Over the past year, we have seen wages rise considerably, especially in low-skilled jobs.  According to the Bureau of Labor Statistics, the average wage for a non-management employee of a limited-service (e.g., fast-food) restaurant has risen by $1.22 per hour over the past 12 months from $12.04/hr. to $13.26/hr.  That is an increase of 10.1%!  Many places are even higher.  In my current little slice of Heaven (Cape Cod, Massachusetts), the local Five Guys Burgers and Fries offers $16/hr. During the past few years, as minimum wage activists have been advocating for a $15 minimum wage, many economists (myself included) argued that such a wage increase would cause a substantial loss of jobs.  Yet, even at wages above $16, many firms struggle to find workers.  These data present us with a conundrum: how can we explain an increase in wages without decreasing employment?  Were minimum wage activists right all along that increasing the minimum wage would not lead to unemployment and that firms were simply choosing to underpay workers?   Let’s see what the Economic Way of Thinking has to say. The problem with drawing the conclusion that minimum wage hikes wouldn’t have an effect is reasoning from a price change.  Prices, including the price of labor (wage), are not arbitrarily determined.  In the case of wages, wages are determined by the marginal revenue product of labor.  In other words, the wage is equal to the contribution that the marginal employee makes to the company’s revenue on the margin.  Thus, wages can increase in two ways: 1) increasing the productivity of labor (i.e., increasing the amount one worker can produce) or 2) increasing the revenue earned by selling one more unit. So, what is going on in the current market?  Partly, we have a shift in the supply of labor, as extended and increased unemployment insurance has kept some workers out of the labor force.  Employers have had to offer higher wages to lure workers from their alternative options.  But, to make these wages possible, employers also need to have more productive workers (quantity supplied must align with quantity demanded). For employers, the current source of increase in the marginal revenue product of labor is from price increases.  Over the same period (the past 12 months), we have seen general inflation.  In fact, fast-food prices have risen by nearly the same amount as wages: 9.1%, according to the Bureau of Labor Statistics (CPI calculation).  So, employees are more productive because they can now produce more revenue for the firm; the demand curve has shifted out.  Thus, their higher wages are achievable without the need for layoffs. But wages cannot rise infinitely.  If the marginal revenue product per worker is less than the wage, then the worker will not be hired (or fired, as the case may be).  And, likewise, firms cannot simply pass 100% of price increases onto customers.  So, we are seeing a situation as we have now: firms remain understaffed despite unusually high wages.  So, firms find other margins to adjust along to bring quantity supplied back into alignment with quantity demanded.  These margins include: operating reduced hours, increased automation, reduced offerings, etc.  The Law of Demand remains in effect. So, the answer to the fallacy expressed above (that firms always could have paid a $15 wage) is that the situation has changed.  Ceteris is never paribus; we must be cautious before overturning a scientific law. (0 COMMENTS)

Author and journalist Johann Hari talks about his book, Lost Connections: Why You Are Depressed and How to Find Hope, with EconTalk host Russ Roberts. Hari, who has suffered with depression as a teenager and an adult, offers a sweeping critique of the medical establishment’s understanding of depression and the frequent reliance on pharmaceutical treatments. Hari argues that it is our lost connections with each other, with our work, and with ourselves that explains the rise in depression in recent times. (0 COMMENTS)

Author and journalist Johann Hari talks about his book, Lost Connections: Why You Are Depressed and How to Find Hope, with EconTalk host Russ Roberts. Hari, who has suffered with depression as a teenager and an adult, offers a sweeping critique of the medical establishment’s understanding of depression and the frequent reliance on pharmaceutical treatments. Hari argues that it is […] The post Johann Hari on Lost Connections appeared first on Econlib.

