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Consistency about elasticities

Summary:
If you think “stimulus” is effective right now, presumably you think supply curves are pretty elastic and thus fairly horizontal. That is, some increase in price/offer will induce a lot more output. If you think we should hike the minimum wage right now, presumably you think supply curves are pretty inelastic and thus fairly vertical.  That is, some increase in price for the inputs will lead not to much of a drop in output and employment, maybe none at all.  The supply curve is fairly vertical. You might somehow think that supply is elastic with respect to output price, but inelastic with respect to input price.  Is there a model that can generate that conclusion?  It is the net profit on the marginal output units that should matter for decisions.  And did you start with that model, or

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If you think “stimulus” is effective right now, presumably you think supply curves are pretty elastic and thus fairly horizontal. That is, some increase in price/offer will induce a lot more output.

If you think we should hike the minimum wage right now, presumably you think supply curves are pretty inelastic and thus fairly vertical.  That is, some increase in price for the inputs will lead not to much of a drop in output and employment, maybe none at all.  The supply curve is fairly vertical.

You might somehow think that supply is elastic with respect to output price, but inelastic with respect to input price.  Is there a model that can generate that conclusion?  It is the net profit on the marginal output units that should matter for decisions.  And did you start with that model, or develop it afterwards to justify your dual intuitions?

Do you right now favor both a lot of stimulus and a big minimum wage hike?  What are your assumptions about elasticities?  Show your work!

Do you favor a minimum wage hike, but also think a lot of immigrants to this country won’t lower real wages by very much if at all?  The latter view would seem to imply a fairly elastic demand for less skilled labor.  (The new labor can be absorbed into the market with only a small price change.)  Are your assumptions about elasticities consistent there as well?

Are your assumptions about elasticity with respect to stimulus and elasticity with respect to tax cuts consistent?

If you favor a minimum wage hike, do you criticize wage subsidies because inelastic demand for labor means most of the value of the wage subsidy will be captured by the employer? Or do you somehow want both policies at the same time, because they both involve “government helping people”?

If you favor a minimum wage hike because you think the demand for labor is inelastic, does that mean you don’t see “downward sticky wages” as a big problem?  After all, the demand for labor is inelastic, right?

What are your assumptions about elasticities?  And are those even the assumptions that actually matter to you?

How many economists do you know who start with beliefs about elasticities and then apply them consistently, before considering the politics of the conclusions?

How many of you actually think you are consistent across all of these views about elasticities?  How many of you think you actually have a jerry-rigged model (“increasing returns for me but not for thee?”) that holds it all together?

Inspired by these tweets from Garett Jones.

The post Consistency about elasticities appeared first on Marginal REVOLUTION.

Tyler Cowen
Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics as a professor at George Mason University and is co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. Cowen and Tabarrok have also ventured into online education by starting Marginal Revolution University. He currently writes the "Economic Scene" column for the New York Times, and he also writes for such publications as The New Republic, the Wall Street Journal, Forbes, Newsweek, and the Wilson Quarterly.

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