Thursday, July 29, 2010

Retrospective on ShortTask vs. Predictify. Only the strong survive!

Internet business bears some resemblance to the law of the jungle, or perhaps Lord of the Flies -- the strong survive and eat the tattered remains of the weak (OK, so maybe I only read the beginning and the end). As a case study, let's compare ShortTask, which is still in business, with Predictify, a website that has closed its doors. Along the way, there are some lessons for other online entrepreneurs on how to avoid pitfalls of the past.

Both ShortTask and Predictify harnessed the power of the web for commercial purposes. A brief background:


ShortTask: people seeking solutions for simple online tasks can post a job description and cash offering (anywhere from a few cents to several dollars, depending on difficulty) and individuals can choose which tasks they wish to complete. At the time of this writing, there were 12,849 tasks available to choose from, and over a million have been completed so far.

Predictify: a predictions market where anyone can post a question (e.g. "will Tiger Woods be over or under par in the next Iron Woods Open, and by how much") and the guessers who are most accurate receive a higher reputation or on occasion, a cash reward. I'm fond of Predictify, as it made me twenty bucks a few years back, but sadly it closed back in 2009. Note: Don't try going to their website, it's been replaced by something shady that will install malware on your computer.

First, the similarities between the two sites. Both ShortTask and Predictify rely on individuals willing to devote time toward a goal set by others. Both also allow experienced users to gain a reputation, increasing their opportunity for higher rewards.

It's about there that the similarities end. Predictify allowed anyone to submit a question free of charge. The majority of prediction topics would only boost your reputation, with paid questions few and far between. On ShortTask, everything has a direct dollar amount (even if very small).

How did Predictify ever hope to make money, or was it just a bad idea from the start? Theoretically, Predictify had a kernel of profitability. As some commentators quickly noted, the real purpose was to function as a survey engine for marketing purposes. The cash reward was an incentive to guess correctly, so the data collected would have maximum accuracy. The downfall was that there's no way to tell how accurate their predictions actually were overall.

Unlike Predictify, where you never could really tell when or if you'd get a reward, ShortTask is very consistent and straightforward with how to make money. Complete your task, report back, get paid. It's been called one of the most effective money-making portals, and there are over 5,000 employers regularly assigning tasks. Especially with the growing popularity of social media marketing in lieu of traditional advertising, ShortTask has become a useful tool to get online promotions done without hiring an outside consultant. Filling the need for temporary yet reliable online labor has created a steady niche that will likely keep ShortTask around for some time.

What can other aspiring entrepreneurs learn from the differing fates of ShortTask and Predictify?
A few thoughts:
  • Find a need and fill it. Or, if you can't think of what people need, provide avenues for them to tell you themselves. The most successful websites today (Amazon, Craig's List, Facebook, Ebay, etc.) are all match-making services which allow buyers and sellers to find each other more easily. This capacity takes advantage of the best parts of the web - instant connectivity and global access - to bring people together, then lets individual business sense do the rest. ShortTask is one example of a niche market within this larger trend, and its success demonstrates there might be room for other niches as well.
  • Fill a direct need, not an indirect one. Predictify users were rewarded for accuracy, but this was just a proxy to generate better survey results. ShortTask is very simple and direct -- they pay for results. Either you complete the assigned task or not, so there is immediate feedback and quality control. Instead of doing indirect marketing, ShortTask provides connections so companies have it done themselves. Intuitively, users are turned off by jumping through hoops. Simplicity keeps transaction costs to a bare minimum, encouraging more use of the site.
  • Feedback goes both ways. On Predictify, users interacted solely via predictions, and couldn't tell whether their guesses were right or wrong until the event occurred. There was no way to calibrate your guessing strategy, because by the time you knew what had gone wrong, it was too late to adjust your other (already made) predictions. For ShortTask, there is a two-way dialogue between seekers and solvers, where both have to be satisfied by each transaction. ShortTask realizes that if people can plan their social schedule online, they can probably plan the work-day there too. This shows new businesses that can harness the untapped personal initiative available on the internet have a better chance of success.

Unfashionably Economic

Wednesday, July 28, 2010

If Bernie Madoff had a hobby... an exploration of D.O.D. accounting practices

In the news: Special Inspector General for Iraq Reconstruction says that 96% of the money from the Development Fund for Iraq cannot be accounted for. This is very different, and probably worse, than saying those funds were ineffective. Based on press releases, the Department of Defense just hasn't a clue where the money went. To further illustrate the situation, see the attached pie chart.