In his September 4 guest essay in the New York Times, “Good News: There’s a Labor Shortage,” MIT economist David Autor presents a mix of good reasoning, error, and confusion. Autor argues that a labor shortage (he really means “increased labor scarcity”) is driving up real wages at the bottom end of the pay scale and will likely drive them up further. His reasoning is good assuming all of his premises are right. But I doubt one of his premises: that paying millions of unemployed people more to be unemployed than to work does not cause a lot of people to stay unemployed. Co-blogger Scott Sumner dealt recently with what’s wrong with that claim. Other parts of his reasoning are good. He writes: For years, social scientists have warned that because of declining birthrates, retiring baby boomers and severe immigration restrictions, we’re approaching an era of labor scarcity. But there are also two other claims, the first of which is, at best, confused and, at worst, wrong and the second of which is simply wrong. Here’s the first: There’s no future in working the fry station at White Castle. It’s true that those who plan to work the fry station at White Castle shouldn’t plan on doing well in the labor market if they want that job long term. But surely Autor knows that the vast majority of people who take those jobs while young are not in those jobs 10 or even 5 years later. Those jobs are a stepping stone to better jobs and can teach young people some basic labor market skills: being punctual, taking responsibility, taking direction, and organizing their time, to name four important ones. That means that there actually is a lot of future in working the fry station at White Castle. Imagine that Autor had said: There’s no future in going to middle school, grades 6 to 8. Everyone would see the problem with that reasoning. You won’t do well if you plan to be, and succeed in being, in middle school for the next 10 years. But everyone understands that middle school is a step on the way to better things. We can disagree about how much you learn in middle school, with co-blogger Bryan Caplan being on one end of that debate and me being almost on that end. But the point is that it’s not the final step. Autor also writes: Let’s say that you like cheap burgers and don’t lose sleep over the low wages burger flippers earn. Would it bother you to know that their well-being is subsidized by taxpayers? Members of the bottom fifth of U.S. households receive an average of $9,500 per person per year in means-tested government benefits like Medicare, Medicaid and food stamps. More than 20 percent of income for the poorest fifth of households comes from refundable tax credits like the earned-income tax credit, which supports low-wage families with children. So, one reason companies can pay such low wages is that you’re paying for the things their low-wage workers can’t afford. The bottom line, he claims, is that “That burger isn’t as cheap as you think; it’s just that you’re paying part of your meal tab in federal taxes.” Ignore the irony that the push to put the cutoff for means-tested benefits higher and higher has come mainly from the left. If Autor is arguing for tightening eligibility, then I’m with him, although I’m not sure he is. Here’s the problem with his reasoning: he gets the shift in the supply curve wrong. Means-tested benefits tend to make workers less willing to supply hours of work at a given wage. So the programs he cites (other than the earned income tax credit, which is more complicated) shift the supply curve to the left, not the right, making wages higher than otherwise and making that burger more expensive than otherwise. Seven years ago, Bryan Caplan dealt well with what’s wrong with an Autor-style argument about means-tested benefits leading to increased labor supply. (0 COMMENTS)

A friend and I went to see the San Francisco Giants play the Milwaukee Braves in San Francisco last Thursday. Great news: the Giants won with an exciting bottom of the 8th inning. (Not so great for my friend, who grew up in Wisconsin and is a Braves fan.) One of the key plays happened late in the game when a fairly heavy set Brave, Daniel Vogelbach, hit what looked like a double to the right field. He ran through first and on the way to second. But halfway to second, he turned and looked to see whether the right fielder had thrown the ball yet. That was a key error. That little turn slowed him down slightly–he wasn’t a really fast runner–and he was thrown out in a close call at second base. Vogelbach ignored the irrelevance of sunk costs. Once he had made the decision to run through first base and get halfway to second base, he would have had too much momentum if he had decided to turn back to first base. He should have just run to second as fast as he could without looking. Whether or not it was a good decision to go for two bases, by the time he was halfway between first and second, that decision was in the past and irrelevant. If he wanted to look anywhere, it should have been to the third-base Braves coach. That would not have slowed him as much and the third-base coach could have signaled whether he needed to slide or take second base standing. Note: The picture above is of Vogelbach when he was with the Seattle Mariners. (0 COMMENTS)

