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  • I thought I recognized that name !

    Posted by Michael Kennedy on September 3rd, 2011 (All posts by )

    Obama has announced his new appointment for economic adviser. It is a Princeton economist named Alan Kreuger. I am not an economist or an expert on economists but that name rang a faint bell. Then I saw that someone else had remembered him, too.

    In a 1994 paper published in the American Economic Review, economists David Card and Alan Krueger (appointed today to chair Obama’s Council of Economic Advisers) made an amazing economic discovery: Demand curves for unskilled workers actually slope upward! Here’s a summary of their findings (emphasis added):
     
    “On April 1, 1992 New Jersey’s minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in the minimum. Comparisons of the changes in wages, employment, and prices at stores in New Jersey relative to stores in Pennsylvania (where the minimum wage remained fixed at $4.25 per hour) yield simple estimates of the effect of the higher minimum wage. Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent.”

    This was tremendous news, especially for Democrats. Raising the minimum wage did not increase unemployment as classical economics had said since the issue first arose.

    Unfortunately, their study was soon ripped apart by other economists who used more objective methodology.

    It was only a short time before the fantastic Card-Krueger findings were challenged and debunked by several subsequent studies:
     
    1. In 1995 (and updated in 1996) The Employment Policies Institute released “The Crippling Flaws in the New Jersey Fast Food Study”and concluded that “The database used in the New Jersey fast food study is so bad that no credible conclusions can be drawn from the report.”
     
    2. Also in 1995, economists David Neumark and David Wascher used actual payroll records (instead of survey data used by Card and Krueger) and published their results in an NBER paper with an amazing finding: Demand curves for unskilled labor really do slope downward, confirming 200 years of economic theory and mountains of empirical evidence (emphasis below added):

    I would suggest reading the entire post which demolishes the study by Kreuger and Card. This is the new Chairman of the Council of Economic Advisers. More academics with no real world experience and this one is incompetent even as an academic. Spengler has a few words on the matter, as well.

     

    2 Responses to “I thought I recognized that name !”

    1. Tim Says:

      I actually don’t think that Krueger is a politically motivated guy like Krugman, where his politics always inform his economics instead of the reverse. I think he and Card disavowed the assertion that this study showed that raises in the minimum wage increase employment. They were trying to show that it might not mean large changes to employment.

      I agree with you that the study was poorly done and they should have thought twice when they got the conclusion they obtained. It was a sign that something was wrong with the study. Of course, in Economics, you don’t have experiments. There are always many variables moving at the same time and it can be tricky to attribute results to a particular cause. A better study has now been done and I bet Krueger would agree with you on that.

    2. Michael Kennedy Says:

      Still, it is not a great recommendation for his new job. Secondly, the conclusion that increasing the minimum wage would not raise unemployment was a highly political issue with Democrats, then and now, and anyone without a bias would surely realize that their results were contrary to all microeconomic theory. I think they set out to find evidence to support Democrat policy and didn’t look too hard when they found it.