Krugman on Walmart and the Minimum Wage
He really outdid himself on this one, as I explain in my latest Mises CA post. An excerpt:
[I]t is a very strange argument to say, as Krugman does, that since we observe Walmart raising wages voluntarily, that therefore having the government force other firms to do so involuntarily won’t cause any major problems.
Look, Target just announced that it will lay off thousands of workers as part of a package to save $2 billion over two years. So should Stephen Moore write an op ed arguing that the government should require all existing firms to lay off thousands of workers, because the possible downsides are obviously smaller than what conventional wisdom suggests?
Or, if my Target analogy is too extreme for you–even though it’s exactly what Krugman did with Walmart–try this one: Chick-fil-A doesn’t serve food on Sundays. So that means the government could pass a law forcing all fast food restaurants to stay closed on Sundays, since clearly the gains to the workers (in the form of more time with their families) is higher than any potential downsides, such as convenience to consumers and paychecks for the workers. Right?
However, I found something quite juicy that many of you will enjoy, so click the link.
“If raising the minimum wage to $10 isn’t harmful why not raise it to $100”
“if raising wages is good for Wal-Mart it should be good for others as well”
Sounds like a similar (it’s not exactly the same I know)argument lets see if Krugman is allowed to use that argument or if only Murphy is not allowed to use it.
Those aren’t the same. First, we do not know if this is a good move for Walmart. It may do little or nothing in terms of worker productivity or quality of potential employees, and completely backfire in terms of profits. That is one of the arguments against the minimum wage: no one knows the optimum wage for any given job, and therefore it is better to leave those decisions to self interested actors and not one overriding authority. Second, the “If raising the minimum wage to $10 isn’t harmful why not raise it to $100″ argument is used against a specific pro-minimum wage argument: that higher wages leads to higher consumption, and therefore higher economic growth. If one believes this, why would they stop at $10 or $15. It seems that you could create infinite economic growth using minimum wage law.
I know.
Bob Murphy recently made the “if a 10 dollar min wage is a good idea then why not make it 100” argument (in an article on gas taxes) and some people got mad at him.
I just thought it would be ironic if the people who do not accept that argument when it comes to the min wage would defend Krugman using a SIMILAR argument. (It’s not identical, there are irrelevant differences)
so far they have not done so but it might still happen
We have no particular reason to believe that Walmart is doing it voluntarily. Seems more plausible they have just buckled under political pressure and are making a small effort to divert some of the heat.
That would be the best explanation of why Krugman is crowing about it… nothing to do with economics, everything to do with politics. He even spells this out for his less astute readers:
For added amusement, imagine how many Krugman readers also believe that farm subsidies have nothing whatsoever to do with social forces and political power. Apparently bad butter mountains are a spontaneous free market phenomenon, totally unrelated to State policy; while good minimum wages are the beneficent hand of governance… because Krugman says so. Oh yeah, the readers will just lap that up.
“Second, and arguably far more important, is what Walmart’s move tells us — namely, that low wages are a political choice, and we can and should choose differently. …
“… The law of supply and demand, they say, determines the level of wages, and the invisible hand of the market will punish anyone who tries to defy this law.
“Specifically, this view implies that any attempt to push up wages will either fail or have bad consequences.”
He sees low wages as a political choise because he mistakenly views wages as homogenous.
Wages rise or fall when it is in the interest of the individual owners and workers to agree to it. One employer may have opportunity costs which permit him to offer higher wages; One employee may have opportunity costs which permit him to accept a lower wage.
Since an individual can always expend his own time and energy toward acquiring the means for satisfying his own preferences (with varying levels of success), what will be considered profitable or unprofitable wages will always be relative to the individual under Crusoe Economics.
The presence of other people, with their own preferences and skills, reveal comparative advantages, but it is only profitable to engage in trade when the individual’s own subjective opportunity costs are higher when he attempts to satisfy his preferences with his own labor and capital.
