In Which I Disagree with Paul Krugman about the Minimum Wage
I winced typing that title, since it is not wise to disagree with Paul Krugman and since I am going to argue that cutting the minimum wage can cause increased employment. Before going on, I stress that I oppose cutting the minimum wage as the logic of my argument suggests making the tax code more progressive. I think what we need right now is a more progressive tax code. That’s what I always think.
OK so first Krugman argues that, when in a liquidity trap cutting all wages equally will not cause increased employment. Only here does he respond to the obvious criticism.
1. Why did I go from minimum wages to overall wages? Clearly, a cut in minimum wages –which only apply to some workers — can raise the employment of those workers at the expense of other workers. But the advocates of a cut are claiming that they can raise overall employment. The only way that can happen is if a reduction in average wages raises employment.
I assert it depends on how you measure employment. Krugman is appealing to standard macro models in which employment is measured in “efficiency units” and the wage level (“wage unit” to Keynes) is the wage per efficiency unit.
The standard assumption is that labor is uniform and can be measured by a number. The plain fact that some people are paid more than others is handled by assuming that they are more able in every way so their wage per efficiency unit of labor is the same. Thus consider able Andy who has twice the wage of luckless Larry and of bad Brad so he is paid as much as the two of them. It is assumed that he can do everything just as quickly as the two of them working together.
This is clearly absurd and is not to be taken literally.
As Krugman does.
Worse than that, once you define labor in efficiency units, you define employment as the number of efficiency units of labor employed.
The public policy concern is about how many people are employed. These can’t be the same. Measuring labor in efficiency units might be an OK approximation if we cared about GNP, but if we care about employment and unemployment (as Krugman regularly insists we should) we have to think about people not units of efficient labor.
For the sake of argument let’s stick with the efficient labor assumption. Oh and assume wages are sticky (we need some nominal stickiness to avoid the price level falling a few hundred fold in a second making the real balances effect a real factor). Now assume 2 types of workers able and not so able (90% are able 10% not so able) . An able worker produces just as much as two not so able workers.
Back in 2007 all workers were employed, not so able workers were paid the minimum wag and able workers twice as much. Now the market clearing real wage is lower, able workers are paid 1.99 times the minimum wage. Not so able workers are all unemployed so the unemployment rate is 10%
What happens if the minimum wage is cut 1% ? Suddenly all the not so able workers are hired. For each two that are hired one able worker is fired. Now the unemployment rate is 5%.
See simple. The reduction of the minimum can “raise the employment of those workers at the expense of other workers.” Under standard assumptions such a shift in relative demand for different types of workers “can raise overall employment.” so long as employment is counted you know by counting how many people are employed.
The absurd “efficiency units of labor” assumption implies that this effect is huge. Able and not so able workers are perfect substitutes so the elasticity of substitution of not so able for able workers is infinite.
In the real world the effect would be much smaller. It might be smaller than the damage to employment caused by the reduced expected inflation and therefore increased real interest rates noted by Krugman.
I oppose cutting the minimum wage, because I support cutting payroll taxes on low wage workers and making up the money by raising the FICA ceiling. I think payroll income above a floor should be taxed, not payroll income up to a ceiling.
According to Krugman’s argument this wouldn’t cause increased employment.
To put it another way, he is arguing that the increase in taxes on the rich and of the EITC enacted in 1993 had nothing to do with the huge puzzling increase in employment (without accelerating inflation) of the 90s.
OK now that I have argued with Krugman what about Card and Krueger. Empirical estimates of the effect of the minimum wage on employment suggest that the effect is very small. One famous study by Card and Krueger showed a positive effect of an increase in the minimum wage. The logic used by Card and Krueger to understand how this could happen suggests that things are different now.
Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly. If they are forced to pay the higher wage, their desired level of employment will be lower, but that level is the sum of employment plus vacant jobs. A binding minimum wage can reduce the number of vacant jobs by more than it reduces the sum of employment plus vacant jobs. Thus more employment.
I think this is not relevant to the current situation. There are very few vacant jobs. Quit rates are low. According to their logic, the effect of the minimum wage on employment depends on the unemployment rate. The evidence of a small effect is almost all from periods of unemployment far below 10%. I don’t think it is relevant to the current situation.
Arguing that the minimum wage should be lower plays right into the hands of the corporate elite that has been dismantling the middle class over the last 30 years. Workers are already stressed to the limit (h/t Elizabeth Warren). Any excuse to make workers earn less, while paying more in housing, health care, banking and credit card fees, etc., is exactly what corporate America wants. What sucks, is that there is no one to stop the erosion, and the top percentile will likely get everything they want and more.
At the moment, being among the long-term, chronically unemployed, I am now applying for minimum wage jobs I wouldn’t have considered a year ago, and will be thrilled to get one or two or three. Will I be able to support my two person household with these minimum wage jobs? No more than I am now, taking the bits of freelance work I can find, and selling off what little I own. Currently we’re living in a near empty home and behind on the rent, but with no money, or credit left for that matter, to move elsewhere. Meanwhile, there is a 6+ month wait for section 8. I would say I feel shame for even considering section 8, but I’m way past that.
