Paul Krugman’s Intellectual Dishonesty: Minimum Wages

by Dec 18, 2013Liberty & Economy6 comments

Paul Krugman's intellectual dishonesty is once again on display when he advocates increasing the federally mandated minimum wage while denying that doing so would exacerbate unemployment. An examination of the argument he presented in his column on December 1 is instructive.

Paul Krugman’s intellectual dishonesty is once again on display when he advocates increasing the federally mandated minimum wage while denying that doing so would exacerbate unemployment. An examination of the argument he presented in his column on December 1 is instructive.

He begins by asserting that the minimum wage should be raised in order to help workers. Already there is a problem with his argument. As I’ve previously commented in another article pointing out Krugman’s dishonesty on this issue,

That Krugman can make this argument with a straight face is remarkable. Krugman constantly calls for more inflation, which doesn’t just redistribute income away from workers to the wealthy by robbing them of the purchasing power of their wages (funny how that happens), but actually worsens the economy, like by creating housing or other asset bubbles that precipitate financial crises when they eventually burst, as they must.

Krugman has even explicitly argued the “case for a higher inflation rate” on the grounds that “it’s really, really hard to cut nominal wages”, so in lieu of “wage cuts”, just have “higher inflation”, which “would lead to lower unemployment”.

In fact, just last month, Krugman once again advocated for more inflation (in this instance, in Europe), which he argued would be a good thing in part because “inflation reduces the problem of downward nominal wage rigidity: people are very reluctant to demand or accept actual wage cuts, which becomes a serious constraint if the relative wages of large groups of workers ‘need’ to fall.”

How can it be that reducing workers’ real wages by reducing the purchasing power of their currency through inflation helps lower unemployment, and yet increasing the federal minimum wage would not exacerbate unemployment by pricing inexperienced and low-skilled workers right out of a job? And how can he claim to have the best interests of workers in mind when he argues the latter while at the same time repeatedly also having advocated the former?

But wait, there’s more! You really won’t want to miss the punchline at the end of this post, so please stay with me. Krugman argues:

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.

Fast food worker on a $15 minimum wageBut Americans do buy lots of goods manufactured in China in no small part because of the cheaper cost of labor, so how won’t this “wash here”? The meme to the right says it all. Krugman’s own newspaper informs us that the restaurant  industry has “balked” at Barack Obama’s proposal to increase the minimum wage, “saying it would sharply raise fast-food prices and reduce employment, in part by fueling automation of some jobs.”

Naturally, the consequence of outlawing jobs is unemployment. The Times also quotes a senior Vice President at the National Retail Foundation, David French, making the sensible point: “There’s been a lot of growth of jobs in the retail and service sector. It’s been one of the bright spots. Why then should the policy response be to create fewer jobs? That’s a bizarre remedy to a crushing problem.”

It’s also interesting how Krugman carefully chose his words “man or woman”, for a reason we’ll shortly return to. First, he continues:

Still, even if international competition isn’t an issue, can we really help workers simply by legislating a higher wage? Doesn’t that violate the law of supply and demand? Won’t the market gods smite us with their invisible hand? The answer is that we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.

… If there were anything to the notion that minimum wage increases have big negative effects on employment, that result should show up in state-to-state comparisons. It doesn’t.

So, in other words, Krugman answers his own question by saying that, yes, the evidence tells us that wages do violate the law of supply and demand. Which is prima facie nonsense. Wages are a price like any other in that they are determined by supply and demand, and any studies which claim to show that this elementary economic principle doesn’t apply when it comes to wages is quackery. (If you don’t understand how supply and demand determine prices, watch this helpful video from the Khan Academy; for more, see the whole series of lessons on “Supply, demand and market equilibrium“.)

But according to Krugman, government price fixing works when it comes to wages because somehow the law of supply and demand doesn’t apply, and anyone who doesn’t agree is either ignoring the evidence or just mean to workers:

Now, many economists have a visceral dislike of anything that sounds like price-fixing, even if the evidence strongly indicates that it would have positive effects. Some of these skeptics oppose doing anything to help low-wage workers.

As Rob Wenzel humorously comments in Economic Policy Journal in a post appropriately titled “This is Why Paul Krugman Should No Longer Be Considered and Economist“, “He doesn’t think wage earners face a negatively sloped demand curve. I am not making this up…. Yup,  Krugman completely ignores the fact that we no longer have attendants who pump our gas and wash our windshields for us, and why it is near impossible to find a sales clerk in a department store. These potential hires have already been frozen out of the job market by the minimum wage.”

