David R. Henderson  

Keynesian Politics and the Minimum Wage

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Last month, Alex Tabarrok posted an interesting piece on the failure of Keynesian politics. Let's posit arguendo, he said, that Keynesian economics is correct: during a recession, if the government increases aggregate demand using tax cuts or government spending increases, the economy will recover. The problem, says Alex, and he quotes prominent Keynesian Paul Krugman admitting the problem, is that in a democratic society, the policies that Keynesians advocate are unlikely to be followed. What to do?

Alex proposes automatic stabilizers that kick in when there's a recession. That's not new, and he doesn't claim that it's new. Milton Friedman and other Keynesians (Milton was a Keynesian in the 1940s and early 1950s) wrote about this back in the 1940s and early 1950s.

Alex also advocates increasing wage and price flexibility. But he's a little vague about those details and there's one big piece of wage flexibility that the government could have, not by imposing a law, but by repealing a law. I refer, of course, to the minimum wage. The minimum wage sets a lower bound that, even in good times, prevents the least-productive workers from finding work. In recession times, it's even worse.

Keynesians in the golden age of Keynesianism were quite critical of the minimum wage and were sympathetic to its victims. One of Paul Samuelson's best lines in the 1970 edition of his textbook was his comment about a proposal to raise the minimum wage from its existing level of $1.45 an hour to $2.00 an hour:

What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?

Keynesians Gunnar Myrdal in the 1940s and James Tobin in the 1960s and 1970s were also critical of the minimum wage.

In 1973, for example, Tobin stated:

I am against minimum wage legislation and have said so. It diminishes job opportunities, ceteris paribus, and it is an inefficient and haphazard tool for income maintenances or redistribution. At the same time, it does contribute to the existence of a Phillips trade-off, at least in the short run; this is because it makes for asymmetry in the response of wages to changes in demand and in rates of inflation.

In other words, Jim Tobin was making the argument I'm making. The "have said so" refers to this passage from a 1965 article, "Improving the Economic Status of the Negro":
People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures, or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulation is that the intended beneficiaries are not employed at all.

It would be nice to see some Keynesians follow in their predecessors' footsteps.

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COMMENTS (21 to date)
Steve Sailer writes:

Yes, but there is a huge change since Myrdal, Tobin, and Samuelson were writing in the 1940s-1970s. They were thinking primarily about the welfare of American blacks, who are my fellow citizens.

Today, in contrast, low-paying employers tend to suck in foreigners from abroad. And then the taxpayers get stuck with the costs of educating their children, policing them, and so forth. (In contrast, with African-Americans, we have to do that anyway, so I'd prefer that they had the character-improving benefits of work.) Privatize profits, socialize costs. Enforcing minimum wage laws can discourage that.

Maniel writes:

My foreign, immigrant grandparents worked for low wages. America educated their children: my father fought in WWII, got his PhD in psychology, and worked into his 80s; my mother was a CPA.
The minimum wage is an anti-poor (racist) law.

David R. Henderson writes:

Steve Sailer,
Do you really think that an anti-immigrant bias is what has changed modern American Keynesians? I've got to say that I doubt it.

Justin writes:

Surely, the last quote is "other devices which seek to compel employers to pay them more than their work is worth", not workers. Google Books has one instance where Tobin is quoted with the word "employers" and none with "workers."

Evan writes:
Today, in contrast, low-paying employers tend to suck in foreigners from abroad. And then the taxpayers get stuck with the costs of educating their children, policing them, and so forth. (In contrast, with African-Americans, we have to do that anyway, so I'd prefer that they had the character-improving benefits of work.) Privatize profits, socialize costs. Enforcing minimum wage laws can discourage that.

Are you sure you don't have that backwards? From what I understand, the reason illegal immigrants can find jobs is that they can make a believable commitment to not turn in their employer if they're hired below the minimum wage. If an employer made a private agreement to hire a native at under minimum wage they'd live in fear of being turned in to the cops. But an illegal can't do that because then their employer can report them to INS.

If there was no minimum wage it would remove that incentive structure. Employers would prefer to hire native workers, since they speak better English, and you can't get in trouble for hiring them. This would reduce the employment opportunities for illegals, which based on your stated political views, sounds like something you'd favor.

Now maybe you're only talking about legal immigrants. But it seems like the advantage abolishing the minimum wage would give to natives over illegals more than makes up for any legal immigrants it might encourage, if you want to reduce the amount of foreigners coming here.

Lord writes:

The problem is times of depression are just the times this flexibility would be counterproductive. Under flee goods, seek money, wages would be cut but employment would not rise.

Maniel writes:

Government intervention in the private-sector labor market is always counterproductive.

David R. Henderson writes:

Correction made. Thanks.
Very good point. See my November 2006 article for that point.

Ricardo Cruz writes:

Lord: I don't know what the economic model you're using is. Prof Henderson is discussing Keynesian models, in which wage stickiness is the cause of cyclical unemployment. (Systemic in the case of the minimum wage, in pretty much any model.)

