The traditional first-year economics minimum wage story starts with a minimum wage that is binding above the equilibrium wage. This increases the quantity of labour supplied (more people wanting to work more hours at the higher wage), and decreases the quantity of labour demanded (fewer employers willing to employ workers for fewer total hours), leading to excess supply of labour (unemployment). Further increases in the minimum wage simply exacerbate the problem. And the early empirical research supported that story.
Then came the research that started to debunk the idea of minimum wages leading to increased unemployment, mostly involving cross-border pairs of counties in the U.S., and often focusing on teenagers or fast food workers (e.g. probably the most famous piece is this one by David Card and Alan Krueger (ungated)). In support of these findings, the argument was made that employers had monopsony power, and minimum wages would therefore increase employment (see here for an explanation of this).
Last week Adam Ozimek updated the state of research on the minimum wage. To briefly summarise Adam's summary: several recent papers, improving on the methodology of earlier contributions, have found significant job losses when the minimum wage is increased, "the lost job experience hurt workers even after they eventually found new jobs", and that "low-skilled workers move out of states that raise minimum wages" (which likely means that many research projects using macro data will run the risk of underestimating the disemployment effects of minimum wage increases).
So, those of us still teaching that high minimum wages increase unemployment can breathe a little easier, with the latest research again providing support for the disemployment effects of higher minimum wages.
[HT]: Eric Crampton at Offsetting Behaviour
Friday, 29 May 2015
Wednesday, 27 May 2015
Poisoning rhino horns to save the rhinos
Earlier this month I wrote a post about the ineffectiveness of burning ivory to save elephants. This week, out of the same file, we have the Rhino Rescue Project, poisoning rhino horns:
However, the eventual buyers of the horns may not be so lucky. Rhino horn is sought after as a therapeutic drug ingredient in lots of Asian countries - believed to cure cancer and many other ills. However, if there is a chance that your rhino horn elixir is going to make your sick, maybe you re-consider. That should reduce the demand for rhino horns. Decreasing demand is a much better solution to the problem, especially if you are decreasing the supply at the same time.
Here's my final diagram from that earlier post on ivory burning:
If demand decreases (from D0 to D1), and supply decreases (from S0 to S1), you end up with a large decrease in rhino horns traded in the market (from Q0 to Q1), with little change in price. But importantly, less trade in rhino horns means fewer dead rhinos. Although then the poachers probably move back to hunting elephants...
[HT: Marginal Revolution]
So, the Rhino Rescue Project argues that you can save the rhinos by making it more costly for poachers to handle the rhino horns. Are the effects the same as those I noted in the earlier post about ivory burning? In part, yes. It will increase the costs to poachers (since now they face the risk of being infected by the ectoparasiticides), which decreases the supply of rhino horns. Decreased supply increases the price of rhino horns, which would encourage more poaching. Besides that, the costs to the poachers can easily be dealt with by poachers wearing gloves when handling the horns.Hern, the co-founder of the Rhino Rescue Project, has spent the last four years “devaluing” the horns of rhinos by infusing them with ectoparasiticides — or anti-parasite drugs — and pink dye. The dye isn't visible on the outside, and the ectoparasiticides are harmless to the rhinos when injected into their horns. But humans who handle or consume the horns may not be so lucky.“At a minimum it would start with diarrhea, nausea, vomiting, severe headaches, all the way up to nervous symptoms, which could be permanent,” Hern says. “Some ectoparasiticides also precipitate the development of cancers later on in life.”
However, the eventual buyers of the horns may not be so lucky. Rhino horn is sought after as a therapeutic drug ingredient in lots of Asian countries - believed to cure cancer and many other ills. However, if there is a chance that your rhino horn elixir is going to make your sick, maybe you re-consider. That should reduce the demand for rhino horns. Decreasing demand is a much better solution to the problem, especially if you are decreasing the supply at the same time.
Here's my final diagram from that earlier post on ivory burning:
If demand decreases (from D0 to D1), and supply decreases (from S0 to S1), you end up with a large decrease in rhino horns traded in the market (from Q0 to Q1), with little change in price. But importantly, less trade in rhino horns means fewer dead rhinos. Although then the poachers probably move back to hunting elephants...
