A minimum wage field experiment

Thanks to Dan for inviting me to guest blog!

Tyler Cowen suggests that the expected increase in the minimum wage may serve as a useful “controlled experiment,” at least if the increase applies to Northern Mariana but not to American Samoa. A commenter points out that it’s not a well controlled experiment, because the two territories are not identical. This point rehearses a familiar challenge for empirical legal analysis: Legal scholars don’t have the luxury of randomized studies. Even natural experiments rarely provide conclusive evidence of policy effects.

But we could have randomized studies (or so I will argue in a paper that I am working on). John List is a leader among those who do “field tests” rather than using laboratory experiments or relying on other econometric techniques. (I refer of course to John List the economist, not John List the family murderer, although the boundary between these occupations has allegedly blurred recently.) We could do field tests in law, if only legislatures would cooperate.

An explanation, after the jump.

For example, instead of a hypothetical $1 uniform increase, Congress could provide that the minimum wage will be increased by $0.75 in half the nation’s counties and $1.25 in the other half. The counties would then be selected at random. The resulting data should be considerably more meaningful than anything we can otherwise obtain.

If legislators really disagree about the effects of a minimum wage increase, there should be some incentive to structure the increase in this way. Suppose that Democrats generally believe that there will be at worst small disemployment effects from the higher increase, while Republicans generally believe that there will be higher effects. Assume as a simplification that Democrats generally want larger minimum wage increases than Republicans. Then, Congress could provide that after some experimental period, the national minimum wage will depend on the result of the experiment. The minimum wage would then be $0.75 everywhere or $1.25 everywhere depending on the result of the experiment (or there could be another experimental round). Each side should prefer this to the uniform legislation, because each side should expect to win the bet.

Yet, we almost never see legislative arrangements like this. (If you know of any randomized legislative experiments outside the education area, I’d be very interested in the information.) I think there are a number of reasons for this, both positive and normative. A critical obstacle is cultural. Legislatures don’t want to be seen as playing dice with people’s lives. I believe that it would generally be useful, though, if we could establish randomized experiments as a common, even expected, policy tool. Not every policy intervention lends itself to a perfect experiment; a significant problem with the minimum wage experiment is that workers can walk across county lines. But information is valuable, and we would have much better information with even imperfect legal field tests.

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4 Responses

  1. Michael, isn’t at least one reason that we don’t get these sort of information seeking legislative experiments (in addition to the cultural forces you cite) because of the time gap between the experiment and the results? I mean, to do this sort of diff-in-diff style of analysis in labor markets and other settings we need some time to elapse after the experiment before collecting data. Then there is the time elapsed in collecting and analyzing the data and time involved in forming a consensus re: interpretation of the results. The legislators doing the experimenting may well not be around to see the fruits of their creative efforts. Of course, their is always the more sinister explanation that they are not interested in more information …

  2. …or we could just let the states act independently in this arena. You know, kind of like the original idea behind the Republic…

  3. Andrew says:

    Would this experiment really work, though? The problem is that your control and your experimental groups would necessarily interact with each other. Imagine I am going to set up a business in a metropolitan area that spans two counties (or I am going to expand one branch, when I have branches in both). If I rely on low-wage labor, I might well choose the low-wage county. Similarly, if I were a low-wage laborer in the same area, I would seek work in the high-wage county. Disentangling these two phenomena would be difficult. (I suspect other macroeconomic factors, notably the unemployment rate, would determine which was more powerful.) Moreover, both would distort our experiment, which is to determine not where I will establish my business if I am faced with two different minimum wages, but whether I would establish it at all given the higher wage. It would be like conducting a trial of an immunostimulating drug while allowing the experimental subjects to steal white blood cells from the control subjects.

    The experiment might answer the question as to whether the US might lose jobs to other countries, but it would not tell us whether it would lose jobs compared to the hypothetical US where we did not raise wages. (I suspect, too, that the loss of jobs to foreign countries would be minimal, since most minimum-wage jobs are service-industry jobs that cannot be easily exported.)

    I haven’t thought this through entirely, but that is my first reaction.

  4. David S. Cohen says:

    Did the New York Times read your post? Check out today’s article comparing Idaho and Washington border towns.