On July 28 (electronic) and July 29 (print edition), the Wall Street Journal published an article by Charley Hooper and me on ivermectin. At our request, the Journal published a correction that we provided on the evening of July 28 and our letter to the editor. The letter to the editor is appended below. Because over 30 days have passed, I’m free to upload the whole article. Here’s the article: The Food and Drug Administration claims to follow the science. So why is it attacking ivermectin, a medication it certified in 1996? Earlier this year the agency put out a special warning that “you should not use ivermectin to treat or prevent COVID-19.” The FDA’s statement included words and phrases such as “serious harm,” “hospitalized,” “dangerous,” “very dangerous,” “seizures,” “coma and even death” and “highly toxic.” Any reader would think the FDA was warning against poison pills. In fact, the drug is FDA-approved as a safe and effective antiparasitic. Ivermectin was developed and marketed by Merck while one of us (Mr. Hooper) worked there years ago. William C. Campbell and Satoshi Omura won the 2015 Nobel Prize for Physiology or Medicine for discovering and developing avermectin, which Mr. Campbell and associates modified to create ivermectin. Ivermectin is on the World Health Organization’s List of Essential Medicines. Merck has donated four billion doses to prevent river blindness and other diseases in Africa and other places where parasites are common. A group of 10 doctors who call themselves the Front Line Covid-19 Critical Care Alliance have said ivermectin is “one of the safest, low-cost, and widely available drugs in the history of medicine.” Ivermectin fights 21 viruses, including SARS-CoV-2, the cause of Covid-19. A single dose reduced the viral load of SARS-CoV-2 in cells by 99.8% in 24 hours and 99.98% in 48 hours, according to a June 2020 study published in the journal Antiviral Research. Some 70 clinical trials are evaluating the use of ivermectin for treating Covid-19. The statistically significant evidence suggests that it is safe and works for both treating and preventing the disease. In 115 patients with Covid-19 who received a single dose of ivermectin, none developed pneumonia or cardiovascular complications, while 11.4% of those in the control group did. Fewer ivermectin patients developed respiratory distress (2.6% vs. 15.8%); fewer required oxygen (9.6% vs. 45.9%); fewer required antibiotics (15.7% vs. 60.2%); and fewer entered intensive care (0.1% vs. 8.3%). Ivermectin-treated patients tested negative faster, in four days instead of 15, and stayed in the hospital nine days on average instead of 15. Ivermectin patients experienced 13.3% mortality compared with 24.5% in the control group. Moreover, the drug can help prevent Covid-19. One 2020 article in Biochemical and Biophysical Research Communications looked at what happened after the drug was given to family members of confirmed Covid-19 patients. Less than 8% became infected, versus 58.4% of those untreated. Despite the FDA’s claims, ivermectin is safe at approved doses. Out of four billion doses administered since 1998, there have been only 28 cases of serious neurological adverse events, according to an article published this year in the American Journal of Therapeutics. The same study found that ivermectin has been used safely in pregnant women, children and infants. If the FDA were driven by science and evidence, it would give an emergency-use authorization for ivermectin for Covid-19. Instead, the FDA asserts without evidence that ivermectin is dangerous. At the bottom of the FDA’s warning against ivermectin is this statement: “Meanwhile, effective ways to limit the spread of COVID-19 continue to be to wear your mask, stay at least 6 feet from others who don’t live with you, wash hands frequently, and avoid crowds.” Is this based on the kinds of double-blind studies that the FDA requires for drug approvals? No. Correction This article has been edited to remove a reference to a study of 200 healthcare workers by Ahmed Elgazzar of Benha University in Egypt. Messrs. Henderson and Hooper relied on a summary of studiespublished in