[HT: Marginal Revolution]
Monday, 25 May 2015
John Forbes Nash Jr., 1928-2015
Last week in ECON100 we covered game theory, including the concept of Nash equilibrium. Tragically, John Forbes Nash Jr. (for whom the Nash equilibrium is named) and his wife Alicia were killed in a car accident in New Jersey on Saturday. The L.A. Times obituary is here, and New York Times here, while the New Zealand Herald also covered the story this morning.
Nash will be best known for his work as a mathematician (rather than an economist), and in particular his PhD thesis which was just 27-pages long. It was this work that introduced the world to the concept that would later become known as Nash equilibrium, and that won him the Nobel Prize for economics in 1994. At the time of the accident, he and his wife had just returned from Norway where he had just received the Abel Prize from The Norwegian Academy of Science and Letters.
Sadly, I can't recommend any of his writing to my first-year students or regular readers because of the heavy mathematical content, but here is a great summary of his contributions from his Nobel seminar in 1994, and here is an interview with Nash from 2004.
Nash will be best known for his work as a mathematician (rather than an economist), and in particular his PhD thesis which was just 27-pages long. It was this work that introduced the world to the concept that would later become known as Nash equilibrium, and that won him the Nobel Prize for economics in 1994. At the time of the accident, he and his wife had just returned from Norway where he had just received the Abel Prize from The Norwegian Academy of Science and Letters.
Sadly, I can't recommend any of his writing to my first-year students or regular readers because of the heavy mathematical content, but here is a great summary of his contributions from his Nobel seminar in 1994, and here is an interview with Nash from 2004.
Sunday, 24 May 2015
Why New Zealanders face a double-whammy from the new bio-security and customs levy
One of the announcements in the Budget last Thursday was a new bio-security and customs levy of $16 for arriving passengers and $6 for departing passengers. Notwithstanding the government's reluctance to call it such, this is a tax on travellers, and has generated quite a bit of anger, not least from the tourism industry. Auckland Airport has it right when they said (in the linked article):
In terms of relative cost, the levy is probably much less than one percent of the cost of long haul travel to New Zealand so probably won't make a whole lot of difference either way for many long haul travellers. However, the addition of $22 onto a budget fare to/from Australia or the Pacific Islands is quite substantial - around five percent of the cheapest fares on offer. New Zealanders make up a larger proportion of short-haul passengers than long-haul passengers on flights to/from New Zealand (compare departures of New Zealanders with arrivals of international visitors in Statistics New Zealand data here). So, the levy is likely to be more significant for New Zealanders than for international visitors because it affects the cost of flights New Zealanders take relatively more than for international visitors, and New Zealanders have no alternative but to pay the levy. So, New Zealanders should be less price sensitive (because of having no options), but also pay a higher proportionate increase in price for fares (because of the higher proportion of low-cost short-haul fares).
However, coming back to the effects of the tax on price sensitive travellers versus those who are less price sensitive, we can illustrate the difference on a diagram. Assuming a starting price that is the same (P0) [*] and the same starting quantity (Q0), demand by price sensitive travellers is D1 and demand by less-price-sensitive travellers is D2 (note that D1 is flatter than D2). We illustrate the bio-security and customs levy using the S + tax curve (or maybe that should be S + levy?), which is the supply curve shifted upwards by the per-unit value of the levy ($22).
For price sensitive travellers, the price paid by these travellers increases to PC1, the effective price for the airlines falls to PP1 (this is the price the consumers pay, minus the levy), and quantity of tickets falls to QT1. In contrast, for less-price-sensitive travellers, the price paid by these travellers increases to PC2, the effective price for the airlines falls to PP2 (this is the price the consumers pay, minus the levy), and quantity of tickets falls to QT2. Note that the price difference is larger for the less-price-sensitive travellers than price sensitive travellers, and the change in quantity is larger for the price sensitive travellers. So, price sensitive travellers are likely to be turned off travel to/from New Zealand by the levy in greater numbers than less-price-sensitive travellers (as noted by Auckland Airport). For those of you keeping score, New Zealanders face a double-whammy here - higher proportionate increase in fares firstly (as noted above), plus higher fare increases on top of that because of being less price sensitive than other travellers.
Finally, from the diagram the deadweight loss of the levy will be relatively larger from price sensitive travellers (the area BEF is the deadweight loss for price sensitive travellers, compared with the area AED for less-price-sensitive travellers).
One final point: Given the levy will affect travel to/from Australia disproportionately more than travel to/from other destinations, maybe this is a modest way of ensuring a reduction in net migration from Australia, while keeping those who are already here?