No one has ever accused the military of being efficient, but even with the infamous $640 toilet seat we at least knew where the money went. If there's one thing a giant bureaucracy like the D.O.D. should be good at, it's keeping paperwork. Those times seem to have changed since the Bush presidency and Iraq invasion.  

So where did those 8.7 billion dollars go? As a personal guess, we'll probably find Jimmy Hoffa before those funds are fully accounted for. However, based on the record so far, it's likely that money was eaten up by the fraud, bribery and theft which has plagued reconstruction efforts from the start. How did this problem begin?

This isn't the first scandal involving misappropriation of funds in Iraq. Back in 2005, when the Development Fund for Iraq was still young, they had almost exactly the same problem involving another $8.8 billion. Money was spent wildly with little or no record keeping. Large sums of the missing money had gone to private contractors, military and otherwise, and other undisclosed expenses. Fraud and other malfeasance cost the reconstruction at least $13 billion more in 2008 as well.

What makes the recent DFI scandal so egregious is that it's not even our money that's being wasted. The Development Fund was built by diverting profits from Iraq's oil and natural gas industry. While the "no blood for oil" slogan is still silly, it doesn't help America's case in world opinion when we make crowds of chanting hippies sound prescient.

The money missing from Iraq doesn't mean our military is full of crooks; far from it. Instead, these scandals are a lesson in incentives under government bureaucracy. A business interacts directly with customers or investors who provide operating capital, and it must perform to their satisfaction or go out of business. In  government, incentives are less clear. The taxpayers will foot the bill no matter what, so the average bureaucrat (or soldier) is accountable only to their superiors. When it comes to the DFI, misuse of funds becomes even more likely because there is another party involved-- the Iraqi people.  As another group taking the costs without much say in how development money is spent, it's no surprise that they got the short end of the deal.

Private military contractors earn up to ten times an equivalent rank's salary in the U.S. military. Viewed from the ground, the difference between private industry and government must be stark and demoralizing. With soldiers taking the same risks for less pay,  the message is loud and clear -- the government is underpaying for your services. The opportunity for rent-seeking becomes too much to ignore. Even high-ranking members of the military were unable to resist the allure of easy cash. It's time for the D.O.D. to make up its mind: either increase military salaries until enough people enlist, or hire an exclusively private military and let the market decide what it's worth to put your life on the line.

Tuesday, July 27, 2010

"Mayhem is Coming" -- the new Allstate ads are hilarious

While I was getting my reality TV fix last night, I was exposed to the most hilarious insurance ad I've ever seen. A preface: when I started this blog all those weeks ago, I made a solemn oath to keep it about serious subjects, not whatever random crud I stumbled across on YouTube. Well, these were so funny I had to break that promise.


Usually when I think of funny ads, the immediate association is beer or deodorant commercials, not insurance. Allstate ads especially have been fairly somber, featuring a very serious Dennis Haysbert (famous for his role on "24" as a black democratic president, where he far outshone his contemporary, President Bush, in terms of crisis decision-making). Now, the tone to their ads has completely changed.

Allstate's new slogan: "Mayhem is Coming." The mayhem is personified by Dean Winters. I really can't do it justice, you'll just have to watch for yourself.
YouTube Links:
Destructive Puppy eats your Back Seat
Teenage driver smashes your New Car
The keying that wrecks your Paint Job
The random wind storm that drops a branch on your Windshield

I will now pause for a moment while you view these clips, then another moment while you regain your composure from fits of laughing. Ready? Ok, now we can continue.


Several factors I think make these commercials successful:
  • Sometimes it feels like the universe has it out to get you and destroy your property. Having that figure personified by someone easy to dislike is a very satisfying feeling.
  • Good dead-pan is hard to come by. Enough said.
  • A lot of commercials take themselves too seriously, and after seeing enough "trust us, we love your family just like our very own" insurance commercials, it's nice to see the lighter side (if such a thing even exists in the insurance business).
OK, so the analysis on this one is pretty trivial. I just wanted an excuse to rep the funniest ad theme I've ever seen. Hopefully you agree.

KS9XPW5FU2Q7

Monday, July 26, 2010

Krugman on "Greed and Cowardice" in the climate debate

Was Paul Krugman famous for his work in economics, or was it environmental studies? Right now, I'm not sure. From an op-ed article yesterday:
It has always been funny, in a gallows humor sort of way, to watch conservatives who laud the limitless power and flexibility of markets turn around and insist that the economy would collapse if we were to put a price on carbon.
Source. An intelligent person like Mr. Krugman can spot a bad argument, especially when it applies to his home discipline of economics. The passage above contains logical flaws which should have stood out to a Nobel Laureate.