Logically, we would likely have a better chance at survival, at least in the short term, for me not to work those minimum wage jobs at all, but instead, apply for every available form of welfare in my state. I shudder to think what will happen if the minimum wage is reduced below what it is now.
***What happens if the minimum wage is cut 1% ? Suddenly all the not so able workers are hired. For each two that are hired one able worker is fired. Now the unemployment rate is 5%.***
More likely, the able worker’s boss calls him in and says “If you don’t take a 1% pay cut, we will be forced (by whom?) to fire you and hire two bozos. A.W. thinks it over, sees no options, says “Yes”, takes his pay cut, and starts looking for another job — which he does not find until the economy picks up.
So, unemployment stays at 10%, everyone who was unemployed stays unemployed, Some metrics of the economy (e.g. retail sales) drop because workers have less money. Others (e.g. GDP) are unchanged. Bonuses get bigger. Lose-Lose-Lose, No?
“The public policy concern is about how many people are employed.”
Really? Prove it. I really want to believe you, but I don’t think that’s how our government, which has been captured by corporate interests, actually thinks. Our government, and its corporate overlords, care about how much we consume as a nation, not how many we employ. The 80/20 Rule tells us that 20 percent of the population can be responsible for 80% of the consumption, so let’s concentrate on getting more out of that 20 percent, and the remaining 80 percent be damned. That’s what Fox News does: they’re not a GOP outlet so much as they’re a profit engine that targets a specific demographic.
Let me provide an alternative assumption that I think is more plausible: The public policy concern is about maintaining the perception that the economy is growing by showing that GDP is growing.
Look, economists decades ago started to accept and expect jobless recoveries. Now we have a job-loss recovery. But it’s all good because GDP is growing, so we have a recovery. And everything is great, so, move along; nothing to see here!
Regressive minimum wage policies will just spread the pain from luckless Larry to able Andy (but not bad Brad because he is management material, after all), it won’t solve any real problem we have. They will just reduce the number we multiply. Progressive tax polices, however, will solve our problems.
Dr Krugman’s argument is an across the board decrease in wages has the same effect as a deflationary spiral – it won’t change unemployment much,
For industry that employ people on minimum wages, the labor cost tends to be a small factor in marginal cost. A small decrease in the minimum wages will only increase the profit for the company as the existing workers will put in extra hours to make up for the lost wages, and could even lead to MORE unemployment!! Living on minimum wage is pretty much ‘hand to mouth’.
***Dr Krugman’s argument is an across the board decrease in wages has the same effect as a deflationary spiral – it won’t change unemployment much, ***
Depends I think on whether one assumes that all spending comes from current earnings of workers. That’s one extreme. In that case, tinkering with the minimum wage is pretty much shuffling deckchairs. If, on the other hand, one assumes that there is a vast pool of money on the sidelines just waiting for baubles to appear in the marketplace at sufficiently attractive prices, then lowering production costs by paying workers less will presumably bring sidelined production capacity back on line. A 96 inch flat panel TV in every running dog capitalist’s pot as it were.
Reality is probably somewhere in between, but in a country with high labor costs and a predatory “investment industry” systematically looting workers (and non-workers for that matter) savings, I think perhaps the current earnings model is closer to reality. So, we should presumably leave the minimum wage alone and stimulate the economy through infrastructure investiment funded by lowering the maximum wage rather than the minimum wage.
Robert,
The public policy concern is about how many people are employed. These can’t be the same. Measuring labor in efficiency units might be an OK approximation if we cared about GNP, but if we care about employment and unemployment (as Krugman regularly insists we should) we have to think about people not units of efficient labor.
Pulled the following “well-known” story from Carpe Diem, though it’s available from many other sources: “While traveling by car during one of his many overseas travels, Professor Milton Friedman spotted scores of road builders moving earth with shovels instead of modern machinery. When he asked why powerful equipment wasn’t used instead of so many laborers, his host told him it was to keep employment high in the construction industry. If they used tractors or modern road building equipment, fewer people would have jobs was his host’s logic.
“Then instead of shovels, why don’t you give them spoons and create even more jobs?” Friedman inquired.”
Regarding FICA – I think you know that looking at the FICA tax without looking at the benefits is looking at one side of a coin and concluding it only has “tails”. The FICA program, when viewed holistically, is slightly progressive.
I meant the public policy concern which Krugman and I share. I was referring to Krugman not to anyone else. He has made it clear he is concerned about unemployment and not about GNP.
Krugman argued that cutting the minimum wage would not cause increased employment. In the part on which I comment he very explicitly discussed what would happen if other wages stayed the same. Krugman has written many things. I was discussing one of them. You mention that he has written other things which are not vulnerable to my criticism. Indeed he has. For example he has discussed the health care bill recently.
