Five Ways Minimum Wage Studies Fail - Anticipation

The first post on the Mere Economics blog revisited a post I'd written over at the Independent Institute. Here's part 3.

Entrepreneurs, to be successful, must be forward-looking. They’re in the business of anticipating future states of affairs and arranging production in the present based on their forecasts. This point applies to unhampered markets every bit as much as it applies to forecasting how policy will impact profitability. For instance, in a free market, entrepreneurs must anticipate how suppliers’ cost changes will impact their own production processes, sometimes years down the road.

Adding intervention doesn’t change this basic point, it only makes things more complex for entrepreneurs. A minimum wage hike is an increase in a producer’s costs, no less than is the price of any other input rising. Businesses that anticipate minimum wage increases may prepare for them by shifting to kiosks or investing in other capital goods well in advance of the law going into effect.

Thus, so much depends on the timeframe over which a study examines employment changes. Once more, Card and Krueger (1994) is illustrative. Here, the authors measured unemployment just a few weeks before the hike went into effect. Yet, minimum wage increases are typically advertised by legislatures years before they become law. Not to mention the never-ceasing national debate that accompanies this issue. All firm owners are aware that future increases are a distinct possibility. In short, employment loss can come prior—even years prior—to the timeframe a paper examines.