- "Putting a price on carbon" is a bit more complicated than grabbing the sticker gun and tagging away like a manic grocery store employee.
There's carbon in pretty much everything (including humans). While the idea of "internalizing the externality" by taxing for the social cost of carbon is all very good in theory, the devil's in the details. How much should emitting a pound of carbon cost? Who would pay the tax and how would it be collected? What stops people from cheating? It's the tinkering with all of these complicated, yet extremely important factors which will really crush the economy. Just look at the government's performance in fighting drugs, poverty, crime, and war, then ask yourself whether they can handle the complexity of a global climate system.

 - The only reason that markets still have any power and flexibility is because of those "conservatives" who don't give in to the alarmist environmental message of the year. Examples are numerous, so I'll just pick an amusing one: Back in 1971, President Obama's science adviser predicted a coming ice age which would wreck agricultural productivity and usher in mass famine. Had we listened to the doomsayers back then, right now I'd be standing in a mile-long line to get my daily food ration instead of writing this blog. There's nothing so permanent as a government solution, so before we "fix" something it's good to be extra sure first.

In general, Krugman's argument is that "greed and cowardice" has prevented passage of the climate bill. By "greed" he means the efforts of climate change skeptics (last I checked, the other side of the debate gets a paycheck too) and by "cowardice" he means unwillingness to take drastic action based on environmentalists crying wolf yet again. It's funny, because the people demanding action against global warming could just as easily be called cowards, for doubting humanity's ability to change and adapt without some central authority telling us what to do. We survived multiple ice ages, two world wars and the Bush presidency. Have a little faith, eh?

I don't claim to be an expert on climate change science, but anyone who looks at the numbers can tell the proposed fix is not of the required scale to stop or even slow global warming. Even the EPA agrees that U.S. action would be ineffective. Two new coal plants are built in China each week; between them and India, the U.S. emissions total will be small potatoes pretty soon. If you think those countries will put climate paranoia in the U.S. and Europe ahead of development for their own people, you'll be sadly mistaken.

The bottom line is that in our current economic position, a cap and trade bill would impose immediate and serious costs in exchange for a small chance of preventing far-away catastrophe. We will all be impacted, one way or another, by the actions taken. Commentators like Mr. Krugman do a real disservice to the intellectual climate by presenting the issue as "good regulators vs. evil industry" because the reality is a lot more complicated. If Americans think it's worth prolonging the hard economic times to do something about carbon, that's the democratic process at work. However, Mr. Krugman shouldn't blindside the public by claiming that sweeping regulations can be passed without any cost to the economy, because it just isn't true.

Unfashionably Economic

Saturday, July 24, 2010

Kitchen Nightmares -- restaurant makeover or yelling contest? Let the numbers decide.

Gordon Ramsay's show, Kitchen Nightmares, has brought hope to the greasy spoons and dirty dive restaurants across America (but mostly New York) for two seasons now. Ramsay made his name first as a soccer player, then gourmet restaurant owner, and now as a TV host to a variety of competitive cooking shows, most notably Hell's Kitchen. He's been named the #1 most successful restauranteur in the world thanks to his kitchen acumen, high standards and vitriolic temper.


For Fox's show Kitchen Nightmares, Gordon Ramsay visits restaurants which are financially floundering and attempts to turn them around. This may mean producing an entire new menu, renovating the d├ęcor, or installing state-of-the-art kitchen appliances. In spite of these efforts, many still go belly-up after Ramsay leaves.

Before the show starts, most Kitchen Nightmare restaurants are under a mountain of debt. The stubborn owner of Sabatiello's was over a million in the hole before Gordon Ramsay showed up. Facing such a dismal business scenario, even expert advice can only go so far. Are heavily indebted restaurants doomed to bankruptcy, or is Gordon Ramsay not the miracle worker he's sold as?