As Dominick T. Armentano comments at the Independent Institute, “Common sense, logic, and the law of demand easily refute” the contention that “raising the minimum wage does not increase unemployment among the young and poorly skilled, the only relevant labor pool”.

It’s interesting to also note that The New York Times editorialized in 1987 that raising the federal minimum wage from $3.35 an hour was “a mistake”, that “there’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market.” A higher minimum wage “means fewer jobs”; it “would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.” In conclusion, “The idea of using a minimum wage to overcome poverty is old, honorable—and fundamentally flawed.” The title of the editorial was “The Right Minimum Wage: $0.00”.

Krugman cited in support of his argument a post on the Times‘s “Economix” blog, which discusses how economists pretty much agreed that minimum wage laws caused unemployment until 1994, when along came “a now-famous case study by the economists David Card and Alan Krueger” that “compared employment trends in fast-food establishments in New Jersey affected by an increase in the state minimum wage in 1992 with trends in nearby counties of Pennsylvania, where no legislative change had taken place. Professors Card and Krueger reported the surprising result that employment trends in the two areas did not significantly differ.” The blog post also notes that “Critics of the Card-Krueger studies point to a number of methodological limitations, including their focus on relatively small geographic areas.” (The Card-Krueger study can also be found here and an earlier working paper here.)

We’ll return to the critics of the study shortly. First, keep in mind that Krugman claimed that the evidence was overwhelming that increasing the minimum wage doesn’t exacerbate unemployment. Yet we can read in a Washington Post blog post titled “Four things to know about Obama’s minimum wage increase” that “Economists are sharply divided about whether the minimum wage increases unemployment”. It notes that the findings of the Card and Krueger study “flagrantly contradicts Econ 101”. So are all these economists who hold to what they learned in “Econ 101” willfully ignorant of all this overwhelming evidence that the law of supply and demand doesn’t apply when it comes to wages?

Krugman’s own source links to a second “Economix” post from November 2009 in which professor of economics at the University of Chicago argued that the 2007 increase in the minimum wage was a causal factor in the increase in youth unemployment that followed.

The Wall Street Journal made the same argument in October 2009, pointing out that “Hardest hit of all” in the increased unemployment were “black male teens, whose unemployment rate shot up to a catastrophic 50.4%.” It makes sense that young workers would be hit hardest by minimum wage laws. After all, “teenagers are five times more likely to earn the minimum wage than adults” and “Minimum wage jobs are nearly all first-time or part-time jobs”.The Journal concluded, “The wonder of it all is that liberals still call “progressive” a policy that has driven the wages of hundreds of thousands of the lowest skilled workers down to $0.00.”

The Card-Kreuger study itself found “A low utilization of teens in the work force.” Hmm…

Remember how Krugman denied that raising the minimum wage would not cause the “man or woman” behind a cash register to lose their jobs? You know, as opposed to the “teenager” behind the counter.

Here is some more evidence: the average rate of unemployment in Western European countries that have minimum wage laws twice as high as those that don’t.

And it isn’t hard to find studies contradicting Krugman’s claim. In fact, in 2007, David Neumark and Federal Reserve economist William Wascher published a paper titled “Minimum Wages and Employment” in Foundations and Trends in Microeconomics in 2007 which reviewed the literature on the subject and found that “the oft-stated assertion that recent research fails to support the conclusion that the minimum wage reduces employment of low-skilled workers is clearly incorrect.” Rather, “a sizeable majority” of the more than 100 studies they looked at indicated that minimum wage laws had a negative effect on employment. Moreover, “the studies that focus on the least-skilled groups that are likely most directly affected by minimum wage increases provide relatively overwhelming evidence of stronger disemployment effects for these groups” (emphasis added).

A study by Neumark, Wascher, and J.M. Ian Salas titled “Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater” and published by the National Bureau for Economic Research in January 2013 concluded that “the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others”.

A study by economists from the Central Bank of Turkey and the London School of Economics, Yusuf Soner Baskaya and Yona Rubinstein, titled “Using Federal Minimum Wages to Identify the Impact of Minimum Wages on Employment and Earnings Across the U.S. States” and published in October 2011, found that higher minimum wages increased unemployment.

