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Lec01-02-Intro_Min_Wage_Debate

Lec01-02-Intro_Min_Wage_Debate - Lectures 1 and 2...

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Lectures 1 and 2 - Introduction and a First Application: The Minimum Wage Debate and Causal Inference in Economics David Autor 14.03 Microeconomic Theory and Public Policy, Fall 2005 1 Introduction to the class This is an intermediate course in microeconomic theory. The class assumes pro°ciency with economic theory at the 14.01 level. It±s helpful if you±ve also taken some statistics or econo- metrics. The class is organized around three themes: 1. Economic theory ²What does it say? What is it good for? 2. Causality ²What do we mean by this? And how do we know it when we see it? 3. Empirical tests ²Economic theory is a way of organizing facts and predicting and inter- preting patterns in the world. We will use data to test theory and use theory to interpret data. We will be analyzing numerous experiments and quasi-experiments in the light of the theory we discuss. De°nition: Quasi-experiment ²Events that unintentionally creates conditions similar to a randomized experiment. Examples: (1) identical twins are separated at birth. This quasi- experiment could be used to analyze nature-nuture questions. (2) Two-hundred million people buy 1 lottery ticket each and 100 of them win the lottery. This quasi-experiment could be used to evaluate the e/ect of wealth on happiness, health, marital dissolution, obesity. With luck, you± ll be impressed by the diversity and sheer cleverness of the range of quasi-experiments that economists have recently used to analyze important questions in social science. Why use quasi-experiments? Because many of the key economic questions center around major life choices and outcomes: health, wealth, education, risk. These things are not usually 1
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open to experimentation due to cost or, more often, ethical constraints. So we look for chance events in the real world that approximate the experiment we would conduct if it were °nancially and ethically feasible. Rather than start the class with a discussion of economic methodology, we± ll start with an application and return to the big picture when that is completed (sometime in the second lecture). 2 A °rst example: The minimum wage and employment debate Agenda 1. Textbook model of competitive labor market 2. Impact of minimum wage on textbook model 3. Assumptions behind this model 4. What happens when we relax an assumption - price taking? 5. Impact of minimum wage when employers have market power. 6. Testing the textbook model and alternatives 7. Natural experiments in economics 8. Card and Krueger article. Minimum wages: A venerable topic in economics and area of ongoing controversy. 2
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3 Textbook model of wages and employment S L D L employment Q* w* wages Labor Supply curve: all of the potential workers in the labor market, arranged according to their ³reservation wage,´which is the lowest wage they will accept to take a job (from low to high) Labor Demand curve: all potential employers in labor market, arranged according to their willingness to pay for a worker (from high to low) Q: What is the key variable in this model? The wage or the number of employed workers?
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