With some simple econometrics, we can take a stab at answering that question. Data were collected on the amount of debt, proportion of male owners, and whether each restaurant was still open. After watching the twenty-one episodes from Season 1 (so I like reality TV, sue me) and running it through a regression program, here are the results:

  • Of the restaurants shown in Season 1 of Kitchen Nightmares, 28.5% are still in business. The other 71.5% have been either sold or foreclosed on. For each additional $10,000 in debt before Ramsay arrives, the restaurant's chance of staying open decreases by 1% (holding constant whether the management is male or female). This makes intuitive sense -- as a business' debt load increases, it becomes increasingly difficult to turn a profit while making interest payments. Many owners on Kitchen Nightmares have taken second home mortgages, maxed their credit cards, and pressured friends or relatives into loaning them money. As these burdens grow, bankruptcy or foreclosure becomes more likely.
  • Restaurants with more male owners have an increased chance of staying open. Comparing two restaurants with the same amount of debt, one owned by a husband and wife and one owned by two men, the second establishment would have a 26.6% better chance of staying open (sorry ladies, it's just what the numbers say). This result is somewhat slanted because there was only one exclusively female-owned business featured in Season 1 of Kitchen Nightmares, and it went under. Most of the other women on the show co-owned the business with their husbands. The advantage this model displays for men is almost certainly the result of quirky data in a small sample set, not any objective difference between men and women as restaurant owners.
  • Number of years in business was statistically irrelevant to a restaurant's chance of staying open. Some places had been floundering for up to eight years; none on the show had made it past ten years under their current management. Even owners who had been stuck in a rut managed to turn it around after Ramsay's visit. For example, the Secret Garden had run at a loss for seven years, accumulating $310,000 in debt, but it still remains open and is much more successful now. I think this is the best evidence for Gordon Ramsay's influence; his confrontational approach helps some owners change bad habits and bring their restaurant back to profitability.

To predict a Kitchen Nightmares restaurant's chance of staying open, the formula is:

Chance of Being Open = .192 -.001*[Debt in Thousands] +.532*[Proportion of Male Owners]

For an example, we can apply this to Campania's (Episode 9) which had $80,000 in debt and a male owner. The result would be:

Campania's Chance of Being Open = .192 -.001*[80] +.532*[1] = .644 or 64.4%. In actuality, Campania's did stay open, so the model is accurate in this case.

As a second example, we can do the same exercise for Trobiano's (Episode 13) which had $500,000 in debt and was jointly owned by two men and one woman. The model would predict:

Trobiano's Chance of Being Open = .192 -.001*[500] +.532*[.67] = 0.048 or 4.8%. Trobiano's is closed, so again the prediction is correct.

It worked a couple of times, but how accurate are these predictions generally? To find out, I did the above calculations for all the Kitchen Nightmare restaurants I knew the debt total for. When comparing the theoretical result to reality, the model predicted correctly 80% of the time. I usually strive for better than a B– but for these purposes, it's sufficient.

What does this mean for you? Well, if you're considering starting a restaurant with your significant other, letting it go downhill until you could be a Kitchen Nightmares feature, and then trying to turn the business around, you can substantially improve your chances by selling your loved one into slavery to pay off credit cards and then taking on several men as co-owners. The numbers don't lie, right?

The Fine Print:

This small study shouldn't be taken too seriously (which is why you're reading it here, not in the American Economics Review). The sample size is small so the statistical significance could be better. For five of the episodes the amount of debt wasn't disclosed, making the number of useful observations even lower. I might revisit this subject in a little while, after the restaurants on Kitchen Nightmares Season 2 have a chance to sink or swim. Basically, if you're a restaurant owner, don't bet your retirement on these scribblings (at least until you've paid me as a consultant). If you're interested in the t-stats and significance levels for the variables, see the table to the right.
 
Conclusions:

These are a few things I've learned from watching all these Kitchen Nightmares. If you skipped all the numbers and just want the Reader's Digest version, here you go.


  1. The restaurant business is about high standards. Revolutionary, I know. People want value for their money, and expect that food they go to a restaurant for will be better than what they could make at home. Restaurant owners need to taste their food, nag the chef, and check the fridge often, or else standards can end up somewhere in the back with the spoiled mayo. 
  2. Restaurants have inertia. Once they start to go downhill, they tend to continue that way. When a restaurant is professionally managed, it closes down when cost exceeds profit for a sustained time. However, when the restaurant is family-owned and represents someone's long awaited dream or a parent's beloved memory, shutting the doors becomes much harder. Owners will exhaust everything they have to prevent a business from closing, but often can't break the habits that made them unsuccessful. It's tragic to watch, because everyone loses; the owners, the staff, the community, and most of all the customers. Although Gordon Ramsay still doesn't make my top ten list of great humanitarians, I think he does a real service to restaurant owners who have lost their way and need to be redirected. For that, well done.
  3. The service industry is hard work, and the glamor of owning a restaurant causes some people to forget that. As someone exclusively familiar with the consuming end of the restaurant business, I gained a new appreciation for all the good restaurants I've been lucky to eat at. A lot can go wrong, so it's impressive that so many people manage to get it right.
  4. Be careful where you eat in New York. You might see them later in Kitchen Nightmares Season 3.

