Christmas Inflation: 3.1 percent

In the spring in Ec 10, we will discuss how economists measure inflation using price indexes. Here is an offbeat example:

The cost of "The Twelve Days of Christmas" is on the rise - again.

Buying each item in the song just once - from a partridge in a pear tree to 12 drummers drumming - will cost you $18,920, or 3.1% more than last year, according to PNC Financial Services Group.

The total cost of items gifted by a True Love who repeats all of the song's verses costs more than ever before - $75,122 - for all 364 items, up from $72,608 in 2005, a 3.5% increase.

While prices for the partridge, two turtledoves, three French hens, six geese and seven swans remained the same as last year, higher wages made the lords a-leaping, ladies dancing and pipers piping costlier. The maids a-milking, however, make the federal minimum wage, which has been $5.15 per hour since 1997.

From the NY Daily News.

From Harvard via Youtube

Professors John Campbell and Ed Glaeser recruit students to the Harvard econ department. Here are the "outtakes" first shown at last night's grad student skit party. Now doesn't this make all of you want to come to Harvard for a PhD?

Update: Also from the skit party, here's a sneak preview of next year's recruiting video.

Can 600 economists all be wrong?

An ec 10 student recently asked me why some economists, including some prominent ones, favor an increase in the minimum wage, in light of the standard economic analysis of price floors. To avoid putting words in other people's mouths, I asked one of the leading economists who signed the open letter supporting a minimum-wage increase exactly that question.

My friend told me that he viewed the minimum wage as a second-best policy. He would prefer increased cash payments to the poor, such as a much-expanded earned income tax credit (EITC) or a more general negative income tax. But if his first-best policy was politically impossible, a minimum-wage increase was, in his view, an improvement over the status quo. He admitted that the minimum wage had adverse effects on employment, but he judged those to be modest in size. All things considered, he concluded that a higher minimum wage was better than nothing.

There is, of course, another side of this coin. Some economists, such as David Neumark, view the adverse employment effects as larger than my friend does. But, even if my friend is correct that the disemployment effects are modest, one should look at the magnitude of the anti-poverty effects. The minimum wage is not well targeted to poor families. Many minimum-wage earners are like I was in the summer of 1976: teenagers from middle-class homes with minimal skill and experience, getting their first taste of working.

Economists Richard Burkhauser (Cornell University) and Joseph Sabia (University of Georgia) report:

a beneficiary from a proposed federal minimum wage hike to $7.25 an hour is far more likely to be in a family earning more than three times the poverty line than in a poor family. In total, only 12.7 percent of the benefits from a federal minimum wage increase to $7.25 an hour would go to poor families. In contrast, 63 percent of benefits would go to families earning more than twice the poverty line and 42 percent would go to families earning more than three times the poverty line.

So even if my friend is right that the disemployment effects are modest, it seems that any benefits from the standpoint of poverty reduction are likely to be modest as well. When I asked him about this, he agreed.

As I noted in a previous post, professional economists are divided about whether the minimum wage should now be increased or eliminated. But I believe that relatively few economists would include the minimum wage as part of their first-best package of policies.