Extrapolating to a world with the presence of billions of people, it is still the case that employers must compete with a laborer’s own capacity to satisfy hiw own preferences, but now the laborer has other potential sources of income in the form of other employers which naturally raises his wage above the productive capacity of his own labor and capital.
In other words, any wage above an individual’s own productive capacity, in terms of the individual’s subjective opportunity costs, is necessarily profitable, however low.
“However, I found something quite juicy that many of you will enjoy, so click the link.”
You’re like Professor X.
I really don’t understand how there are still people that take this guy seriously.
Well Dan, at least three of them regularly comment here.
A really bad example can be a good teaching moment. Sometimes stuff can be so off-the-wall that it is useful to watch a careful analysis.
Yes, everyone should click on the link. That is hilarious. Brilliant, Bob.
Damn you, Erdmann, your housing market posts have completely eaten up my afternoon!
Have you studied the academic literature on this housing stuff? If not, you might find it useful for calibrating your models. Anyway, I’ll leave comments on your website as I work through your posts. Good stuff!
Thanks Jeff. Please share any relevant articles in the comments. So much of the literature treats low long term interest rates as a sign of loose money, or treats any movement of the trend in home prices away from the trend in incomes as an obvious disequilibrium, or reverses the causation of low economic growth potential > low real rates > high home prices > large finance sector. Any useful readings would be appreciated.
And, thanks for taking a look. At this point, especially on this housing series that keeps growing like a Little Shop of Horrors plant, even I lose patience with myself when I go back to read what I’ve already written.
Let me get this straight:
Walmart raising wages: does not decrease employment
Government raising wages: does not decrease employment
Deflation raising wages: does decrease employment
Huh?
Krugman says:
1. Walmart’s justification for its wage hike echoes what critics of its low-wage policy have been saying for years: Paying workers better will lead to reduced turnover, better morale and higher productivity.
and
2. when the minimum wage is above the equilibrium wage rate, some people who are willing to work–that is, sell labor–cannot find buyers–that is, employers–willing to give them jobs.
so: Higher wages lead to higher productivity., and this means the equilibrium wage rate increases. So both 1 and 2 can be true, and Krugman gets off on a technicality.
And I suppose it is part of his point that if “Paying workers better will lead to reduced turnover, better morale and higher productivity” is assumed to be true then the labor market is indeed different from the butter market.
Not according to his textbook.
And he doesn’t get off on a technicality. Raising wages may keep and attract more productive workers and may make sense for Walmart. But, this doesn’t mean raising the minimum wage for everyone in the country won’t cause unemployment – it may well price workers who are currently in the labor market out of it. Just like he said in his textbook.
He said in his text book that when the minimum wage is above the equilibrium wage rate, some people won’t be able to find jobs. Which is just standard economics 101 for supply and demand
He says now that workers become more productive at the margin when paid more. When a worker is more productive the demand for his/her labor increases and therefore so does the equilibrium wage rate. This would mean (if he is correct) that you can increase the minimum wage without additional unemployment in a way that doesn’t violate the laws of supply and demand.
It is (again in his view) this unusual attribute of labor supply that makes it different from butter.
Ah I don’t think you’re describing it quite right, but it seems you want to say:
Krugman could simply assert that a higher minimum wage, above current wage rates, would not have disemployment effects because the current wage rates are below the equilibrium, market clearing rate.
That’s an interesting hypothesis. It’s completely inconsistent with his belief that Aggregate Demand needs to be increased because there’s involuntary unemployment because wages are stuck above the market clearing rate, but it’s an interesting idea anyway.
Here’s an example of what I think he is saying:
A worker in a widget factory would produce 10 widgets if paid $10 an hour but 18 if paid $15 an hour.
There are 100 workers in the economy and at $10 an hour 90 of them want to work, so 900 widgets are produced and we are in equilibrium.
Krugman persuades the govt to make the minimum wage $15 an hour. At that rate all 100 people want to work.
If output per worker stays the same then the factory owner will want to employ less than the previous 90 and there will be over 10 workers who want to work at the current rate but can’t.