the American Journal of Therapeutics. They learned after publication that this study has been retracted because of charges of data manipulation. Our letter to the editor, which ran in the July 29 electronic edition (July 30 print): We, the authors of “Why Is the FDA Attacking a Safe, Effective Drug?” (op-ed, July 29), have egg on our faces. Relying on a summary of studies published in the American Journal of Therapeutics, we quoted the results from a study of 200 healthcare workers. After our article was published, we learned that this study, by Ahmed Elgazzar of Benha University in Egypt, has recently been retracted due to serious charges of data manipulation. We retract the part of our article that relied on the data from Dr. Elgazzar’s study. But the broader point stands: There’s strong evidence of ivermectin’s efficacy in treating Covid-19. David R. Henderson Charles L. Hooper Grass Valley, Calif.     (0 COMMENTS)

How do we know what we know, or what we think we know? If you ask the guest in this episode, he’ll tell you most of what you think you know is wrong. And not just a little, but way wrong. Host Russ Roberts welcomed Jonathan Rauch to talk about his latest book, The Constitution of Knowledge. This constitution, says Rauch, is “our system, collectively as a society, for figuring out what’s true and what’s not true, and doing that in a way that respects our freedom, and keeps us sane, and keeps us civil.” It has much in common with the market process and written forms like the US Constitution. (I’d be interested to hear which you think it has more in common with…) The Constitution of Knowledge comes from four sources: research (i.e., academia and science), journalism, law, and government. It’s built on informal norms, and its institutions are being too heavily taxed today, says Rauch. So what forces are at work to undermine the Constitution of Knowledge, and why isn’t free speech enough to keep is safe? Let’s hear what you think!     1- How does the “epistemic funnel” work to create the Constitution of Knowledge? What steps must be followed in the epistemic funnel, and what role does free speech play? And, as Rauch asks, “How can a society find that small fraction of 1% of people’s ideas that actually advance knowledge?   2- Why have journalists become openly partisan over last 20 years? How do Roberts’ and Rauch’s views differ on this question, and what do they suggest as possible solutions? How plausible do you think their suggestions are? To what extent do you buy Rauch’s argument that we’ve fought this battle (and won) before- especially in 19th century journalism?   3- Rauch says, “This is the biggest message of my book. The notion of a marketplace of ideas in which free speech is enough, and everything else is self-maintaining is completely wrong.” What does he mean by this?   4- Roberts notes the role of US Constitution in restraining certain political outcomes. What analogies are there for the Constitution of Knowledge? How do the two final ideas Rauch and Roberts discuss- “no final say” and “no personal authority” fit in here? And how might these last two ideas be applied to our personal lives, as Roberts suggests?   5- What can be done to reverse the damage that’s been done to the Constitution of Knowledge? Rauch says, “optimism is too complacent, but pessimism is too fatalistic, and in between is hope.” Are you more optimistic or pessimistic about the future of the Constitution of Knowledge? (0 COMMENTS)

During Covid, legislatures became extraordinarily deferential to their executives.  Congress deferred to the President, yes.  But more shockingly, state legislatures across the country virtually abdicated in favor of their governors.  On everything Covid-related – and what isn’t “Covid-related”? – governors have essentially ruled by decree since March of 2020. In short, America is now an elective dictatorship.  Unlike almost all historical dictatorships, however, these are dictatorships within a federal system.  Every governor makes it up as he goes along… but he only makes it up for his own state.  Elections will still happen, possibly replacing one dictator with another.  But until those days of reckoning, whoever won the last election has a remarkably free hand to do as he pleases. What has this freakish experiment in federalist dictatorship taught us?  I’m curious to hear your thoughts, but here are the biggest lessons I’ve drawn thus far. 1. The variance of policy under federalist dictatorship has been vast.  My friend in Alabama barely remembers the lockdown because it lasted so briefly.  Californians endured major – and repeated – restrictions on their freedom for months at a time. 2. Part of this high variance, no doubt, comes from the compromises inherent in divided government.  