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Has Card Been Misinterpreted?

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Tags Monetary TheoryProduction Theory

Here's an interesting excerpt from an interview with David Card by the Minneapolis Fed's Region (December 2006).

Is Card making the Austrian point that the perfectly competitive model (a.k.a. the simple supply and demand model) does not explain what actually goes on in labor markets? Has the infamous Card and Krueger really been misinterpreted?

Region: Your research on the effects of raising the minimum wage, much of which was compiled in your book with Alan Krueger, generated considerable controversy for its conclusion that raising the minimum wage would have a minor impact on employment.

Have you continued to conduct research on the impact of raising the minimum wage? And do you have an opinion about "living wage" legislation and the petition that's been circulated recently with 650 or so economists calling for an increase in the minimum wage?

Card: I haven't really done much since the mid-'90s on this topic. There are a number of reasons for that that we can go into. I think my research is mischaracterized both by people who propose raising the minimum wage and by people who are opposed to it. What we were trying to do in our research was use the minimum wage as a lever to gain more understanding of how labor markets actually work and, in particular, to address a question that we thought was quite important: To what extent does the simplest model of supply and demand actually describe how employers operate in the labor market? That model says that if an employer wants to hire another worker, he or she can hire as many people as needed at the going wage. Also, workers move freely between firms and, as a result, individual employers have no discretion in the wages that they offer.

In contrast to that highly simplified theoretical model, there is a huge literature that has evolved in labor economics over the last 25 years, arguing that individuals have to spend time looking for job opportunities and employers have to spend time finding employees. In this alternative paradigm a range of wage offers co-exist in the market at any one time. That broader theory is, I think, pretty widely accepted in most branches of economics. The same idea is used to think about product markets where two firms that sell very similar products may not charge exactly the same price. The theory explains a lot of things that don't seem to make sense, at least to me, in a simple demand and supply model.

For example, what does it mean for a firm to have a vacancy? If a firm can readily go to the market and buy a worker, there's no such thing as a vacancy, or at least not a persistent vacancy. During the early 1990s, when Alan and I were working on minimum wages, it was our perception that many low-wage employers had had vacancies for months on end. Actually many fast-food restaurants had policies that said, "Bring in a friend, get him to work for us for a week or two and we'll pay you a $100 bonus." These policies raised the question to us: Why not just increase the wage?

From the perspective of a search paradigm, these policies make sense, but they also mean that each employer has a tiny bit of monopoly power over his or her workforce. As a result, if you raise the minimum wage a little-not a huge amount, but a little-you won't necessarily cause a big employment reduction. In some cases you could get an employment increase.

I believe that that model of the labor market is correct. There are frictions in the market and some imperfect information. It doesn't mean that if we raised the minimum wage to $20 an hour we wouldn't have massive problems, if we enforced it. Realistically, of course, the U.S. is never going to enforce a draconian minimum wage, nor is one ever going to be passed. However, our results don't mean that minimum wages in other economies couldn't have some effect.

I think economists who objected to our work were upset by the thought that we were giving free rein to people who wanted to set wages everywhere at any possible level. And that wasn't at all the spirit of what we actually said. In fact, nowhere in the book or in other writing did I ever propose raising the minimum wage. I try to stay out of political arguments.

I think many people are concerned that much of the research they see is biased and has a specific agenda in mind. Some of that concern arises because of the open-ended nature of economic research. To get results, people often have to make assumptions or tweak the data a little bit here or there, and if somebody has an agenda, they can inevitably push the results in one direction or another. Given that, I think that people have a legitimate concern about researchers who are essentially conducting advocacy work. I try to stay away from advocacy of any kind, but that doesn't prevent people from being suspicious that I have an agenda of some kind.

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.

I also thought it was a good idea to move on and let others pursue the work in this area. You don't want to get stuck in a position where you're essentially defending your old research. I certainly think it's possible that someone will come up with credible research documenting a situation where raising the minimum wage has a significant employment effect. I rather doubt we will see that right now because minimum wages are fairly low, at least in northern California where I live. My guess is that small raises in the minimum wage won't have much of an effect.

Roger W. Garrison received his doctorate degree from the University of Virginia in 1981. He is now Emeritus Professor of Economics at Auburn University in Alabama, where he taught Macroeconomics and History of Economic Thought (among other courses) from 1978 to 2012. He was a Post Doc Fellow at New York University in 1981. He was winner of the Smith Prize in Austrian Economics in 2001 for his book Time and Money: The Macroeconomics of Capital Structure. In 2003 he was named First Hayek Visiting Scholar at the London School of Economics, where he delivered LSE’s First Memorial Hayek Lecture. He served as President of the Society for the Development of Austrian Economics in 2004. His Austrian-oriented writings have appeared in Economic Inquiry, Journal of Macroeconomics, History of Political Economy, Journal of Economic Education, Independent Review, Cato Journal, Journal of Austrian Economics, and in a number of conference volumes and reference volumes. Most recently, his invited chapter titled “Friedman and the Austrians” appears in Robert A. Cord and J. Daniel Hammond, eds., Milton Friedman: Contributions to Economics and Public Policy, Oxford University Press, 2016. 

Roger Garrison is professor emeritus of economics at Auburn University and Associated Scholar of the Mises Institute.

See his web page. Send him mail.

Recent Publications (2012–2016)

Earlier Publications (1979–2012) can be accessed through www.auburn.edu/~garriro.

Garrison, Roger W., “Friedman and the Austrians,” in Robert A. Cord and J, Daniel Hammond, eds., Milton Friedman: Contributions to Economics and Public Policy, Oxford University Press, 2016 (forthcoming).

Garrison, Roger W., “Cycles and Slumps in an Overly Aggregated Theoretical Framework,” in Steven Kates, ed., What’s Wrong with Keynesian Economics, Edward Elgar, Cheltenham, UK, 2016 (forthcoming).

Garrison, Roger W., Review of Randall G. Holcombe, “Advanced Introduction to the Austrian School of Economics, Journal of Economic Literature, 2015 (vol. 53, no. 1): 119-–21.

Garrison, Roger W. and Norman Barry, eds. 2014), Elgar Companion to Hayekian Economics, Edward Elgar, Cheltenham, UK (2014).

Garrison, Roger W., Review Essay: “Alchemy Leveraged: The Federal Reserve and Modern Finance,” Kevin Dowd and Martin Hutchinson’s Alchemists of Loss: How Modern Finance and Government Regulation Crashed the Financial System, The Independent Review, 2012 (vol. 16, no. 3): 435–51.

Garrison, Roger W., “Natural Rates of Interest and Sustainable Growth,” The Cato Journal, 2012 (vol. 32, no. 2): 423–37.

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