Deductive Economics

With a binding minimum wage of w the marginal ...

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I must admit to some small pleasure in seeing one of the better economic blogs quote approvingly from a comment I posted in another of the better economic blogs. But in case you don’t see what all the fuss is about, allow me to explain.

Economic analysis is practiced in two very different ways. One, which I call Deductive Economics, starts with some very basic assumptions and then, through the use of deductive logic, draws conclusions. For example, one common deductive conclusion is that as the price of something increases, the demand for it decreases. You probably know this as the supply and demand curve.

The other form of economic analysis is what I call Empirical Economics.  Empirical Economics relies on measuring things in the real world, determining the relationships between things, and then constructing equations which (hopefully) predict real world behavior.

The two forms of analysis often conflict. Consider the always popular arguments over the minimum wage. Deductive Economics says that as the price of labor rises, employers will be less inclined to hire more labor or even keep what they have. Unfortunately, many Deductive Economists make the mistake of saying that if you raise the minimum wage, people will lose their jobs. That may or may not be true, as I’ll explain shortly.

Empirical Economics would like to measure what happens when the minimum wage is increased. One such famous study of increasing the minimum wage found no effect on employment. This causes some to conclude that the minimum wage can be increased without ill effect. This too is wrong.

The real world problem is that life is not a laboratory. There are many things happening simultaneously, and it is difficult to identify and isolate all of the important factors. For example, if there were a shortage of workers to begin with, raising the minimum wage might have no observable effect.

Deductive Economics is correct, but it’s easy to overstate the conclusion. The real conclusion is that raising the minimum wage will tend to cause an increase in unemployment,  but other factors may simultaneously be causing employment to tend to grow. It’s impossible to say exactly what will happen, but it is possible to say the raising the minimum wage increases the risk of increased unemployment.

The vocabulary of risk is sadly lacking in most economic writing.

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One response to this post.

  1. […] effort (coming from the world of Empirical Economics) would suggest that unions have little impact one way or the other. But the study is limited to […]

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