But variance seemed to grow even in one-party states.  Compared to one-man rule, even one-party rule is centrist. 3. The governor’s political party turned out to be a powerful predictor of how he rules.  Love them or loathe them, the governors of Florida, Texas, and Tennessee haven’t just aggressively moved to normalcy.  These governors have stood by their decisions even though the media keeps putting bereaved family and distressed doctors on TV.  The same goes for Democratic governors, though that’s less surprising since “We’ll do everything we can to fight this menace” is the political path of least resistance. 4. Republicans have been paying lip service to “freedom” and “liberty” for decades, but all they’ve made me do is roll my eyes.  During Covid, Republicans started taking their freedom talk seriously.  It’s not just on the news;  during Covid, I’ve spent many months in Florida, Texas, and now Tennessee, and the difference is blatant.  (I also visited California a week after they opened up, and heard the locals’ tales of relief).  True, some governors are using their dictatorial powers to force businesses to set laxer measures; but this pales compared to all the ways governors are have used their dictatorial powers to force businesses to set stricter measures. 5. All 50 US governors have been vaccinated, so none of them are literal “anti-vaxxers.”  Still, many governors staunchly oppose mandatory vaccination.  What’s their motive?  High vaccination rates don’t merely make governors’ lives easier.  They also reduce resistance to every other expression of normalcy.  Could it be that governors who oppose vaccines mandates actually do so… because freedom? 6. For the last few minutes, virtually every major organization in society has embraced the mantra of “Out of an abundance of caution…”  K12 schools live by the mantra.  Colleges live by the mantra.  The media lives by the mantra.  Even many businesses live by the mantra.  And of course most Democratic governors live by the mantra.  Prominent Republican governors, in contrast, have repeatedly embraced risk.  They’ve opened up earlier, and usually stayed open despite fierce media criticism and rising deaths. 7. What explains the wide policy variation we’ve seen under federalist dictatorship?  Social scientists will be tempted to appeal to the Median Voter Model, but it’s hard to believe that’s close to the whole story.  Ron DeSantis won the 2018 election by a nose.  Contrary to some odd gaslighting, Florida remains a swing state.  But dictator DeSantis rules like his reelection is guaranteed.  Nor is he a strange outlier.  Jarringly, Democratic and Republican governors tend to follow their own ideologies, or even their own consciences. 8. Standard models of politics assume that voters have independent preferences that politicians try to satisfy.  Another possibility, however, is that voters have dependent preferences that politicians try to mold.  This is especially plausible during an emergency, when the public desperately looks to rally around a heroic leader.  If the Great One says vaccinated people need to wear masks indoors, then vaccinated people need to wear masks indoors.  If the Great One says they don’t, then they don’t.  Upshot: Perhaps governors are hoping that they can make their ideas popular simply by adopting them with great confidence and self-righteousness.  And perhaps they’re right. 9. Our era of federalist dictatorship has been a great “Obedience to Authority” experiment.  And the experiment replicates.  People in fifty different states have been given fifty different (and fluctuating) sets of often arbitrary rules.  And people in fifty different states have, by and large, obeyed.  You could protest, “Each governor is just ‘ordering’ their citizens to do what they would have done on their own volition.”  But that’s grossly overstated.  The store mask mandates in Virginia and Texas were very similar this winter, and almost universally observed.  But when both states dropped mask mandates, most northern Virginians kept wearing masks in stores for a month and more.  In Texas, in contrast, masks in stores vanished almost overnight.  As individuals, Texans wanted less caution than Virginians.  Yet both groups obeyed their authorities. 10. Will voters punish extreme governors in the next election?  Lax governors?  Strict governors?  My poll respondents lean moderately in the direction of, “Dems are more likely to be punished for strictness than Reps for laxity.”  I’m not so sure, but I hope they’re right. True or False? (D) On net, Dems are losing votes for being too strict on COVID. (R) On net, Reps are losing votes for being too lax on COVID. (In both cases, holding the *other* party's position constant). — Bryan Caplan (@bryan_caplan) August 26, 2021 (3 COMMENTS)