-NFB


Tuesday, July 20, 2010

Big money selling free computer games

Video game producers have been accused of many things, from greediness to promoting Satanism, so it was a surprise yesterday when software development company Valve released a new, professionally-made game free of charge. That's right, Alien Swarm (a top-down, cooperative shooting game) is available to play for the click of a button. To really shock and amaze, Valve also released the full source code for others to emulate or modify.


Open source isn't new, but it's been a rarity in the computer game industry. Most publishers take strict precautions against online game sharing (a.k.a. piracy, which cost the software industry $51 billion last year). Every game distributed freely online is taken as a lost sale, so blocking private distribution becomes a necessary evil.
As an example of the "closed source" path, game developer Ubisoft requires a unique CD key, online account registration, and a constant internet connection in order to play their recent titles, Assassin's Creed II and Splinter Cell: Conviction. These costly measures were implemented after the first Assassin's Creed title was leaked and distributed before the official release, causing Ubisoft to take serious losses.

With other companies paying to protect intellectual property, why would Valve be giving theirs away for free? The best explanation for this corporate altruism: keeping customers on your side matters. As explained on the Valve forums:

The decision to release the game for free was made most likely to promote the Steam Platform and as a show of good faith to the community. While the immediate monetary profit is not seen, these sorts of unique business maneuvers have usually profited Valve more in the long run and pushed them to the top of the PC gaming industry.

The public response has obviously been positive (not many will complain about getting free stuff). Compare that to Ubisoft, which has suffered a boycott of Assassin's Creed II because of their invasive anti-piracy measures. It's unclear how much an online protest can impact eventual sales, but it certainly can't help.

Many factors have contributed to Valve's success; their estimated market share for digital-distribution of computer games is 70%. Solid public relations have helped them beat out their competitors. Valve's game platform, Steam, offers 1,100 games for sale and has 25 million active members. It's no Facebook, but with a large customer base and active discussion forums, Steam's social media presence is substantial.

A cynic might say that with those numbers, Valve can easily afford to give away one game. And they'd be right. Regardless of the motive, it's an interesting move for the cutthroat video game industry. Former giants such as Midway (makers of Mortal Kombat and other arcade classics) have fallen into bankruptcy. Only time will tell if Valve's investment in releasing Alien Swarm pays off, or they follow the unlucky path of other technology headliners.

Unfashionably Economic

Monday, July 19, 2010

Blast From the Past -- Moonshine


In the 1920s and 1930s we had economic stagnation following a record boom, flappers, widespread appreciation of Jazz music, growing popularity of the automobile, and illegally produced liquor. Now in 2010, we've still got the first and last items from that list. There's been a spate of recent news articles discussing the moonshine phenomenon in the United States. According to the BBC, up to a million Americans have participated in the illegal production of alcohol. Statistically, you might be one of them.

In my home state of Washington, every liquor store must be run by the government. While this is advertised as preventing underage drinking and abuse of alcohol, it also serves a convenient revenue-raising function for the state (at the expense of college students from Seattle to Walla Walla). Of course, this is pretty common in other states too. Across America, liquor is one of the most highly taxed and regulated items on the market.

On the one hand, there's a case for regulating alcohol distribution and consumption (given that the number of deaths from alcohol, excluding homicide and accident, is 23,199 people in 2007 alone). On the other hand, with numbers like that you have to wonder how well the government's protective measures are working. Either way, it's indisputable that all regulations generate some form of black market. When the product is as socially accepted and culturally pervasive as alcohol in America, then illicit production becomes a certainty.

While moonshine became famous during the Prohibition era, it didn't disappear when alcohol was legalized. Illegal moonshine has moved away from criminal gangs, and is now more about home production. In the age of the internet, you can conveniently order a copper still to your home and set up shop making moonshine for a few hundred dollars. While the fines for illegally producing alcohol aren't cheap, the risk of being caught for having a still in your basement is relatively low. Compare that to thousands of dollars for a distiller's license, and it makes sense why so many people are producing moonshine.

America was founded on resistance to taxation, so it's no surprise that tradition is still alive and well with regard to our second national pastime, getting drunk. Thanks to the 21st Amendment the power to regulate alcohol was left to the states, and they've obviously enjoyed the privilege. To reference Washington again, consumers pay a 20.5% tax on liquor which must be bought in state-run stores. While these high taxes are promoted as combating underage drinking and other societal ills, Washington State takes a “complicated” stance on the issue; the liquor tax code is adjusted to encourage small bottlers to enter the market. Should alcohol be cheap and available or shouldn't it?