But suppose that at the new rate workers suddenly become motivated to do a better job and so produce 18 rather than 10 widgets per time period ?
Then demand for labor increases to match the supply. We get 100 workers employed at $15 an hour. At this new equilibrium 100 workers are employed and produce 1800 widgets. Krugman gets a second Nobel prize and everyone is happy.
Then I look forward to Krugman’s next article where he argues for a government mandated increase in the price of butter. People will then work harder to earn more money so they can buy the same amount of butter. Which means they will have to produce more, and the price of all other goods will fall.
If that’s the case he’s nonsensically reverse causality. Productivity determines wages, not the other way around.
Does a worker with no skills and no tools suddenly become a more productive worker if I pay him more? Only if we weren’t in equilibrium in the first place.
http://www.archives.gov/publications/prologue/2004/summer/hoover-1.html
That ended well.
Guess who wrote this:
So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces.
What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda–for arguing that living wages “can play an important role in reversing the 25-year decline in wages experienced by most working people in America” (as this book’s back cover has it). Clearly these advocates very much want to believe that the price of labor–unlike that of gasoline, or Manhattan apartments–can be set based on considerations of justice, not supply and demand, without unpleasant side effects. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination.
For example, the authors argue at length that because only a fraction of the work force in the firms affected by living wage proposals will be affected, total costs will be increased by only 1 or 2 percent–and that as a result, not only will there be no significant reduction in employment, but the extra cost will be absorbed out of profits rather than passed on in higher prices. This latter claim is wishful thinking of the first order: Since when do we think that cost increases are not passed on to customers if they are small enough? And the idea that employment “of the affected workers” will not suffer because the affected wages are only a small part of costs is a non sequitur at best. Imagine that a new local law required supermarkets to sell milk at, say, 25 cents a gallon. The loss in revenue would be only a small fraction of each supermarket’s total sales–but do you really think that milk would be just as available as before?
They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist’s reply is, if paying higher wages is such a good idea, why aren’t companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage “compared with other companies” — and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish. What makes this an odd oversight is that the book contains a lengthy and rather well-done critique of attempts by local governments to create jobs through investment incentives, arguing that they mainly end up in a zero-sum poaching war; how could the authors have failed to notice the parallel?
… what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.
http://www.pkarchive.org/cranks/LivingWage.html
C. Van Carter, I’m assuming that’s from Larry Kudlow or Stephen Moore, right? That’s the only thing that makes sense.
Wouldn’t it be freaky to write up an economic model–just for fun–where there were human beings who sold butter and depended on that income for their livelihood? And to really make it ironic, make these humans part of some social group that people really care about–like schoolteachers, or maybe farmers or something.
We saw recently that supply demand curves etc. do not tell the whole picture. This simple economic approach would lead one to believe that one could get a win win from a carbon tax. This cannot be shown to be wrong by reference to the supply and demand arguments being made here to say a minimum wage will cause unemployment. No, it can only be shown wrong by running sophisticated models, out of which the result pops, with no clear reason why it is so. It does not seem impossible to me that the simple supply demand model could be off a bit in this instance also, so modest minimum wages would not lead to increased unemployment.
Nice try Harold.
unfortunately, because of people like Dan, above, who make up most of the uninformed/non thinking society people like Krugman can continue to be taken not only seriously but as intellectual giants?
“as with all of Krugman’s jaw-dropping pieces’…
Krugman knows better. Duh! He is plainly intellectually dishonest and manipulative. At best a university indoctrination specialist/pundit.
At worst an elitist, propaganda pushing, self serving, establishhment mouthpiece. unfortunately because the masses are liked Dan, above in the comments section, thats what passes for “economics.”
Mainstream economic rhetoric is nonsense and completely contrary to historical fact and honest analysis. It couldn’t possibly be more obvious.
