Paul Krugmans recent call to raise the minimum wage is consistent with much of his liberal political writing over the past decade. But raising the minimum wage is not consistent with Krugmans writing as an economist. Those who care about the poor should pay more attention to Krugman the economist than to Krugman the liberal pundit.
Krugman uses the Christmas shopping season, and the fact that 60 percent of minimum wage workers are in sales or food services, to talk about the decline in the real wages of people working in retail. His solution to their problems: We can raise the minimum wage.
But before we embrace the policy prescription of Krugman the pundit, lets ask the opinion of Krugman the economist. In his 1998 review of a book on living wages he wrote: 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.
Krugman the economist should know. He co-authors an Econ 101 textbook. The 2008 edition clearly states, when the minimum wage is above the equilibrium wage rate, some people who are willing to workthat is, sell laborcannot find buyersthat is, employerswilling to give them jobs.
Most peoples employment prospects arent harmed by a minimum wage because their productivity is far above the legal mandate. Young people with fewer skills are the most affected. Roughly a quarter of all minimum-wage earners are teenagers, and more than half are under 25 years old. Its no accident that these age groups have the highest unemployment rates. Teen unemployment is 22.2 percent while 12.5 percent of 20 to 24 year olds are unemployed, compared to the U.S. national average of 7.3 percent.
People who deny that the minimum wage causes unemployment often point to the empirical work of economists David Card and Alan Kruger, whose study and subsequent 1997 book didnt find an unemployment effect of the minimum wage. What did Krugman the economist think of their work? Heres what he wrote:
What is remarkable...is how this [Card and Krugers] 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.... Clearly these advocates very much want to believe that the price of laborunlike that of gasoline, or Manhattan apartmentscan be set based on considerations of justice, not supply and demand, without unpleasant side effects.
So fifteen years later, why does Krugman the pundit not believe Krugman the economist? New evidence has surfaced but the bulk of it agrees with Krugman the economist, not the pundit. Economists David Neumark and William Wascher surveyed the vast literature studying the effects of minimum-wage laws in their recent book, Minimum Wages. They find that the bulk of the evidence accumulated over the last 20 years indicates that minimum-wage laws reduce employment for the least-skilled workers and lowers their earnings.
Maybe Krugman the economist can give us some insight into Krugman the pundits newfound faith in the minimum wage. In 1998 he asked why liberals supported a minimum wage. His answer:
What the living [minimum] 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 pricedetermined 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.
When Krugman the moral pundit asks: Doesnt that [minimum wage] violate the law of supply and demand? Wont the market gods smite us with their invisible hand?, he need only turn to Krugman the economist for his answer: Yes. Economics put limits on our utopian fantasies. Unfortunately, Krugman the pundit writes from a fantasyland that should embarrass Krugman the economist.
|Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research. He is also the editor of the Independent Institute books, Housing America: Building out of Crisis and Making Poor Nations Rich.|