For decades, everyone assumed higher minimum wages inevitably cost jobs. It was an article of faith, and it was rarely questioned.
That was until a pair of Princeton economists, including then-32-year-old Alan Krueger, put the theory to the test. In the early 1990s New Jersey increased its minimum wage to $US5.05 per hour — $US0.80 higher than in neighbouring Pennsylvania.
Krueger and his colleague surveyed hundreds of fast-food restaurants, and their findings broke new ground. Compared to Pennsylvania, New Jersey actually added jobs. They found “no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state”.
Krueger, 58, died suddenly last month. An adviser to two US presidents, he has been remembered for his impact on American public policy as well as economics research. But Krueger’s influence resonates in Australian debates too — and not just in the fight for a higher minimum wage, which Prime Minister Scott Morrison says would force businesses to sack workers.
Beyond minimum wage, Krueger’s work reshaped the debate on inequality. As president Barack Obama’s chief economist, Krueger popularised the “Great Gatsby curve” which signalled a negative relationship between inequality and social mobility. It confirmed what many progressives suspected but had been unable to show: the more unequal a society is, the more a person’s financial circumstances are determined by their parents’ circumstances.
In other words: when the rungs on the economic ladder are too far apart, the ladder becomes difficult to climb.
This busts a popular myth peddled by Australian conservatives: that policy-makers ought to focus exclusively on equality of opportunity, disregarding equality of outcome. In truth, the two are linked in a way that should disturb progressives and conservatives alike: economic inequality skews opportunity, stifling mobility from one generation to the next.
In recent years, Krueger shone a new spotlight on an old problem: monopsony power. Just as monopoly power allows big companies to jack up prices for consumers, monopsony power allows companies to hold down prices for suppliers.
In labour markets, Krueger argued, monopsony power hurts workers. Employer concentration restricts worker mobility and suppresses pay. And while there are concrete ways to improve worker bargaining power, governments are not doing enough to bring about change.
As Australians grapple with stagnant wages, we should take a closer look at competition. The federal opposition is alive to the problem of monopsonies, and would introduce a suite of competition and small business policies aimed at improving market dynamism.
But perhaps Krueger’s most important legacy is his contribution to the so-called “credibility revolution”.
Always willing to challenge conventional wisdom, Krueger insisted on finding real-world answers to economic questions. He was a pioneer in using natural experiments and randomised trials. Rejecting baseless theories and self-serving data, Krueger and his colleagues set a new standard for identifying policies that actually work.
In Australia, openness to randomised trials has driven calls to create an Office of the Evaluator General. Labor has proposed rigorous evaluations of Commonwealth government programs, led by a new office within Treasury. As well as identifying what works, the government would stop funding initiatives shown to be ineffective. While the idea gets little attention, it has the potential to transform social policy across the country.
In a statement, former president Obama remembered Krueger as someone who went deeper than numbers and charts. “He saw economic policy not as a matter of abstract theories, but as a way to make people’s lives better.”
Canberra needs more Krueger, and less of the simplistic “economics 101” that politicians love to cite. With an election around the corner, Australians deserve an economic debate of substance, not dogma. Voters will reward policies backed up by evidence and based on improving the lives of real people.
Daniel Allman is an Australian lawyer based in New York.