On hours worked you seem to assume that employees decide how many hours to work. This is not the way things are. Even in normal times many people would like to work more hours in the USA but can’t. In particular, the fair wages and labor practices act forces firms to pay time and a half for overtime. This prevents the phenomenon of each worker works more and fewer work (this was the orignal aim of the act and it largely works).
You also assert that the elasticity of labor demand is low. I basically agree with you. It is not miniscule (best estimate 0.5 due to Card). However, that point is orthogonal to my disagreement with Krugman. He asserts that changes in relative wages affect relative demand for labor, but not aggregate demand. Thus he assumes that labor demand is elastic. Your statement about the world may be true. You should note “In the real world the effect would be much smaller.” in my post. My post was a comment to Krugman’s invalid argument not advocacy of a lower minimum wage.
In sum, you have thoughts on the minimum wage, but you didn’t say anything about my post.
Vt Krugman made more than one argument. One was explicitly not about across the board wage increases. That is the one I quote and discuss.
Krugman also made an different argument about across the board wage cuts. I think that argument is stronger than you imagine. It does not depend on any assumption about where spending comes from. The argument is that a cross the board wage cut will cause a cross the board price cut so real wages stay the same. The only change is that the real value of the money supply will increase. Normally this causes higher real demand. We are now in a liquidity trap so it won’t. Krugman doesn’t at all need any claim about how changes in wages affect demand as a function of GNP.
I am talking about a change in the tax which will give the same revenues and proposing no change in benefits. Since I propose not change in benefits, I don’t discuss the effects of changes in benefits, because I did not propose any change in the benefits.
Friedman was making fun of his host not discussing optimal road construction strategies. Developing countries benefit enormously from modern equipment (say Brad DeLong and Larry Summers) so the case for not using it when you can use muscles instead is very good. The reply “the relative price of labor is low compared to equipment here as we have lots of labor but can’t make modern equipment. so following price signals we use muscles where we can and modern equipment where it is really essential” would have pleased him.
Krugman and I agree that we would like more employment. We are not talking about pointless work like digging with spoons. In general we are talking about building more roads not about building roads without using modern equipment. In the post I discussed the effects of a change in wages which brought the demand for different types of labor closer to the supply of different types of labor. Nothing about digging with spoons.
1. Why can’t so many influential economists get that their models are based on assumptions that overly simplify real conditions and only provide a thumbnail heuristic for thinking about a problem in a general sense? Why do they then proceed to make policy recommendations? This is like engineers using their rules of thumb to build bridges instead of only employing them to get a general idea of what will be required and then proceeding to work up detailed plans.
2. The obvious solution is to attack unemployment at the cause, namely, nominal aggregate demand falling below the real output capacity of the economy, especially when there is also a CAD. Since it is evident that business is not going to invest in such an environment, it is left to government to pick up the slack. Only government can close the gap between nominal AD and real capacity through fiscal policy, increasing spending, reducing taxes, or a combination of both.
A sovereign government that is the monopoly provider of a non-convertible floating fx currency of issue is not financially constrained and is always capable of purchasing good and services that are for sale, without taxing or borrowing to finance spending. Moreover, there is no possibility that a sovereign can “run out of money,” “go bankrupt,” “become insolvent,” or “default on its own debt.” This is like saying that basketball or football are limited because the scoreboard will run out of points. Ridiculous. And this isn’t theory based on assumptions, it is how the contemporary fiat system has worked since August 15, 1971, when President Nixon closed the gold window.
Oh, and someone please tell Chairman Bernanke that commercial banks don’t loan out reserves. His monetary policies are a waste of time if that’s what he thinks.
If we raise taxes on the rich and no unanticipated technological jump takes place the level of capital will fall which will drag down employment and wages.
Wages and employment in the classical model are driven by the marginal product of labor. This marginal product goes up with increases in capital. So as we invest in more capital the value of labor goes up and so does the wage. Raising taxes on the rich is going to reduce their investment in private capital which will lower the value of labor and thus lower wages and employment.
You get to the Keynesian model by essentially throwing away the labor supply curve but again wages and employment are still determined by their value in production. So if you reduce the value or quantity of capital thru raising taxes employment will still take a hit. This is also true when you reduce the value of capital because of global warming legislation.
I don’t think it could happen but if you wanted full employment like in the classical model you need wage flexability. A new economic policy that addresses the problem at hand would somehow adjust wages automatically. You could extend this to fixed income assets with their payouts rising and falling with the economy.
But this is a fantacy since its too complicated to implement since we don’t have the ability to measure and adjust real time.
FDR tried to partially sidestep the labor market by creating the WPA. But then he never beat unemployment until WWII (1940 unemployment was just under 15 percent).
That’s why deflation is such a drag on the “real” economy. Face it, USA’s living standard is falling, the only way to maintain that standard is by borrowing, at least for a while. Eventually, the bills will come due.