The issues surrounding alcohol are complex, and made more so by the web of regulations issued at all levels of government. Often good-intentioned policies aiming to reduce the societal harms of alcohol backfire. For example, a California tax on “barrel aged” liquors, intended to keep dangerous beverages like Mike's Hard Lemonade and Smirnoff Ice out of the hands of teenagers, instead punished craft beer distillers who are producing innovative new flavors by aging their beer in alcohol-soaked barrels. Larger brewing companies are paying the tax without a problem, so sugary malt drinks are here to stay. The outcome for small, enterprising breweries is much less certain.

This brings up a reason for home distilling that hasn't been mentioned yet -- flavor. Some people crave the distinctive taste of clear whiskey made famous as “white lightning” during the Prohibition era. The current generation of liquor snobs has gone back to its inebriated roots, so to speak. As a symbol of resistance to hyper-active government and an economic necessity during lean times, it's clear moonshine is here to stay.

Unfashionably Economic

Wednesday, July 14, 2010

You Only Live 22 Times -- Death of the James Bond Legacy


As a male American born in the last 50 years, I can say with confidence that the mythical figure of James Bond has influenced my upbringing and views on action movies. The Bond series has grossed $1.6 billion in the box office, making it the #3 most successful movie series of all time. The early movies turned Sean Connery into a legend, and built up the "action-movie cred" for the following Bonds. Through the Cold War and beyond, James Bond resonated with a culture that glorified adventure and perceived itself in a global struggle against evil. However, the times seem to be turning against iconic 007.


The early Bond movies were ground-breaking in their well-developed spy plots, advanced special effects and risque sexual innuendo. As the franchise wore on, paying for the latter two elements seems to have been put ahead of the plot. The first Bond film, Dr. No (1962), had a budget of just $1,000,000 while the most recent, Quantum of Solace (2009) cost a whopping $230,000,000 to produce. The rapidly rising budget for each Bond film can be seen in the graph above. While all of them have turned a box-office profit (shown in yellow) it hasn't been enough to keep MGM out of the red. So far, the studio hasn't been able to find a buyer, and so the 23rd Bond film has been put on hold indefinitely.
Check Spelling

No one's willing to buy out the legacy of James Bond, even at a fire sale price? That decision makes more sense when looking at this second chart, which measures the ratio of box office revenue over each movie's budget. The multiple on early bond movies is very high, with box office revenues at 60x budget for Dr. No, around 40x for the next two movies, then steadily down from there. Looking at a graph like this, potential MGM investors must be wary to say the least. The most recent bond film had a paltry ratio of $2.55 in the box office for each $1.00 of budget, a record low for the series. With those numbers, it's no surprise that Bond has been hung out to dry (along with a number of other highly awaited film titles). Unless there's a fundamental change to the high-budget Bond formula, we're more likely to see "Traveling Pants V: the Seam Goes Out" in theaters before the reappearance of 007.

Unfashionably Economic

Data for the graphs taken from the James Bond Wiki.

Tuesday, July 13, 2010

Are minimum wage hikes the answer to recession?

The current economic downturn has caused belt tightening by businesses globally, and much of the hardship has been felt by low-paid workers. In response, many have called for a higher mandated minimum wage. From California and Minnesota to Azerbaijan and Nigeria (just in recent news) the issue has been a political hot-button.

In the economics literature, a consensus has not emerged on whether minimum wages cause unemployment. According to basic economic theory, any binding price floor (e.g. minimum wage laws) will cause a surplus of the good in question. In the labor market, that means unemployment. While politicians and pundits tout the benefits of "a living wage" or the difficulty of living off $8.25 an hour they conveniently ignore those unable to find work as a result. Until relatively recently, this trade-off was at least acknowledged. However, a study conducted by Card and Krueger, which found no impact on the fast food industry in Pennsylvania and New Jersey from a minimum wage increase, fueled a new round of optimism regarding higher price floors on wages. Is economic theory put on hold when discussing the labor market, or is this just too good to be true?

You can read my paper on minimum wages and unemployment here. By comparing state unemployment levels to their unemployment rates in 2008 while controlling for other job-related factors, a positive relationship between minimum wages and unemployment rates was found (it's a riveting read, I promise). It was presented at the SIRC on April 24, 2010.