… but whats honesty worth at the tail end of a cultural revolution in a society that claims there is no such thing as objective reality/truth? Is this not the same “scientific society” that try’s to engineer everything according to empirical evidence/analysis. Truly strange go behold. Mass confusion from mass propaganda. No doubt about it the day of reckoning is right around the corner. Anyone with half a brain knows it.
How can educated people believe there is any real political constraint? Could it be anymore obvious that politicians do nothing but patronize “constituents”? Could it be anymore obvious that the politicians are puppets and we have a fascist dynamic between state and corporate world? Could it be any ore obvious that neither party cares about the populace. Not even a little bit. Could it be anymore obvious that all mainstream dialogue and what passes as journalism is never ending propaganda. Could it be anymore obvious that even at university propaganda and ideology reign supreme? This is truly the age of disinformation, just ask Cass Sunstein. He will tell ya. Again it is so hard to understand how people can’t look around at the state of affairs and realize that all the lies and backroom deals these people are guilty of (in the open) are by intent. Political consolidation. Power broker moves. How can one not see it yet not be able to add it up? Particularly in the light of history!
Any academic, political scientist, economist, historian, etc. who can’t see that there is a geopolitical power play being made at the hands of the ruling class elite to reshape the world to it’s liking has no excuse. How many think tank and round table groups have to be SAY SO IN THE OPEN before people catch a sniff? They are not trying to save the world. They are trying to completely dominate it. They are quite open about it. Like Carlin said. You and I, we ain’t in the club. Come on people. Is the divide and conquer that hard to see? Do you really think the leaders of the world are that incompetent. Can you not see the flagrant criminal nature of the whole thing. Do you not see the entire world has effectively been turned into a caste system?
Paul Krugman using rhetoric that implies he doesn’t even know the contents of text books he has written is a perfect example!
Hi Taboo,
Man has been trying to escape slavery since the beginning.
Does this mean Walmart will no longer hand out welfare application/instructions at the new hire orientation?
“None are more hopelessly enslaved than those who falsely believe they are free” – Goethe
“A republic, if you can keep it” – Franklin
“Gold Is Money, Everything Else Is Credit” – JP Morgan
JP Morgan did not say this; he actually said, “Money is gold, nothing else.”
while testifying in front of Congress back in 1912 shortly before his death.
Still the reserve act was signed the following year and Nixon finished it during
his term. YET THE ENTIRE ECONOMICS WORLD is just a shit show for the bankers
who keep BS artists like Krugman in the seat. Garbage in, garbage out. Despite the
fact that the entire global economy has stagnated and become extremely volatile after
fascist criminals like Hank Paulson (illegally raped the public for trillions of dollars to literally hand out o criminal beneficiaries [and we call that capitalisim?] Jump back and forth from the highest gov. positions
to the highest corporate positions seemingly unnoticed and nobody has a clue what the problem is?
And the “wage debate” nonsense passes as real economic debate/analysis? Meanwhile the entire western economy is imploding, countless millions have fallen into poverty and small business start ups are in the toilet. The very fabric of society is hanging on by a thread and WWIII is in full swing.
What is a note? Finance 101. It’s an instrument of debt. Hello! What have almost all major wars been fought over? Hello! Do you think it is a coincidence that the income tax and fed reserve were established in the same year? Do you really think the constitution has provisions for such things? Could you really believe people like Paul Krugman are the only people smart enough to understand why quadrillions of toxic assets and hundreds of trillion of debt don’t matter?
Paul Krugman: Conscience of a Fascist!
And they refuse to be audited! yeah no kidding. I couldn’t possibly imagine why? maybe cause we are too stupid to know why COMPLETELY SELLING OUR NATION OUT is good for us. We will just have to leave it to the smart people like Krugman, Grubber, Pelosi, Sunstein, Paulson, and the whole lot of lovely benevolent public servants that are just trying sooo desperately to save us from ourselves??? Yeah, that’s it. You got it nailed guys. Really.
“We need a reset in the way the economy grows around the world.” – Christine Lagarde, IMF