Instead of contracting and adjusting to the new reality, we borrow and spend. Then tax and spend somemore. How can you justify decrease in minimum wage, when your tax payer dollars are paying two to four times national middle class median income to fireman, police etc for your “proctection.” This is like playing national mafia, with one sheriff in town.
As for progressive tax, 50% of the tax payer support the nation, is there any responsibility for the other 50% that don’t pay? Benjamin Franklin, George Washington, Thomas Jefferison all warned for the excess of government. Ladies and Gentlemen, we are there already, that’s why we are having a debate on minimum wage. We have a system of government run by extremely rich democrates and filthy rich republicans. What happened to commen sense?
IN A TRUE DEMOCRACY, EVERYONE EVENTUALLY VOTE THEMSELVES A FREE MEAL
Thanks for the clarifying.
Robert
This is what’s wrong with “economics.” You have a “theory” which is all very cute and fun for the people who like to play that sort of game. But it is not only worthless in the real world, it is a positive evil because it leads people who can’t think… and that means high end non partisan experts… to do things that hurt people all in the name of “economic efficiency.”
That said, turning Social Security into welfare, which is what you are proposing, would kill social security and, incidentally, rob working people of the dignity that comes with paying for their own retirement,
If you want to cut taxes for employers, I bet you could find a better place to do it. And if workers need more money, a raise in the minimum wage might be a good place to begin.
GET SICK READING THE TITLE TO THIS POST — TOO SICK TO READ IT OR KRUGMAN’S COLUMN. I have begun reading Nipperdey’s “Germany to Bismark.” It begins with weathering whatever economic turmoil might be caused by FREEING THE SERFS (pardon me if I shout but I have been more and more a serf in this economy — progressive pay deterioration — for 35 years — as average income nearly doubled [did so since 1968]).
Time has got to come when American labor is educated to what is happening to it and we just have to get back to paying people what the market would be willing to pay them if compelled. Guess what: good way to build really, not bubbly, demand!
I posted the essay below on my blogspot as well as emailing it around. James Surowiecki posted the title without a link on his WSJ blog (misspelled by name with two “n”s.
[SEE NEXT POST FOR ESSAY — OVER 5000 CHARACTERS HERE]
HEADLINE: YEAR 2007 MINIMUM WAGE UNDER-PERFORMED MALTHUS! 🙂
Even under defunct Malthusian theory, LBJ’s $10/hr minimum wage ($1.60/hr in 1968, adjusted) should have shrunk only 33% as US population grew 50%. But by the time GWB’s $5.30/hr minimum wage ($5.15/hr in 2007, adjusted) came to be it had sunk nearly 50%.
Adding 72.5% to today’s $7.25/hr minimum wage would make it $12.50/hr; would raise a $6.00 fast food meal to $7.45, but would raise nearly 40% of the US labor force to (a still shamefully low for the 40 percentile US wage?) $500/wk — the fast food buying 40%. Direct inflation would be 2% — not “1000%” with the fantasy “$100/hr.” Two short years ago the federal minimum wage was $212/wk. Today it is just short of $300/wk. Michigan Democrats are pondering $400/wk next. Does anybody expect — has anybody yet experienced — any great unemployment tragedy? $212/hr never should have happened!
A realistically* assessed (if never ever reported) 30% US poverty level shouts that there is lots — and lots — of room for more fairly set labor costs (which should be all the market will bear, just like ownership’s prices) to be re-inserted into US products and services — the same missing labor costs that have siphoned 15% of income share from the pockets of bottom 90 percentile earners mostly into the buckets of top fraction of 1 percentile earners over the past few decades — with neither matching increase in relative output from the top nor decrease from the bottom. (*see charts, pp. 44-45)
This “http”* illustrates that minimum wages do not affect employment below half the median wage. Unfortunately (unbelievably?) the US median wage rose only 20% while average income climbed 100%, probably making half the US median no longer a true test (meaning that if the minimum could be pushed harmlessly to $12.50/hr that the median could sensibly be pushed to $25/hr?). *http://worthwhile.typepad.com/worthwhile_canadian_initi/2006/11/when_the_minimu.html
LBJ’s 1968 minimum was about 80% (!) of the median (around $12.50/hr) — really pushing it. It must have been recognized back then that nobody could live on half their day’s median ($6.25/hr). LBJ’s minimum wage earners would fit into today’s $20,000/yr income tax paying bracket — GWB’S were in 2007’s $10,000/yr almost no income tax paying bracket. (If LBJ’s minimum wage had kept up with average income growth, today, it would be $5/hr higher then Obama’s median wage!)
Re-inserting (re-asserting!) fair US labor costs across the board must needs cause a boat load of inflation – but that just quantifies the depth of what I call America’s “Great Wage Depression.”
