Paul Krugman, the former Enron advisor (as James Taranto of the Wall Street Journal’s Best of the Web column always describes him), has come out touting an increase in the minimum wage as the cure to all that ails us. Or, at least as a cure to the working poor, so that they can stay off food stamps. (But aren’t food stamps a “minimum wage” by another means?)
Here’s the gist of his argument:
First, a few facts. Although the national minimum wage was raised a few years ago, it’s still very low by historical standards, having consistently lagged behind both inflation and average wage levels. Who gets paid this low minimum? By and large, it’s the man or woman behind the cash register: almost 60 percent of U.S. minimum-wage workers are in either food service or sales. This means, by the way, that one argument often invoked against any attempt to raise wages — the threat of foreign competition — won’t wash here: Americans won’t drive to China to pick up their burgers and fries.
Now don’t be misled. 60% of workers are not paid the minimum wage. It’s just that 60% of those who are paid minimum wages are in food service or sales. Only about 3.6 million workers, or 4.7% of the workforce, are paid at the minimum level, 7.25/hour. The last time the minimum wage was raised? You bet, 2009, during the housing bust and financial collapse. But correlation is not causation.
The problem with the minimum wage is that it is only relevant in a few labor markets. A New Yorker could not survive, given the cost of living in the city, on $7/hour, and the same is true in a great many metropolitan areas across the nation, making federal minimum wage laws mainly irrelevant in those locales. If the lowest wage being paid in a local market is $10 per hour, raising the minimum wage to $9 per hour would be irrelevant. It is in flyover country where an increase in the minimum would be most relevant. The cost of living is lowest in rural areas and small towns, and so commensurately, are wages. Who knew Krugman was a champion of rural Americans? Or maybe, in the great tradition of New Yorkers, he hates rural capitalists, and figures this would be a good way to ding them while being irrelevant to most of urban American workers and their employers.
Krugman touts studies that show no effect on employment rates when the minimum wage is increased. But really, does anyone believe anything that economists conclude from their studies, and particularly in areas as fraught with hucksters and political shills as is the politico-economic arena of minimum wage policies? All of these studies claiming no deleterious effect on employment rates necessarily must depend on either the minimum wage being irrelevant (New York City), or the suspension of belief in the demand curve. Does labor, of all commodities, have an upward sloping demand curve? Is hiring someone to flip burgers like buying an expensive painting, where the more expensive is the hire, the more demand there is for the worker? Doubtful, to say the least.
But that’s not the real problem with Krugman’s idea. The real problem is that increasing the minimum wage at a time of slack labor demand, if it actually moves the wage rate above the market-clearing price, will do the exact opposite of what Krugman hopes, at least implicitly, the Federal Reserve’s loose money policy will achieve. It will increase wage rates while the Fed is trying to lower them through inflation.
In the same New York Times, and on the same day, Binyamin Applebaum of the Economix column explains how important inflation is to lowering wage rates and thereby increasing employment rates, in a discussion of how ordinary folks are highly suspicious of policies aimed at increasing inflation:
People generally regard higher prices as eroding their standard of living, because they do not expect wages to keep pace. Economists who favor higher inflation, by contrast, tend to see this erosion as beneficial in the short term and a non-issue in the long term. Unemployment rises after a crisis, they argue, precisely because wages are slow to fall. Higher inflation helps to solve that problem by quietly eroding the real value of wages. That, in turn, makes it profitable for companies to hire more workers, increasing output and consumption and, in time, allowing wages to catch up with prices.
See that little gem of truth in there, Higher inflation helps to solve that problem by quietly eroding the real value of wages? This is not something which Krugman openly admits in his support for greater inflation. But he supports all manner of Federal Reserve “accommodation” aimed at doing just that. While he also supports increasing the minimum wage. Unless Krugman figures that the market minimum wage is substantially higher than the mandated minimum, he is contradicting himself. Or, more charitably, he is disingenuously advocating for a higher minimum wage for purely symbolic or selfish reasons.
My guess is that Krugman is honestly unaware that he is contradicting himself. Such lack of self-awareness is one of the many powers of perception which are impaired when the reasoning mind is hijacked by political impulses. Krugman fails at an essential task of objectivity–logical consistency–because he has become nothing but a mouthpiece for Progressive causes who feels it his obligation to issue normative politico-economic theories concealed in positive-sounding economic analysis.
The Fair Labor Standards Act of 1938 provided for the first minimum wage, at $0.25/hr. It was enacted in the midst of the Great Depression. Did it help or hurt employment rates? There’s no telling, really. The unemployment rate spiked back above 15% around the time of ts enactment, but came plummeting down a year later, with the onset of World War Two.
Perhaps the War was like Keynes’ bank notes, which Keynes had advocated should be buried and then dug up to provide work for the unemployed. Building tanks and planes and ships in order that they might be blown to smithereens is surely as similarly wasteful economically. Krugman mentioned once that a war would solve our economic problems, never mind all this minimum wage and accommodating Fed nonsense. He wasn’t necessarily advocating for war, but just making an observation that a war would increase demand for laborers, solving the unemployment problem without the Fed. At least this observation was logically consistent with the balance of his politico-economic views. Advocating an increase in the minimum wage is a contradiction to them.