level in the market, employment will fall as less workers are employed. However a number of empirical studies, the most well known of which was written by Card and Krueger in 1994, have suggested that employment shows no noticeable decline when a minimum wage is imposed or modestly increased. My reading is that the most convincing studies do show this result, but not all do, so the picture is not completely clear.

This illustrates a problem for economics (and all social sciences) that outsides often fail to appreciate. Measurements and econometric studies are often not conclusive, and even in the case of austerity you can find one or two empirical studies which says something different to all the rest. As a result, it is more difficult to use data to show a hypothesis is conclusively wrong in the way the natural sciences can. My own view is that the balance of studies clearly shows a modest minimum wage has no noticeable impact on employment, but others would disagree.

Here is a question from the IGM survey.of around 50 top US economists on the minimum wage

Academic economists appear evenly divided, and few hold a strong opinion on the issue. A similar survey of UK economists, asked about the 2016 increase in the minimum wage, was also divided but lent more towards no effect. In contrast, most German economists appear to have been opposed to the recent introduction of a minimum wage.

If you were cynical you might say that all this shows is that the views of economists just reflect their political opinions, and I would indeed expect there would be a clear correlation to support that with the minimum wage. However when either theory or evidence are pretty clear, economists do not divide by political opinion. The same survey in 2012 and 2014 showed economists largely agreeing that the Obama stimulus reduced unemployment and was beneficial, even though the political right was strongly opposed to it. The reason is that economic theory and nearly all evidence shows that fiscal expansion when interest rates are stuck at their lower bound is expansionary.

Equally standard microeconomic theory is just as clear that the minimum wage will reduce employment, and I suspect that had this survey been done in the early 1990s most academics would have agreed with this, whatever their political persuasion. What has changed is the evidence. This example clearly shows a good number of academics responding to empirical results that conflict with standard theory.

Furthermore some economists have done what good scientists should do and produced new theories which can explain the empirical results that the minimum wage does not reduce employment. In that sense economists have been behaving as a science should. But because there are some contrary studies, that allows two things that distinguish economics from physical sciences. The first thing is a temptation to hold on to basic theory even though the balance of evidence is against it, something that is not totally absent in the physical science either (Kuhn, Lakatos etc). The second is to allow ideological influences to help decide what should be a scientific judgement. These are the senses in which economics is an inexact science.

For those interested in economic methodology, and excellent place to start is here, the title of which I am abusing in this post. However it is also worth reading this for sources on the new 'empirical turn' in economics. On the impact of ideology on economics a great place to start is this thread from Beatrice Cherrier. On the introduction and history of the minimum wage in the UK, including initial political resistance to it, see here.

Being honest about ideological influence in economics

Noah Smith has an article that talks about Paul Romer’s recent critique of macroeconomics. In my view he gets it broadly right, but with one important exception that I want to pursue here. He says the fundamental problem with macroeconomics is lack of data, which is why disputes seem to take so long to resolve. That is not in my view the whole story.

If we look at the rise of Real Business Cycle (RBC) research a few decades ago, that was only made possible because economists chose to ignore evidence about the nature of unemployment in recessions. There is overwhelming evidence that in a recession employment declines because workers are fired rather than choosing not to work, and that the resulting increase in unemployment is involuntary (those fired would have rather retained their job at their previous wage). Both facts are incompatible with the RBC model.

In the RBC model there is no problem with recessions, and no role for policy to attempt to prevent them or bring them to an end. The business cycle fluctuations in employment they generate are entirely voluntary. RBC researchers wanted to build models of business cycles that had nothing to do with sticky prices. Yet here again the evidence was quite clear: for example data on real and nominal exchange rates shows that aggregate prices are slow to adjust. It is true that it took the development of New Keynesian theory to establish robust reasons why prices might be sticky enough to generate business cycles, but normally you do not ignore evidence (that prices are sticky) until you have a good explanation for that evidence.

Why would researchers try to build models of business cycles where these cycles required no policy intervention, and ignore key evidence in doing so? The obvious explanation is ideological. I cannot prove it was ideological, but it is difficult to understand why - in an area which as Noah says suffers from a lack of data - you would choose to develop theories that ignore some of the evidence you have. The fact that, as I argue here, this bias may have expressed itself in the insistence on following a particular methodology at the expense of others does not negate the importance of that bias.

I do not think this is just a problem in macroeconomics. David Card is a very well respected labour economist, who was the first to present detailed empirical evidence that imposing a minimum wage might not reduce employment (as the standard supply and demand model would predict). He gave an interview some time ago (2006), where he said this about the reaction to this work:

“I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.”

As Card points out in the interview his research involved no advocacy, but was simply about examining empirical evidence. So the friends that he lost objected not to the policy position he was taking, but to him uncovering and publishing evidence. Suppressing or distorting evidence because it does not give the answer you want is almost a definition of an illegitimate science.

These ex-friends of David Card are not typical of academic economists. After all, his research was published and became seminal in subsequent work. Theory has evolved (see again his interview) to make sense of his findings, but unlike the case of macro the findings were not ignored until this happened. Even in the case of macro, as Noah says, it was New Keynesian theory that became the consensus theory of business cycles rather than RBC models.

Yet I suspect there is a reluctance among the majority of economists to admit that some among them may not be following the scientific method but may instead be making choices on ideological grounds. This is the essence of Romer’s critique, first in his own area of growth economics and then for business cycle analysis. Denying or marginalising the problem simply invites critics to apply to the whole profession a criticism that only applies to a minority.