My neighborhood McDonald’s enjoyed a noticeable up tick in business following Illinois’ minimum wage jump from $6/hr ($5.15 in 2003, adjusted) to $8/hr — noticeably (to myself and others) all in the low wage, foreign born customer segment. Minimum wage earners beginning to afford the products of their labor? My neighborhood owners even closed both their stores — one at a time — for 6 months to beautifully rebuild them for $1 million dollars apiece — right in the teeth of the 33% real minimum wage increase which apparently did not phase them much.
Given the too long, below fair share US labor market, those who perform minimum wage studies ought to separate US born from foreign born employment statistics to get a realistic assessment of the effect on both. How else can they detect whether today’s minimum wage may often (most often?) be too low for Americans to even show up […]
***I think that argument is stronger than you imagine. It does not depend on any assumption about where spending comes from …***
I think perhaps we are becoming lost in a maze of abstractions. The assumption that the injection of savings/assets into a market will not change demand because “we are in a liquidity trap” seems quite suspect to me. If people start spending, we are no longer in a liquidity trap (although we might shortly wish that we still were.) I submit that if one lowers wages enough, the liquidity trap will dissolve although I suspect that might be the equivalent of using hand grenades to discourage mosquitoes.
Pragmatically in the case of the US, the pool of “savings” seems to be largely on the wrong side of the Pacific Basin and the people with the savings presumably have little interest in putting Americans back to work in any activity that competes with their export markets. I don’t think sprinting toward the bottom would be likely to have a salutory outcome. But, I’m pretty sure that the idea that it can’t change the dynamic is wrong.
AND TAKE THIS:
80% of LBJ’S very health $12.50 MEDIAN WAGE = 66% of OBAMA’S much weaker $15.00 MEDIAN WAGE = the same LBJ $10 federal minimum wage.
***If we raise taxes on the rich and no unanticipated technological jump takes place the level of capital will fall which will drag down employment and wages.*** Cantab
What a reamarkable piece of utter nonsense. Did you think that up all by yourself?
On what planet is capital formation a function of the discretionary income of the wealthy? At least in societies that have moved beyond feudalism
(And somewhat more seriously, the US does not seem to have suffered from a shortage of capital since the 19th Century. If anything, our problems seem related to too much capital chasing too few good places to invest it. That how one ends up with pets.com and huge housing develoments in Temecula.)
*** Why can’t so many influential economists get that their models are based on assumptions that overly simplify real conditions and only provide a thumbnail heuristic for thinking about a problem in a general sense? Why do they then proceed to make policy recommendations? This is like engineers using their rules of thumb to build bridges instead of only employing them to get a general idea of what will be required and then proceeding to work up detailed plans.***
Because “economic engineering” is an oxymoron? Ben Franklin could probably have understood the conceptual framework of a nuclear power plant after an evening of discussion and a few glasses of wine. He wouldn’t have had the slightest idea how to go about building one.
***The obvious solution is to attack unemployment at the cause, namely, nominal aggregate demand falling below the real output capacity of the economy***
I don’t think that’s stupid. But I’m having a bit of trouble with the problem that much of our real output capacity is idle because it was devoted to making stuff that few people actually needed in return for IOUs of dubious quality. I’m not sure that making stuff no one needs in return for payment promises that will not be kept is long term viable.
***Oh, and someone please tell Chairman Bernanke that commercial banks don’t loan out reserves. His monetary policies are a waste of time if that’s what he thinks.***
I reckon he knows that. Problem is that we want the banks solvent and lending money and at the moment, many are neither. But we perceive that unfortunate things will happen if we admit there is a problem. … if we don’t think happy thoughts …
What a reamarkable piece of utter nonsense. Did you think that up all by yourself?
No. I opened up Macroeconomic Theory by Thomas Sargent and looked at the chapters on the Classical and Keynesian models.
On what planet is capital formation a function of the discretionary income of the wealthy?
On planet Earth the wealthy make more than they can consume and end up investing a larger portion of their income. Taxing the wealthy takes away the last dollar or income that they would have invested.
Coberly,
That said, turning Social Security into welfare, which is what you are proposing, would kill social security and, incidentally, rob working people of the dignity that comes with paying for their own retirement,
Working people don’t pay for their own retirement. That’s not how an unfunded forced savings plan works. You pay to the generation ahead of you and then those behind you pay for you.
And you argument against economics is an argument against reason and logic.
Cantab,
Referencing Thomas Sargent in macroeconomics is like referencing Chairman Mao in a discussion about classical Greek poetry. Some things just don’t fit.
If we raise taxes on the rich and no unanticipated technological jump takes place the level of capital will fall which will drag down employment and wages.
That’s sort of true if we take those tax dollars and burn them. Although even there Sargent’s economics argues that there would only be a wage reduction, not a reduction in both. I’m not saying that Sargent’s textbook doesn’t say what you’re claiming, only that Sargent hasn’t really thought it through. The micro underpinnings of his model does not allow for involuntary unemployment.
