Friday, October 2, 2009
A Beautiful Model, A Clear Prediction
The supply and demand model, which students learn in the first week of Economics One, is a beautiful, powerful tool for investigating real world issues like the minimun wage, the subject of tomorrow's Wall Street Journal editorial. The model's prediction is chrystal clear as this little diagram from my lectures shows: a minimum wage causes unemployment, especialy for young unskilled people, just as the Journal argues. Of course the size of the impact depends on the steepness or elasticity of labor demand. So empirical research by economists like David Neumark and Bill Wascher cited in the Journal is essential. Their research is described in this box from my Principles of Economcs book. The research shows the impact to be quite significant. But as is so often the case in economics, not all economists agree, so the box also describes some contrary findings by David Card and Alan Krueger. I side with Neumark and Wascher in this debate, but you can read the editorial, look at the diagram, read the box, and draw your own conclusions.