Saturday, February 22, 2014

The Congressional Budget Office and Alice in Wonderland

“Begin at the beginning," the King said, very gravely, "and go on till you come to the end: then stop.” Lewis Carroll, Alice in Wonderland.

I first read, or it was read to me by my grandmother, Alice in Wonderland before I was six or seven years old. A few years later my grandmother gave me her 1870's copy of Alice and I still have it on my bookshelf, a bit worse for wear these sixty years later. I was reminded of some of the lines from the book this morning while reading a post by Don Boudreaux (Professor of Economics at George Mason University) about the CBO study of the proposed minimum wage hike on employment.

The CBO considered the role of publications bias on their study and to their mind academic journals “According to some analyses of the minimum-wage literature, an unexpectedly large number of studies report a negative effect on employment with a degree of precision just above conventional thresholds for publication.” Because of this the CBO study assumes that the bias of published data would be stronger toward a negative employment outcome for minimum wage workers.

Now standard economic theory predicts that hiking the minimum wage reduces the number of jobs that low-skilled, first time job seekers have available. This standard supply and demand theory is just that, standard theory, while the CBO assumes that the number of studies about negative impacts show a bias in the publications (which must be "adjusted" for).

Because of this, the CBO study may give undue weight to the no or small effect publications and not enough weight to the standard supply and demand analysis. Don's conclusion is that “the negative effects on employment of minimum-wage legislation are likely even greater than those predicted by the CBO.”

I have said many times that original source data is important but I also have said that source is not everything. One must know how the data is "manipulated" to have a true understanding of the meaning of the data presented.


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