Most likely the govt will not burn those tax dollars, but will put them to some use. For example, hiring teachers, paving roads, providing police protection, equipping an army & navy, pooling age, medical and employment risk in various government insurance plans, providing student loans, etc. All of those things are apt to make workers more productive and are in fact the source of most of the technological change component of productivity. You are forgetting that capital deepening is only one part (and not a terribly large part) of productivity growth.
The only case where the minimum wage should be cut is if there is real deflation occuring, and given that I think that the minimum wage should be higher already, that would be well down the road.
Slugs,
Referencing Thomas Sargent in macroeconomics is like referencing Chairman Mao in a discussion about classical Greek poetry. Some things just don’t fit.
No its not. It was the required text for my Macroeconomics class in graduate school. I would asked you what text you used but your answer would be nothing because you never took the course.
By the way did you ever read the book? I didn’t think so. In the beginning of the book he presents the Classical Model, the Keynesian Model, and Tobin’s Dynamic Aggregative Model. The second part of the book is technical and covers stochastic macroeconomics.
And what specific item do you take issue with? Nothing isn’t it.
can’t resist this.
i used to work for an outfit that “built more roads.” the first step was to condemn the housing where we wanted to build a new road. this meant that we had to pay the people who owned those houses what they were worth. about 10k we figured. they were shacks really. owned by elderly black people. but they were home. and they were cheap. so we gave them 10 k and built the road and the elderly black people got enough out of it to live in an apartment for three years.
there really are consequences to your “theory.”
one could even imagine
that the funny foreign official was simplifying things a bit for Friedman. could be they needed to employ those folk right then for simple humanitarian reasons, or to take the steam out of revolutionary fervor. Friedman, being simple minded, wouldn’t fuss about all that, because in his theoretical heart he would have known that in the long run doing that work with tractors would have provided a higher standard of living. on average.
just speculating.
CAntab
the average unemployment rate during the 20’s boom was 12%. your theory would be helped if you knew a few facts.
I really wish we got a “real progressive” (whatever that means) in office, so that we could end this debate once and for all. A 400% increase in the federal minumum wage over 3 years ought to give us a definitive answer.
add to that
the capitalists in they heyday of capitalism got no small amount of their capital by borrowing it from relatively low wage workers who thought of it as “savings.”
Coberly,
the average unemployment rate during the 20’s boom was 12%. your theory would be helped if you knew a few facts.
Nobody knows what your talking about with this cryptic post. Take a step back, take a few deep breaths, and try again.
pax
while i suspect i don’t agree with your economics or your politics, there is that tendency for everyone to vote themselves a free lunch. this is why we have low taxes. we need higher taxes. at least for a while.
Cantab
i am always willing to argue against “reason and logic” since that is so often the battle cry of fools.
and i am sorry that you can’t understand “pay as you go.” probably you don’t even realize that the money YOU put into “investments” goes to pay someone “ahead” of you, and that when you take the money out, the money will come from someone “behind.”
Jay,
Don’t know if you are kidding. A jump to $500/wk in the federal minimum wage (a mere 25% higher than LBJ’s after average income has doubled) should add about 2% inflation over how ever many years — giving 40% of our workforce a raise.
When the minimum wage was $5.15/hr, I worked out (eighth grade math stuff) raising that minimum wage to $12.50/hr would add only 3.75% to the cost of GDP output.
Average raise of $7,500/yr X 60 million (48 million half raises plus 6 million full raises) = $450 billion in income shifted to bottom 40 percentile workers out of $12.5 trillion GDP – not counting other wages pushed up. 3.75% is about what we grow every year. BTW, my minimum wage doubling scheme is not based on some kind of one-time transfer of yearly growth – in fact it might make a perfect one-time recession tonic.
I cannot replicate these eighth grade calculations for a minimum wage hike while the minimum wage is in flux. It takes a year for new overall wage numbers to accumulate and another year before tabulations become widely available (e.g., the 2005, 40 percentile wage was reported at $12.12/hr – that’s $13.35/hr in 2008 dollars – in The State of Working America 2006-7; table 3.4, p. 121).
Push-ups caused by last years higher $7.25/hr minimum should leave $12.50/hr lower than today’s 40 percentile wage and the GDP is now up to $14 billion, which together should allow a guesstimate of the added cost to GDP output to something near 2% – ditto for inflation not counting other wages pushed up.
Cantab
I was talking about your claim that FDR’s unemployment rate was 15%, down from 25% before the war build-up. just because you can’t remember what you said, doesn’t mean i can’t.
jay
once an economics prof posed more or less exactly that question on a test. the answers he got were so off the wall he threw the question out. 400% all at once would be like throwing a bomb into a bar and studying the effect on the price of beer. how about raising the min wage gradually to a point where people could afford to pay their own health insurance, not live in a project, and save enough for an education, or to be able to retire when their body and mind begins to give out….
give out so much that life becomes a chore… not so much that the boss can’t squeeze a few more years’ profit out of them.
