It started when American Enterprise Institute scholar Mark J. Perry tweeted the following graph about minimum wage:
I was annoyed by the word "actually". My current pet peeve is people not paying attention to empirical evidence - I think if you say "actually", there should be more than just a theory backing you up, especially if evidence is actually available. So I started giving Mark a hard time about ignoring the empirical evidence on the minimum wage question.
That's when Alex Tabarrok jumped in and defended the cartoon, saying that it's just a basic supply-and-demand model:
But that's not right. This cartoon actually doesn't show the basic D-S model at all. Let's look at it again:
The basic, Econ 101 D-S model is a model of a market for a single homogeneous good. In the case of the labor market, that good is labor. There's one kind of labor, and everyone who does it gets paid the same wage. Since the wage in that model is equal to the marginal revenue product of labor, this means everyone's labor generates the same amount of revenue (this is also obvious just from the assumption that labor is homogeneous; if everyone's doing the exact same work, they can't each be generating different amounts of revenue). A wage floor in the basic D-S model will put some people out of work, and will raise the amount of revenue generated by each person who keeps her job, thus raising wages as well.
In the cartoon, however, different jobs generate different amounts of revenue. Also, the last panel implies that a wage floor leaves the revenue generated by some workers unchanged. So while the cartoon and the D-S model both predict that minimum wage causes job loss, it's only a coincidence - they're not the same model at all.
The cartoon could be trying to portray a sophisticated model of heterogeneous labor in a highly segmented market. Or it could just be some sloppy political crap made by a cartoonist who doesn't remember his Econ 101 class very well. Either way, Econ 101 it ain't.
When Alex claimed that the cartoon is an "accurate portrayal" of the D-S model, I waved away his protest, basically saying "Who cares, evidence comes first." But (possibly because I had a nasty virus...excuses, excuses), I didn't realize until this morning that the cartoon is not the D-S model at all! Alex also wasn't paying close attention - since he teaches the D-S model in online videos, he obviously does know how it works.
So the cartoonist, and Mark J. Perry as well, are peddling bad economics. But they managed to momentarily convince both me and Alex that they're just peddling Econ 101. How did they do that?
In my case, it was because I committed the fallacy of the converse. I assumed that because the basic Econ 101 model says minimum wages cause job loss, and the cartoon says the same, the latter must be equal to the former. That's like saying "Horses have legs, I have legs, therefore I must be a horse." I suspect that Alex made the same mistake.
This is 101ism at its worst. It got me too, people. It's a plague, I tell you! A plague!
from Noahpinion http://ift.tt/22kwrXb