President Obama has proposed an increase in the minimum wage from its current level of $7.25 an hour to $9.00 an hour. This is after the George W. Bush increase, between 2007 and 2009, from $5.15 an hour to $7.25 an hour. That would make it a 75-percent increase over 6 years. This is at a time when inflation has been very low. Adjusted for inflation, the increase over 6 years, if Obama's proposal is legislated, would be about 55 percent. That's big.
How, I wondered, would Krugman handle the proposed minimum wage issue? Well, after all, he is an economist who thinks a lot about economic policy and its effects and blogs daily about these things. And he did write the following about the "living wage," which is essentially a higher minimum wage, in 1998:
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. [Krugman should have pointed out here that Card and Krueger didn't study employment in general. They studied employment in fast-food restaurants.] 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?
So how did Krugman handle the economics of the minimum wage? By talking about the politics of the minimum wage. Krugman tries to establish that the Republicans are shedding crocodile tears because they don't really care about the workers who might lose their jobs if the minimum wage were increased.
I wondered if any of his commenters on his web page would catch Krugman changing the subject. So I started reading through the comments, something I don't generally recommend because most of the commenters are sycophants. But one commenter, Capt. J Parker, nailed it, writing:
OK, Republicans are evil, check. Shills for the Uber-Rich, check. Now that that's out of the way, that is to say: the Politics of the minimum wage have been cleared up, Isn't the Amazing Dr. K going to treat us to a discussion of the Economics of the minimum wage? The Good Dr. K states: (Those despicable Republicans would) "like people to believe that their opposition (to raising the minimum wage) is driven by sincere concern for workers who might lose their jobs." People won't believe this according to Dr. K because Republicans are known to be evil and not because concern about increasing unemployment by increasing the minimum wage is economically misplaced, which it is not. So, can I take this as a capitulation from Dr. K that the Econ 101 supply/demand analysis that shows how unemployment increases when government mandates a price above market really is correct? After all, we also have empirical evidence that the last increase in the federal minimum wage (courtesy of Harry, Barry and Nancy) really did increase unemployment among the least skilled.
So, don't we need some magic progressive fairy dust to sprinkle on the Economics of this proposal of the president's to make the obvious downsides of the plan go away? Otherwise it would seem President Obama is willing to throw some of the least advantaged among us out of work for the sake of a "political trap." Now, that would be evil.
Well, Capt. Parker almost nailed it. He should have written "courtesy of Harry, George, and Nancy."