Lord writes:

You are confused about Keynesian models then.

Lord writes:

Perhaps I should elaborate. Lowering wages lowers demand during what is already a demand shock and increases deflationary expectations making it counterproductive at those times. The key is aggregate demand and these times are not like ordinary times. Conventional models are turned on their head. Keynes was quite clear on this.

Lord writes:

Nor is wage and price stickiness the cause depressions, they are merely a fact that must be taken into account in dealing with them. Think about what flee goods, seek money, means. That is the cause and why lowering wages and prices doesn't work to ameliorate it but compounds it through debt deflation. But I don't expect a libertarian to understand this.

kgasmart writes:

But if the minimum wage is eliminated, which poor workers make at least minimum wage?

Frankly, if fast-food places are permitted to pay what they like - Pennsylvania's minimum wage is $7.24, so let's say $4 an hour - what fast-food place will pay more than that? Will any of them? Or will all low-wage work now simply pay less than it does? This --may-- lead to additional job creation, though keeping labor costs as low as possible will still incentivize employers to get by with as few workers as possible. After all, why hire two workers and pay them $4 and hour, when one worker - at $7.25 an hour - is sufficient?

education vs indoctrination writes:

It seems that the point of this article is that the term "Keynesian" has been applied to different theories over the years. It is really nothing more than name calling, we have to do better than this.

Cahal writes:

I don't think anybody thinks the minimum wage is the best way to guarantee a standard of living, but abolishing it now, without any alternatives in place, would be unwise.

Alex Guevara writes:

Whoever wrote on minimun wage and african americans clearly did on a racist bias. Low wages are the biggest incentive for voluntary unemployment. Wages bellow minimun wage wont decrease the price level equally and will actually create more voluntary unemployment and crime. Not to mention income inequality would increase as well. I guess if we keep losing comperative advantage because of high cost of labor eventually minimun wage laws will disappear.

wmcraigbarnard writes:

Free markets don't classify people by race, color or national origin. The opportunity is open to anyone with the right credentials. The symptoms we see in society are part of the same disease, government trying to control free market business. Certainly education for all persons is not equal. Neither is the mind of the student. We seem to assume that equal education provides equal ability and thereby an expectation of equal pay and opportunity. That is baloney. I don’t wish to go to McDonalds and have a college grad serve me. Like teachers he/she has made a terrible life or career choice isn’t making enough money but will expect it and has no chance to really take advantage of his or her education. This is a problem.

I'm no social scientist but I have been an employer with 38 employees of differing talents and educations from janitors to engineers with advanced degree’s. If you have the education and skills that meet the jobs requirements, prove your drive, ability and integrity during the 90 day evaluation period. Little else matters outside of a criminal background. I don't care what your race color or national origin is. i suspect most employers today are of the same thought and consideration. We just want people to be interested in more than a paycheck. However, that is a whole other discussion for another time.

Ricardo Cruz writes:

Lord: lowering nominal wages would of course get you out of the recession in old Keynesian models. Because you can't do that, you resort to inflation or by spurring money velocity (getting people to buy again and bid up prices) to reduce real wages, and help the labor market get to its equilibrium position.

Those are second best alternatives to help wages better adjust to economic shocks. You certainly do not want to add more sources of stickiness.

Lord writes:

Yes, you want to lower real prices, not nominal ones, and inflation is the way to do that, not deflation.

Richard Gregg writes:

I'll go the author one better: Suspend the 8 hour day, mandatory 1 1/2 overtime law as well. That might have made sense at $2 an hour, but it is killing productivity now, raising wage costs too high, and sending our jobs elsewhere. It never existed before 1940, people worked hard but got paid straight time, and things got done for a reasonable price. The road to hell is paved with good intentions !

Robert writes:

When social mood turns down, and the economy soon after goes into a depression, there's no stopping the reversal of accumulated inflation through credit. Deflation WILL occur, and though money wages may decrease, what that money buys soars in value. And it is true that debts become harder to pay back during deflation. But debt is the problem, not the deflation. There is also this to consider, from the January 2011 Elliott Wave Theorist, applicable in so many ways:

"The problem with the Fed is not its chairmen's decisions per se but its very existence. No Fed chairman has ever made a useful, moral decision, because the institution itself is harmful and immoral. It is based on political privilege, monopoly power, counterfeiting, partisanship and theft. The ecology of humanity, left alone, rewards and punishes the right people; initiating force is required only in order to circumvent justice. When Congress created the Fed, it initiated force against most Americans in order to reward undeserving people. The result has been colossal injustice."

Consider also the pedigree of the "minimum wage" law. The minutes of debate on the original Bacon-Davis Act expressly said one of the purposes was "to keep blacks from taking the jobs of whites", an explicitly racist purpose. Moreover, this was not considered a bug, but a eugenic feature to starve "the unfit and undesirables" from gaining the resources to reproduce. One only has to look at how the Nazi regime turned out to see the ugly results of government-compelled eugenics, among other things.

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