Robert:
If you assume Labor is 100% of the cost of the Product or Service; then, I would agree there would be a perceivable impact on employment if wages are decreased or minimun wages are decreased. Not many people work for minimum wage where their labor cost has that type of impact and I would suggest their Labor cost is substainally less than 100% or probably 1/10th.
Lowering minimum wage a fraction of the Minimun Wage amount legislated today with that percentage in mind of amount of labor in a product would have mininmal impact on employment at a result. Conceptually and if labor were 100% of the cost of a product or service, 10 people being reduced in income may entice a business to hire 1 person. I think you are missing the actual amount of labor in a product or service.
Hey folks? The minimum wage already IS lower. http://www.doleta.gov/business/Incentives/opptax/
The feds will pay 25% (if they work less than 400 hours for you) to 50% (40% for most cases) of the wage of someone you hire who meets some fairly broad criteria (about a dozen different ways to qualify). An adult 18-39 who lives in a family that qualifies for Food Stamps qualifies, and virtually anybody 16-25 who hasn’t worked or attended school in the last 6 months qualifies. We’re talking about more than 10% of the work force, here. That’s right, you can hire minimum wage folks for just $4.35/hr (direct wage cost) in states where the federal minimum applies, and only slightly more elsewhere. To maximize your benefit you should hire them for roughly 830 hours per year (or roughly 2.5 hires for each FTE). Of course, whether minimum wage is above the market wage even now (after the significant hikes of the past several years) is debatable. I doubt that it is at a restrictive or determinative level in most places. Unemployment is NOT being caused by the minimum wage, it’s all about a lack of demand for labor, due to a lack of demand for goods and services.
Your point would be valid if the economy is not suffering from a lack of demand. The definition of a ‘deflationary spiral’, demand is constant, and may even decrease with an increase in supply. That is essentially Krugman’s argument : demand is no longer responsive to the price of an item. Whether that applies to reality right now is open to debate, as consumers are still willing to snatch up a bargain when they see one (e.g. cash for klunkers). So the argument really should be on which is the best model to describe US consumer behaviour right now.
My experience is that people who work on the minimum wage will be working at least 2 jobs in order to survive. With an ample supply of workers, the local manager schedules the workers so there will be no ‘overtime’ even if they need two extra shifts. (Senior management really hates overtime.) This is why so many workers wants to ‘work more’ so they won’t have to take that second job.
Coberly you’re both wrong & Cryptic
On your saying the unemployment rate during the 20s boom was 12% this is just plain wrong. I don’t have the original data but this chart based on romer shows the rate never went significantly over 9 percent and the average seems to be just over 6 percent and just prior to the start of the depression it was around 5 percent. And by the way, I don’t know what point your trying to make because you did not make one.
http://en.wikipedia.org/wiki/File:US_Unemployment_1890-2008.gif
I was talking about your claim that FDR’s unemployment rate was 15%, down from 25% before the war build-up.
I have been saying that it was 15% in 1940. I think for the year the average is slightly under 15%. So this is not just a claim its what the data tells us.
We had 5% unemployment just before the depression started and it was still around 15% by 1940 (The 8th year of Roosevelt). This shows that all the Keynesian building projects failed to make the economy return to anything like full employment. A better path for Roosevelt to have takes would be to have tried to restore confidence back in 1933 and then to move the economy back to more of a free market state after the dust in the dust bowl had settled and the banks had stabilized.
ACADEMIC ECONOMICS DRIVES ME UP THE WALL.
They all — left or right– have this beautiful theory
that cutting wages will lead to greater employment.
But Friedman argued that the test of a theory is how
well it forecast.
The problem with the theory is that there is no historic example of
cutting wages leading to greater employment.
If you look at the actual data for the 1920s and 1930s — the
last time we actually had falling wages — you see that wages
and employment were positively correlated. When wages
fell, employment fell and when wages rose employment rose.
Moreover, since WW II wages gains and employment gains
have also been positively correlated.
If you use standard theory that lower wages led to greater
employment your forecast will almost always be wrong.
So why is it that academic economist continue to accept
this thesis lock, stock and barrel when it is so obviously
contradicted by the data? And it is not that it is just some
data that contridict it, rather the evidence is overwhelming
that wages and employment move together in lock step.
“…significant hikes of the past several years…”
…bringing the 2009 federal minimum wage (now $7.25/hr) to only 75 cents an hour short of IKE’s, 1956, $8/hr (adjusted) minimum wage — 250% of the average income later!!!!!!!!!!!!!
Spencer,
Maybe the universities should cut their wages in half. Doubt that any would support that approach.
When is the last time to your knowledge that many facilities’ hours were trimmed to 30-32 hours/week in the USA? That effort is still ongoing across the nation in a number of production plants and other facilities. I talk to individuals every week who face that situation with no relief in sight.