Just a week ago, I did a post that questioned a recent study of the effects of ending the $300 supplemental unemployment benefits (in 25 states).  The problem was not that the study was wrong, rather that it was merely one of lots of similar studies done over recent decades, and its results need to be viewed with caution.  It sure didn’t take long for my warning to be validated. Here’s what I said: And lots of other things are going on that might have effected the results.  As just one example, the study occurred during the recent Covid delta variant surge that disproportionately hit the “red states”.  And which are the states that eliminated the $300 bonus?  Mostly red states.  These states also had a significantly lower unemployment rate than average . . . making job growth more difficult. And here’s today’s headline in the FT: US job growth slows sharply as Delta variant hits recovery Total of new positions drops to 235,000 in August from 1.1m in July but unemployment rate falls Read those figures again.  We went from a blowout figure of 1.1 million in July (probably aided by the expiring benefits in 25 states), to an abysmal 235,000 in August.  You don’t need a PhD in economics to understand that this is mostly due to the delta variant.  Indeed, a couple of days ago the American Economic Association convention that takes place in early January each year was moved online.  (A silly decision, in my view.) Last week, I saw some people on twitter criticizing UI skeptics for refusing to admit they were wrong about the effects of ending the supplemental UI benefits.  In light of today’s jobs report, I wonder if those same people will admit they were wrong about the implications of these new studies. PS.  The FT article describes Goldman Sachs providing what seems like a more clear-eyed view of the effects of this policy: Goldman Sachs economists estimate that July’s jobs growth would have been 400,000 higher had the enhanced benefits expired nationwide, and forecast next week’s termination to add 1.5m in payroll gains by the end of the year. (0 COMMENTS)

No shortage of sugar is expected despite the decrease in world supply caused by unusually cold weather in Brazil, the largest producing country. the Wall Street Journal reports  (“Sugar Prices Soar After Brazil Cold Snap,” September 3, 2021): There is no prospect of a sugar shortage, traders and analysts say. Rather, higher prices are likely to draw sugar out of India and into the world market. Note however that the story ignores the impact of higher prices on lowering quantity demanded compared to what it would otherwise have been. On a free market, an increase in demand (the whole schedule of quantities demanded and prices) or a decrease in supply (the whole schedule of quantities supplied and prices) brings a price increase, not a shortage. A shortage is the unavailability of a good at the going price on the legal market. When prices are capped by the government, a shortage is indeed what happens: quantity supplied is lower and quantity demanded higher than they would otherwise be. A price increase is what prevents a shortage. If some national governments cap the price of sugar (or coffee, which is also currently subject to a supply reduction), then, of course, a local shortage will develop. I explained the simple economics of supply and demand as well as the phenomenon of shortages in two Econlog posts: “A Frequent Confusion and the Yo-Yo Economic Model” and “Don’t Confuse Shortage and Smurfage.” The WSJ story or its sources missed another lesson from elementary economics when it states: Adding to sugar’s upward momentum, hedge funds have piled into bets on higher prices. The number of bullish long positions held by money managers in raw-sugar futures outnumbered short positions by 268,094 contracts last week, Commodity Futures Trading Commission data show. That is up from just under 161,000 contracts in early April. Hedge funds and other speculators can influence only short-run prices—in this instance, by buying now when prices are lower and selling later when they expect prices to be higher, thereby pushing down future prices in times of greater scarcity. As Jean-Baptiste Say observed two centuries ago, speculators move goods in time just like merchants move them in space. Speculators smooth price movements. Simple supply-demand analysis goes a long way in explaining what happens on markets. It provides simple explanations of complex phenomena—although understanding why demand curves slope downwards and short-run supply curves upwards does require some economic theory. (1 COMMENTS)