My bet with Bryan Caplan

Since Europe-US comparisons are in the air again, it seems like a good time to report on the first year of my bet with Bryan Caplan, the terms of which are

The stake is $US100 and the agreed criterion is that, for Bryan to win, the average Eurostat harmonised unemployment rate for the EU-15 over the period 2009-18 inclusive should exceed that for the US by at least 1.5 percentage points

The relevant figures are at Eurostat and, with December still to come in, I estimate that the EU-15 rate will be 0.3 percentage points below that for the US for 2009, so that I beat the spread by 1.8 percentage points.

My first response is that, instead of asking Bryan to raise the spread from his initial offer of 1 percentage point to 1.5, I should have asked to shorten the term of bet to 5 years, which would bring the settlement date within my normal time horizon. If Bryan is up for this change, I’m willing to offer it now.

Second, looking at the sharp decline in labor force participation in the US, any reduction in unemployment rates there is likely to be slow. I don’t have comparable EU-15 figures to hand, but claims about the dynamism and flexibility of the US labor market are looking much less plausible now than they did a few years ago, let alone in the boom times of the 1990s.

I don’t have a full explanation for the apparent failure of economic liberalism in the labor market, but increasingly entrenched inequalities in education (which exist everywhere, but are worse in the US) and the associated lack of social mobility must play a role, I think. I had a go at some of this in the ‘Trickle Down’ chapter of my book.

47 thoughts on “My bet with Bryan Caplan

  1. @Monkey’s Uncle

    Of course they can be set to high. If the minimum wage was set at a million dollars a week there would definitely be a problem. Do you think you have discovered this? Don’t you think most of the people here know that?

    What straw man? I simply pointed out that your statement was a tautology (given that it was not an oxymoron). There is nothing straw man about that. Why not use Wikipedia and see if you can find out what ‘a straw man’ means? While you are at it, maybe you also need to brush up on ‘tautology’ and ‘oxymoron’?

  2. Freeman – do you accept that a minimum wage that may work fine in one economic region may be quite harmful in another? Do you object to regional variations to the national minimum wage for regions that have economic circumstances quite different to the national average? Or is there cause to stick with one size fits all?

    I don’t actually mind if you disagree it is just that if that is the case I’m interested to understand why? And if you actually agree then I’m keen to stop troubling myself to understand the disagreement.

  3. Alice – no I’m advocating the reform of a regulator which will achieve 90% of what full deregulation would achieve without offending the objectives that most pro-regulation people want from a minimum wage regulator. In short I’m trying to figure out what political compromise might achieve if anything. I could retreat to my prefered position of no minimum wage but I already know that most people here disagree with that position so I’m endeavouring to be creative in steering a middle course. I know that some people view such political compromise with great cynicism but so long as people are honest about the fact that they are engaged in compromise the cyncism isn’t necessary. Freelander has already agreed that a minimum wage can be too high so all we are really exploring is boundary conditions. Personally I think the welfare objectives of the minimum wage are better achieved via direct subsidy (eg a social wage) and low income tax relief.

  4. Different minimum wages in different regions have pluses and minuses. They may have static advantages, but dynamically the result may be quite different. People and businesses can move, hence, in what circumstances and what regime of regional variation might be better than a national minimum wage is not something that is at all clear.

    Of course, I imagine it is all clear to you? Do you have a reference for, or have you written a paper elaborating the analysis underpinning your preference for, and the detail of your regional variation preference? Or is it just a seat of the pants, gut feeling thing, like the underpinnings of your views on anthropogenic climate change and other things?

    Where is your reference for you belief that enterprise bargaining is so wonderful?

    Or is this just another, “I may not know much about economics (or anything else) but I know what I like”?

  5. @TerjeP (say Tay-a)

    Further, what about the efficiency benefits of a minimum wage?

    With your targeting ‘welfare objectives’ via a subsidy, and low income tax relief, are you not concerned about churn,loses through the costs of administration, and the marginal burden of taxation, as well as the ‘welfare’ costs of various distortions induced?

    A minimum wage policy can be implemented without an objective of targeting welfare to a particular group. The policy can be implemented simply to improve efficiency. In that case, given that your alternatives reduce efficiency your instruments cannot achieve the same result.

  6. “The minimum wage improves efficiency only if firms are monopsonistic buyers of labour. This is not usually the case.” – Tim Petersen @14

    A very common misunderstanding. The “new labour economics” is driven by the insight that high search and information costs mean that an employer ALWAYS has a local monoposony over their current employees because it is risky and expensive to change jobs. So a rational profit-maximising employer will pay their employees less than their marginal product – IOW exploit them in the technical, Marxist sense.

    Mind you I think the models are incomplete – it’s a bilateral monopoly situation rather than a pure monopsony one because the employee will also impose costs on the employer by leaving. This “balance of terror” varies enormously from job to job though – factory fodder and checkout chicks cause employers relatively little pain by leaving so the pure monopsony model might be a reasonable approximation for them, and they’re the relevant case for setting minimum wages. But not so much for, say, a distinguished professor of economics who is in a positon to appropriate the rents from his talent; John should be hard-nosed in his salary negotiations :-).