I suspect that the econos calling for wage cuts also fail to acknowledge that temp hires over the past couple of decades have substituted for higher wages/benefits in many instances. Moreover, it’s clear that temp hires are playing a leading role at this time and for the foreseeable future, meaning that temp hires (lower wages) will occur before permanent hires launch in mass.
Perhaps those calling for wage cuts should change their message and simply call for MORE temp hires. Let them try to sell that instead. LOL.
I still like the idea of slashing their wages…
Did any of the students bother to draw a demand curve for Walmart cash register operators (or whatever they are called) and a supply curve of qualified labor for said job?
It is amazing what this picture could tell you about minimum wage.
MG — you missed the point.
OK, you still like the theory of slashing wages.
But it is still a theory that is contrary to a 100 years of data that says cutting wages does not lead to greater employment.
that is my point. The data directly contradicts the theory that you favor.
I have not checked the data, but I suspect that larger temporary hires also coincides with falling employment/hours worked and weakening incomes.
My challenge to you. Find a single real world example of economy wide wage cuts causing stronger employment. You have years and years of data and numerous economies to look for examples.
Go find one.
Sorry MG, I read your comment too fast.
Your were refering to those who favor cutting wages, not making a comment contrary to mine.
Sorry about that.
Actually, one of the biggest abusers of the temporary worker concept are the universities and colleges who are replacing tenured faculty with temporary hires of new graduates to work for much lower wages.
I’m not for wage cuts but it seems like the minimum wage could only lower total employment since it prevents deals getting done below the minimum wage rate that would have gotten done otherwise.
Minimum wages are probably of low importance since they don’t constrain the part of the labor market the flies below the radar screen — i.e. part time yard work, baby sitting, shoveling snow, picking up cans, or any work that gets done without reporting the work to the government.
Cantab
your unemployment statistics for the twenties are different from the ones i just read in a book by David Kennedy “Freedom From Fear.” I have no way of knowing. I suspect that the people who publish the statistics have no way of knowing.
jay
it was long before walmart.
run
he is also missing the point that even if the least of these was laid off, he wouldn’t be wasting his time at a job for which he was marginally qualified for and might go get some training. it’s also true that what is more likely to happen is that the turnover rate would assure that each worker got an extra month “vacation” rather than one worker having to take a year off. i only mention these things because the theorists can’t seem to imagine any reality beyond their beautiful equations.
Coberly: Way to dodge the point in classic denialist fashion.
Did any of the students bother to draw a demand curve for A JOB THAT REQUIRES VERY LITTLE SKILL and a supply curve of qualified labor for said job?
I’d juxtapose that with a demand curve for A JOB THAT REQUIRES SPECIALIZED SKILLS and a supply curve of qualified labor for said job.
It is amazing what pictures can tell you about minimum wage.
I should add you should take the aggregate demand and break it up into regional demand. Then draw two supply curves. One supply curve where the product that can be easily transported air, ship, etc, and another supply curve where the product (think services) must be produced locally.
jay
what a way to ignore the point that your damn supply/demand curve, while very pretty, doesn’t seem to have much to do with reality with its rather complicated feedbacks.
“doesn’t seem to have much to do with reality”
You are getting your models confused. You must be talking about the climate models that have consistently overpredicted global temperatures and have little to do with reality.
The fact that you can’t understand that a Walmart worker gets paid X in large part because a majority of the population can count change and scan a bar code, while investment banker gets paid Y because a minority of the population can tell you what the option-adjust spread on a 10 year corporate bond with an inverse floater, sinking fund, and is callable.
I never said it was an end all graph, but it is a starting point. Funny you accuse me of oversimplifying things when a certain person is releasing a book filled of single-variable regressions that prove nothing except that the left is a bunch of religious fanatics that have faith in their dear leaders as the sole driver of GDP growth.
“…but it seems like the minimum wage could only lower total employment since it prevents deals getting done below the minimum wage rate that would have gotten done otherwise.” Cantab
There isn’t any empirical proof of that statement yet it stands there in the face of credulity without significant retort. This entire discussion is incredible. Is there a serious rationale to reduce the pathetic minimum wage? A deal that can’t get done without lower wages may be a deal not worth doing. I don’t see any inclination to argue for the reduction of the top one percent income. That’s where the money is. No, you say. Do the math. The top one percent take home a huge portion of the available income in this country. They can’t return it all to the economy except to purchase yet more income producing assets. There isn’t as much stimulus in the use of income n that manner as would be in the expenditure of that excess income on goods and services. Redistribute the income to 1950 to 1960 levels and the economy might have some chance of recovering. Otherwise the lower 90% of workers are fighting over crumbs. They won’t even have that well known cake to eat.
Start bringing back manufacturing to this country and maybe workers would have some useful income producing activity to engage in. Shifting all the work to the far east was a brillliant strategy if one earns their income within a global economy. The average US worker doesn’t. The discussion of a reduction of minimum wages, or any working class wages for that matter, is little more than mental masturbation carried out by those whose personal income is secure.