Five Ways Minimum Wage Studies Fail - The Second Law of Demand
The first post on the Mere Economics blog revisited a post I'd written over at the Independent Institute. Here's part 4.
On the flipside of anticipation, we ought also to think about the long-run—after a minimum wage hike becomes law. Not all adjustments must come prior to the minimum wage increase being enforced. Some of it may come after. But nothing in economic theory tells us how long this adjustment period is, and it will likely differ from industry to industry, and even firm to firm.
Armen Alchian emphasized what he called “The Second Law of Demand.” As time passes, the price elasticity of demand increases, other things equal. To my mind, this is more than an empirical observation. It’s rooted in reasoning about the costliness of finding substitutes. Determining which substitutes to use for labor, how to re-arrange production, and the like are entrepreneurial, trial-and-error decisions that take time. Even when the prices of consumer goods change, it can take buyers a period to discover suitable substitutes. Production, being more complex, usually takes longer.
A classic example comes from the American 1950s. There are two oft-cited occupations that were casualties of the 1950’s minimum wage increases. First, movie theater ushers—they’d escort patrons to their seats to help them avoid stumbling in the pitch-black darkness of their surroundings. And elevator operators, who turned hand cranks to take visitors to the floor they’d requested. Ushers and manual elevator operators were low-productivity workers, whose labor was no longer profitable in the wake of higher minimum wages.
Though these professions ring archaic to our ears now, these workers didn’t all lose their jobs the day the increase went into effect. It took time for innovators to devise capital goods substitutes (those colored light strips along the edge of the floor in theaters and automatic elevators) which ultimately replaced these workers.
There’s simply no way to know ahead of time how long such an adjustment process might take, which firms will be most affected, etc...This means it’s impossible to know how long after the legal change a study must look to capture all the resulting employment effects. But the longer that window becomes, the more chances there are for intervening events—which may change employment in either direction—to take place. The data get noisy.