Raising the minimum wage.

The minimum wage debate is back on the front page and this time with a CBO report trying to paint the picture.

The CBO found that a gradual increase to $10.10 an hour by July 2016 would eliminate 500,000 jobs, but lift 900,000 Americans out of poverty from the total of 45 million projected to be living in poverty in 2016. The report confirms that while helping some, forcing higher wages has real costs, including loss of jobs. The increased cost of labor would encourage employers to hire fewer higher-skilled workers over paying an inexperienced worker such a high wage.

For its report, the CBO examined the effects of increasing the federal minimum wage on employment and family income through two options:

  1. $10.10 option: an increase in the federal minimum wage from its current rate of $7.25 per hour to $10.10 per hour in three steps (2014, 2015, and 2016). After reaching $10.10 in 2016, the minimum wage would be adjusted annually for inflation as measured by the consumer price index.
  2. $9.00 option: an increase in the federal minimum wage from its current rate of $7.25 per hour to $9.00 per hour in two steps (2015 and 2016). After reaching $9.00 in 2016, the minimum wage would not be subsequently adjusted for inflation.

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In addition to the chart above, likely range of change in employment varies in both options from very slight decrease in job losses to -1.0 million in $10.10 option and -200,000 in $9.00 option.

Conclusion: Passing a law that might put half a million vulnerable people out of work during a slow labor market? A pretty large gray area. 

Source: Congressional Budget Office; The Wall Street Journal.

U.S. Economic activity in 2013 split in half.

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U.S. Economic activity in 2013 split in half.

A 50/50 split of America’s GDP.

This map shows that 50% of all the money generated in the United States comes from a tiny proportion of the country in geographical terms. The largest economic contribution comes from traditional economic hubs including New York, Los Angeles, San Francisco and Miami.

Source: Expert Market; U.S. Department of Commerce, 2013.

The wealth gap.

Median household income was USD 51,017 in 2012, not statistically different in real terms from the 2011 median of USD 51,100. This followed two consecutive annual declines. In 2012, real median household income was 8.3% lower than in 2007, the year before the most recent recession.

Median income for the bottom 20% fell 10% since 2007, while the wealthiest 5% have already seen its median income bounced back to 2007 levels.

Preferences.

The traditional economic model of human behavior is built on the foundation that humans are entirely rational consumers. This framework ignores most of the behavior studied by cognitive and social psychologists. Taking a closer look at preferences:

The key way that economists model behavior is by assuming that people have preferences about things. Often, but not always, these preferences are expressed in the form of a utility function. But there are some things that could happen that could seriously mess with this model. Most frightening are “framing effects” [people react differently to a particular choice depending on whether it is presented as a loss or as a gain]. This is when what you want depends on how it’s presented to you. […]

Now one of the most important tools we have to describe people’s behavior over time is the notion of time preference, also called “discounting”. This means that we assume that people care about the future less than they care about the present. Makes sense, right? But while certain kinds of discounting cause people’s choices to be inconsistent, other kinds would cause people to make inconsistent decisions. For example, some people might choose not to study hard in college, even though they realize that someday they’ll wake up and say “Man, if I could go back in time I would have studied more in college!”. This kind of thing is called hyperbolic discounting. It would make it a lot harder to model human behavior. But the models would still be possible to make.

But what would be really bad news is if people’s time preferences switched depending on framing effects! If that happened, then it would be very, very hard to model individual decision-making over time.

Unfortunately, that is exactly what experimental economist David Eil of George Mason University has found in a new experiment: Experimental and field research has shown that individuals often exhibit time inconsistent preferences.

Original post: What if preferences are unstable? by Noah Smith.