Minimum Wage Forecasting Project

The major project in my economics forecasting project is to forecast what effect, if any, an increase in the federal minimum wage would have on the hiring chances of a young worker. I’m going to isolate my cohort to 16 to 19 year olds.

Venturing into a somewhat unkown field, I would like to use panel data for my analysis, and I’m thinking of doing a comparison of Virginia, which uses the federal minmum wage, and North Carolina, which has a minimum wage currently set at 6.15 an hour, which went into effect on January 1, 2007. I haven’t yet settled on the actual cross-section, but I was thinking of dividing into NC_urban and NC_rural and VA_urban and VA_rural. I would like to find some way to have a suburban factor, too, but I’m not sure how to do that yet.

In any event, since it is a forecast I need to decide A) What exactly it is I intend to forecast and B) How I intend to explain changes in whatever it is I do forecast.

The variable to be explained could either be the unemployment rate of individuals aged 16 to 19, or it could be the probability that a person aged 16 to 19, whose current wage is inbetween the current minimum wage and the new minimum wage, will be “disemployed” – the term the literature uses a great deal. The latter is a more direct approach but will probably require a subtler model. So be it. I’ll roll with for now.

Edit:  I realized not long after finishing this post that I could not use probability of disemployment by minimum wage as a dependent variable.  That would require surveying individual workers.  So I think I’ll stick with the unemployment rate for 16 to 19 year olds as my dependent variable.

How to explain this? That comes down to supply and demand for labor and also to the economic short run fluctuations.

Since what I’m attempting to do is explain the variation in unemployment of 16 to 19 year olds as a result of changes in the minimum wage, it is necessary to control for all other factors that will affect the level of employment of someone within that cohort.  So first there’s the question of labor supply:

The quantity of labor supplied = f(wage, cohort size, season [christmas? summer?], educational attainment, in school? [yes/no], family income, race, geographical region[urban, suburban, rural]).

The quantity of labor demanded = f(wage, marginal rate of technical substitution, # of firms, turnover rate)

Of course, if we’re talking about trying to measure the effect that changes in the minimum wage, then we’re talking about a still smaller group of people who are “at risk” – that is, whose current wage is between the current minimum and the future minimum.  Jobs that would hire people for such low wages are typically fast food and retail in general, as well as a few services here and there.  Then there are those youngsters who work on farms and perhaps do even more complicated work but, since they live in rural areas, have lower wages in general due to a lower cost of living.

Introduction – Hopes for the Future

Notwithstanding the research blog that was required for my economic analysis class last semester, my experience with blogs begins with my livejournal.  However, this past weekend I had the opportunity to attend the Student Academy and I think my experience confirmed what I’ve been thinking I should do for a while now:  Start committing my more constructive mental and academic events and activities to a publicly accessible blog. 

 That said, there are essentially four broad topics which I will broach in this blog, but if it becomes necessary I will go ahead and run separate blogs in order to maintain some coherence.  These topics are:

1) My ongoing research concerning virtual economies, especially as regards world of warcraft.

This summer I hope to be able to gather the data necessary to test my hypotheses concerning the interactionss between real and virtual economies, especially in MMOs.  I’m not as interested in situations where the interaction is intentionally designed into the game, such as is the case with Project Entropia or Second Life.  My interest is more in the destructive interactions between games like WoW, EQ, EQII, and others with the real life economy.  More on this as it develops, but you can read about the early stages of my research in the blog linked above.

2. Also starting this summer, I hope to begin work on my honor’s thesis in economics with my good friend Becca under the supervision of a few of my professors, primarily Prof. Shawn Humphrey.  Becca is actually an anthropology major, among other things, and we hope to be able to do some interdisciplinary work in combining two fields of social science that often find themselves at odds with one another.  The exact topic is yet to be identified, so again there isn’t much to say about this right now.  More as it develops.

3.  Critique of Economics

As much as I love what I do, and as good as I’d like to think I am at doing it, I am often unsatisfied with certain aspects of traditional economics.  Neither, however, do I necessarily consider myself a member of one particular school of economic thought rather than another.  For lack of a better label, I’ll just call myself a critical economist. 

I think that economists wield a great deal of political power, and we often assume that this is the case because we’re just so damned good at predicting and analyzing human behavior.  While I think that is true, I also think that the assumptions we tend to make about humans in order to analyze them is both advantageous to those who wield political power and, in some cases, unsubstantiated.  You will not find me arguing  here that people are not rational; rather, I am interested in the assumptions we like to make about such socially constructed concepts as the self, conflict, government, economic systems, etc. that act to structure incentives and which are often assumed away or completely unacknowledged.

I’m interested in practicing an economics that analyzes human behavior – not one that forces undue assumptions about behavior onto humans.  This is the critical economics I will be writing about here.

4.  Philosophical meanderings

Along with being an economics major, I take at least one philosophy course every semester, and I’ve been doing this in such a way as to follow the chronological order of western philosophical thought.  I started with Thales and now I’m on Nietzsche.  Next semester is existentialism.  I enjoy the places philosophy takes me, and where I think what I have to say is intersting, I’ll be putting it up here. 

 So this is the big plan; if this blog can live up to just one of these purposes, that’d be great.