Commenter “Xan” draws our attention to today’s post from Krugman, in which he writes:
A commenter on my last euro post asks a good question: didn’t Germany once have a problem of excessive unit labor costs, which it cured with a protracted squeeze? And in that case, why is it so terrible if Spain is asked to do the same thing?
The answer is basically quantitative. I’d make three points:
1. Thanks to the giant housing bubble, Spanish costs got much further out of line than Germany’s ever did, so the required adjustment is much bigger.
Here’s a figure that illustrates that point. According to Eurostat data, German unit labor costs peaked in 2003, Spanish costs in 2009. So here’s what the adjustments looked like in each episode, with blue lines representing the earlier case and red lines the later:
You can see just how much harsher Spain’s adjustment is, and how much less help it’s getting from rising wages in the rest of the eurozone. Basically, Germany is refusing to do for Spain what Spain did for Germany in the past.
And the result of all that is incredibly high unemployment.
Now it sure sounds like Krugman is saying that high labor costs make employers less likely to hire workers. Quantitatively, from that chart it looks like having labor costs that are 14% too high, is a problem that will lead to “incredibly high unemployment.”
But when it came to discussing President Obama’s call to make low-skilled American workers have 24% higher labor costs, here’s what Krugman said:
[W]hile there are dissenters, as there always are, the great preponderance of the evidence from these natural experiments points to little if any negative effect of minimum wage increases on employment.
Why is this true? That’s a subject of continuing research, but one theme in all the explanations is that workers aren’t bushels of wheat or even Manhattan apartments; they’re human beings, and the human relationships involved in hiring and firing are inevitably more complex than markets for mere commodities. And one byproduct of this human complexity seems to be that modest increases in wages for the least-paid don’t necessarily reduce the number of jobs.
So what’s the story? Aren’t there human beings in Spain? Do workers there act like bushels of wheat? Won’t it hurt worker morale to see the prices of food and energy go through the roof, while their nominal wages stay flat (Krugman’s preferred solution to the Eurozone problems)? Is there monopsony in the US, but not in Europe?
You almost get the sense that Krugman grabs whatever argument he needs, to justify his preferred policies–a minimum wage hike for the US, more monetary inflation for the ECB. But that’s what the guys at right-wing think tanks do, not Krugman!