Avoiding a Minimum Wage Cobra Effect

The cobra anecdote shouldn't be taken as paradigmatic; many regulations work positively as planned, while others are clearly going to be disastrous but are implemented nonetheless. One of the key lessons, however, is that there are returns to thinking carefully before diving into new regulations.

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.

Continue reading