*****
[*] This of course would not be true. Airlines are very effective at price discrimination, so less price sensitive travellers typically pay a higher fare than less price sensitive travellers. To see why, think about the difference between paying for a flight long in advance, versus paying a few days before the flight. Travellers paying long in advance typically have many other options for destination, route, date of travel, etc. so are more price sensitive, and pay a lower price. Travellers buying a flight a few days beforehand typically have to be somewhere in a hurry - there are few other options to them, so they are less price sensitive, and pay a higher price. However, for the purposes of this exercise let's say we deflate the price differential so that both prices are on different scales.
...the new tax could impact New Zealand's competitiveness as a tourist destination, especially for those travellers who are price sensitive.To that I will add that it will be more significant for New Zealander travellers than for international visitors to New Zealand. Why? New Zealander travellers have no option when undertaking international travel than to pay the new levy - they will pay the $22 as part of the ticket price travelling to and from New Zealand because New Zealand is the origin of their travel. They can't avoid paying it. International visitors on the other hand have other options - they don't need to travel to New Zealand. Maybe the $22 extra cost is enough to sway them in favour of some other destination.
In terms of relative cost, the levy is probably much less than one percent of the cost of long haul travel to New Zealand so probably won't make a whole lot of difference either way for many long haul travellers. However, the addition of $22 onto a budget fare to/from Australia or the Pacific Islands is quite substantial - around five percent of the cheapest fares on offer. New Zealanders make up a larger proportion of short-haul passengers than long-haul passengers on flights to/from New Zealand (compare departures of New Zealanders with arrivals of international visitors in Statistics New Zealand data here). So, the levy is likely to be more significant for New Zealanders than for international visitors because it affects the cost of flights New Zealanders take relatively more than for international visitors, and New Zealanders have no alternative but to pay the levy. So, New Zealanders should be less price sensitive (because of having no options), but also pay a higher proportionate increase in price for fares (because of the higher proportion of low-cost short-haul fares).
However, coming back to the effects of the tax on price sensitive travellers versus those who are less price sensitive, we can illustrate the difference on a diagram. Assuming a starting price that is the same (P0) [*] and the same starting quantity (Q0), demand by price sensitive travellers is D1 and demand by less-price-sensitive travellers is D2 (note that D1 is flatter than D2). We illustrate the bio-security and customs levy using the S + tax curve (or maybe that should be S + levy?), which is the supply curve shifted upwards by the per-unit value of the levy ($22).
For price sensitive travellers, the price paid by these travellers increases to PC1, the effective price for the airlines falls to PP1 (this is the price the consumers pay, minus the levy), and quantity of tickets falls to QT1. In contrast, for less-price-sensitive travellers, the price paid by these travellers increases to PC2, the effective price for the airlines falls to PP2 (this is the price the consumers pay, minus the levy), and quantity of tickets falls to QT2. Note that the price difference is larger for the less-price-sensitive travellers than price sensitive travellers, and the change in quantity is larger for the price sensitive travellers. So, price sensitive travellers are likely to be turned off travel to/from New Zealand by the levy in greater numbers than less-price-sensitive travellers (as noted by Auckland Airport). For those of you keeping score, New Zealanders face a double-whammy here - higher proportionate increase in fares firstly (as noted above), plus higher fare increases on top of that because of being less price sensitive than other travellers.
Finally, from the diagram the deadweight loss of the levy will be relatively larger from price sensitive travellers (the area BEF is the deadweight loss for price sensitive travellers, compared with the area AED for less-price-sensitive travellers).
One final point: Given the levy will affect travel to/from Australia disproportionately more than travel to/from other destinations, maybe this is a modest way of ensuring a reduction in net migration from Australia, while keeping those who are already here?
*****
[*] This of course would not be true. Airlines are very effective at price discrimination, so less price sensitive travellers typically pay a higher fare than less price sensitive travellers. To see why, think about the difference between paying for a flight long in advance, versus paying a few days before the flight. Travellers paying long in advance typically have many other options for destination, route, date of travel, etc. so are more price sensitive, and pay a lower price. Travellers buying a flight a few days beforehand typically have to be somewhere in a hurry - there are few other options to them, so they are less price sensitive, and pay a higher price. However, for the purposes of this exercise let's say we deflate the price differential so that both prices are on different scales.
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