Government regulations vary greatly in their effectiveness. In cases of ones that fail, a common theme is basing regulations on what turn out to be inaccurate models of how people respond to incentives. How can we avoid such errors when thinking about raising the minimum wage?
In the dynamic economy of the 21st century, it’s impossible to accurately predict the effects of raising the minimum wage. However, based on the lessons of yesteryear, imposing some intellectual discipline upon ourselves when we formulate our predictions will help us craft better policies.
Economists often recount the “cobra effect” when analyzing the effects of government regulations. In colonial India, in an effort to reduce the number of venomous cobras in Delhi, the government offered a bounty for dead serpents. Perhaps the idea came from drawing an analogy between cobras and criminals, where bounties have been helping authorities capture outlaws since antiquity; as such, this policy seemed entirely sensible.
But apparently, the policy backfired by motivating people to breed cobras in the pursuit of the bounty. When the government responded by suspending the bounty, the breeders released the now-worthless serpents into the city, leading to a record cobra population. In retrospect, the flaw was failing to realize that people can easily modify their conception of cobras, whereas they cannot do the same for criminals. This error was quite subtle, and I don’t blame policymakers for making it; I pay pest controllers to kill insects, and I’m confident that this hasn’t led to them breeding more insects. Crucially, the government diagnosed and corrected its error.