It started when American Enterprise Institute scholar Mark J. Perry tweeted the following graph about minimum wage:
I was annoyed by the word "actually". My current pet peeve is people not paying attention to empirical evidence - I think if you say "actually", there should be more than just a theory backing you up, especially if evidence is actually available. So I started giving Mark a hard time about ignoring the empirical evidence on the minimum wage question.
That's when Alex Tabarrok jumped in and defended the cartoon, saying that it's just a basic supply-and-demand model:
But that's not right. This cartoon actually doesn't show the basic D-S model at all. Let's look at it again:
The basic, Econ 101 D-S model is a model of a market for a single homogeneous good. In the case of the labor market, that good is labor. There's one kind of labor, and everyone who does it gets paid the same wage. Since the wage in that model is equal to the marginal revenue product of labor, this means everyone's labor generates the same amount of revenue (this is also obvious just from the assumption that labor is homogeneous; if everyone's doing the exact same work, they can't each be generating different amounts of revenue). A wage floor in the basic D-S model will put some people out of work, and will raise the amount of revenue generated by each person who keeps her job, thus raising wages as well.
In the cartoon, however, different jobs are stated to generate different amounts of revenue. Also, the last panel implies that a wage floor leaves the revenue generated by workers unchanged. So while the cartoon and the D-S model both predict that minimum wage causes job loss, it's only a coincidence - they're not the same model at all.
The cartoon could be trying to portray a sophisticated model of heterogeneous labor in a highly segmented market. Or, far more likely, it could just be some sloppy political crap made by a cartoonist who doesn't remember his intro econ class very well. Either way, Econ 101 it ain't.
When Alex claimed that the cartoon is an "accurate portrayal" of the D-S model, I waved away his protest, basically saying "Who cares, evidence comes first." But (possibly because I had a nasty virus...excuses, excuses), I failed to notice until this morning that the cartoon is not the D-S model at all! I gave it the benefit of the doubt and assumed Alex was right. But Alex must not have been paying close attention - since he teaches the D-S model in online videos, he obviously does know how that model works.
So the cartoonist, and Mark J. Perry as well, are peddling bad economics. But they managed to momentarily convince both me and Alex that they're just peddling good' ol simple Econ 101. How did they do that?
In my case, it was because I committed the fallacy of the converse. I assumed that because the basic Econ 101 model says minimum wages cause job loss, and the cartoon says the same, the latter must be equal to the former. That's like saying "Horses have legs, I have legs, therefore I must be a horse." I suspect that Alex made the same mistake. And so we both gave a stupid cartoon far more credit than it deserved.
This is 101ism at its worst. It got me too, people. It's a plague, I tell you! A plague!
This post has stimulated a lot of interesting discussion about what the basic Econ 101 supply-and-demand model actually says (see comments, also Twitter).
One point has been that the definition of "the amount of revenue a job generates" - the language in the cartoon - is not clear. I took it to mean "marginal product of labor", but some people take it to mean "average product of labor". Either way, though, the APL generally changes as total labor consumed changes, so the cartoon still doesn't make sense if we define "revenue generated" as APL.
Alex Tabarrok, in the comments, seems to suggest a model in which one "job" is not equal to one differential unit of undifferentiated labor, but actually represents several units. If this is the case, each job will have a different total revenue benefit to employers, and the MPL of a job can't even be well-defined (since it's a discrete unit rather than a differential). So with these definitions, you can definitely say that "each job generates a different amount of revenue".
But the point is, no matter how you define a job, or the revenue generated by a job, that amount will in general change for each job under a wage floor. The amount of revenue one person's job generates depends on who else is working. That's what Econ 101 teaches - or ought to teach, anyway. And that's what the cartoon gets wrong. It shows a wage floor eliminating every job whose "revenue generated" is lower than the wage floor before the implementation of the wage floor. Actually, basic Econ 101 D-S teaches that a wage floor eliminates every job whose total revenue benefit to employers (the integral of marginal revenue product over some range represented by the "job") is less than the wage floor (representing the cost of hiring the worker) after the introduction of the wage floor. Since the wage floor changes the quantity of labor consumed, and since the marginal revenue product of labor is in general not constant, those things are not the same.
And that is why the cartoon is a bad representation of Econ 101. Good Econ 101, in my opinion (and probably in most people's opinions), should teach how marginal benefits and costs change according to the quantity consumed. The cartoon shows them not changing. That's not good Econ 101.