    Generalising to other markets you soon realise that information costs mean local bilateral monopoly is the norm, not the exception. Pure marginalist models of supply and demand are usually only very rough approximations to reality at best and models of choice and human welfare adhering rigidly to them are very flawed.

  7. Freelander, you are obviously a troll so I won’t waste my time debating back and forth with you any further. Despite twice clarifying the issue, you continue to trivialise and misrepresent the argument for the sake of taking a cheap shot.

    I I was to apply the same kind of argument ad absurdum, it would go something like this:
    Another poster might write ‘minimum wages are barely enough for families to survive on. And yet business is constantly putting pressure on governments to keep wages as low as possible.’
    To which I might reply ‘Of course wages can be too low. Do you think you are the only person to have discovered that? If this is not an oxymoron it is a tautology. If the minimum wage was 5 cents a day then of course it would affect the living standards of the working poor and incentives to work.’

    According to your reasoning, you can never actually make a point because if you take the argument through to its logical extreme it will become so self-evident and tautological that the point becomes redundant. This is sophistry and rhetorical nonsense of the highest order. Indeed, it is sometimes said that the way to determine if an argument is sound or not is to take it to its logical extreme. Yet according to you, the fact that an argument taken to its logical extreme becomes self-evident and obvious is a reason why the argument should not be made at all. Wonderful logic.

  8. @Freelander

    I don’t think that a little local cafe takes into account its (negligible) impact on local wage rates when it hires employees. Ditto for plumbers, shops, market gardeners etc.

  9. @derrida derider

    That is very interesting.

    I have read Ed Phelp’s work on customer markets: it links the value of matches in the search process to the stockmarket valuation of the firm. Higher stock prices increase the NPV of good matches, and cause more search/lower markups by firms. The same sort of thing applies to labour markets.

  10. @Tim Peterson

    They don’t take into account the impact on ‘local wages’. But neither does any other monopsonist. They know that if they want another employee they will have to pay more and pay their existing ones more. Thats monopsony. How about you do a bit of reading?

    Maybe get an economics degree from a good university?

  11. @derrida derider

    The bileteral monopoly situation you describe should also incorporate efficiency wages – firms may not want to set wages as low as they could in the interests of labour productivity.

  12. By “local wages” I meant the wage rates that the firm pays -assuming all firms pay the same wage. No need to be gratuitously insulting!!!

  13. @JQ,
    “I don’t have a full explanation for the apparent failure of economic liberalism in the labor market, but increasingly entrenched inequalities in education (which exist everywhere, but are worse in the US) and the associated lack of social mobility must play a role, I think.”
    Evidence for your theory here: http://www.voxeu.org/index.php?q=node/930

  14. Freelander
    January 19th, 2010 at 15:02 | #36
    Reply | Quote

    …..

    Maybe get an economics degree from a good university?

    Strange comment in a thread discussing the failure of economics to deal with reality.

  15. @charles

    A problem with many so-called economists is that they barely know first-year economics. Any clown, especially one with a loud voice and a thick hide, can fool some print or TV journalist into interviewing them and disseminating their views, no matter how absurd.

    As for those experts who have led many to our current failures with their free market mantra, often they are narrowly read, and even where they are not, the assumptions underpinning their understanding are at best tangential to reality. Problem is, rather than using their models to operate in the vicinity of where they do touch reality, they like to follow them off into the ether.

  16. @Monkey’s Uncle

    You don’t seem to understand that what holds at the extreme, that a very high minimum wage is bad for the economy and everyone and reduces efficiency, doesn’t hold over the whole range. It is your thinking that is flawed.

    If you drink too much water in too short a period of time, it can kill you because the water dilutes your electrolytes. It does not follow that water is bad for you and should be avoided.

    Are you going to pay me for the lesson, or will it turn out to have been gratuitous?

    Also, you don’t appear to know what a tautology is. You can look it up you know? The internet is quite handy for that sort of thing…

  17. “You don’t seem to understand that what holds at the extreme, that a very high minimum wage is bad for the economy and everyone and reduces efficiency, doesn’t hold over the whole range. It is your thinking that is flawed.”

    This is an entirely false mutual exclusivity. What holds for the extreme sometimes holds for more moderate cases, only to a lesser degree. While with some things what holds for the extreme does not hold for less extreme cases. In the case of minimum wages, it is true that the minimum wage does not destroy as many jobs as if it was double or triple the current rate, but it still does some damage nonetheless.

    Your logic seems to be that if you take my argument through to its extreme point it makes sense, ergo I must be wrong because we all know that what holds for the extreme does not hold over the whole range. You are obviously in line to win the Nobel Prize for logic with this.

    “Are you going to pay me for the lesson, or will it turn out to have been gratuitous?”

    I will pay you the cost of a local phone call so you can tell someone who appreciates undergraduate sophistry more than I do.

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