As Armentano explains in the aforementioned Independent Institute piece,

What about the studies (done by reputable economists presumably) that fail to discover job losses when legal minimums are increased? Well the problem here, of course, is that “testing” a proposition in economics is not like testing some theory in physics or chemistry.

In chemistry, for example, it is possible to accurately measure an increase in the molecular weight (mass) of a compound after mixing precise amounts of chemicals together. It is also possible to repeat the very same experiment and get the very same results in any lab anywhere in the world. Economic phenomena, however, are of an entirely different nature. The data in economics is all historical and the economic consequences observed are likely the result of numerous influences, some known some unknown, most of which cannot be accurately quantified at all. Thus, given the inherent nature of economic data, the best that we can say about an economic study that claims to “test” some economic principle is that the findings may be “illustrative” of certain expected outcomes…but that is all.

Now having said that, are we going to concede that the weight of the “evidence” concerning minimum wage laws is that there is little or no unemployment effect? Hardly. The fact remains that there are hundreds of studies (also done by reputable economists, presumably) that conclude that there is measurable job loss when minimum wages are increased.

When the very first federal minimum wage (25 cents) went into effect in 1938, the U.S. Department of Labor itself determined that between 30,000 and 50,000 low-skilled jobs were likely lost due to the law. A comprehensive review of several dozen minimum wage studies by the Federal Minimum Wage Commission in 1981 found that most showed employment declining. On average, for every 10% increase in the minimum wage, employment declined 1% to 3%. And as recently as 2006 economists David Neumark and William Wascher reviewed more than 100 minimum wage studies in the economic academic literature and concluded that 85% of the strongest studies found that low-skilled employment opportunities declined when the minimum wage was raised.

Remember how Krugman claimed that negative effects on unemployment of minimum wage increases don’t show up in state-to-state increases? Well, according to Armentano, “states that set a far lower minimum wage for teen workers generally have lower unemployment rates for teens.”

But let’s return to criticisms of the Card-Kreuger study. Lachlan Markay notes in a Heritage Foundation blog post that

 In 1996, a review of the study by the Employment Policies Institute found that the data sets Krueger and Card used were so badly flawed that “no credible conclusions can be drawn from the report.” Specifically, the study found, “the data set used in the New Jersey study bears no relation to numbers drawn from payroll records of the restaurants the New Jersey study claims to cover.”

Rather than look at those payroll records, Krueger and Card called fast food managers in New Jersey and Pennsylvania to ask about changes in employment at their restaurants. But not only did the data they obtained inaccurately reflect changes in fast food employment in the two states, according to the EPI, about a third of their data points got the direction of hiring wrong – that is, the data showed restaurants reduced employment when they actually increased it, and vice versa, during the period measured.

The actual payroll records told a very different story. When David Neumark and William Wascher re-evaluated the study, they found that data collected using those records “lead to the opposite conclusion from that reached by” Card and Krueger.

“[E]stimates based on the payroll data,” wrote Neumark and Wascher, “suggest that the New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania control group.” In other words, the New Jersey/Pennsylvania case study supports the basic economic notion that increasing the cost of hiring a worker will generally lead to fewer workers hired.

But we don’t need to turn to conservative think tanks like the Heritage Foundation to find criticisms tearing apart the Card-Krueger study. Here’s a well-known self-described “liberal” economist writing in 1998 about the effects of minimum wage laws (emphasis added) in a review of the book Living Wage by Robert Pollin and Stephanie Luce for Washington Monthly:

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. 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?

They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist’s reply is, if paying higher wages is such a good idea, why aren’t companies doing it voluntarily?But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage “compared with other companies”–and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish. What makes this an odd oversight is that the book contains a lengthy and rather well-done critique of attempts by local governments to create jobs through investment incentives, arguing that they mainly end up in a zero-sum poaching war; how could the authors have failed to notice the parallel?

…In short, what the living 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 price–determined 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.

So, who wrote that? Why, none other than Paul “The Conscience of a Liberal” Krugman! Of this piece of writing in which Krugman acknowledges that minimum wage laws cause unemployment, Benjamin Powell in the Huffington Post comments that

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 work–that is, sell labor–cannot find buyers–that is, employers–willing to give them jobs.”

Powell is referring to Macroeconomics by Paul Krugman and Robin Wells (p. 128). The second edition of Essentials of Economics by Paul Krugman, Robin Wells, and Kathryn Graddy published in 2010 contains the exact same quote (p. 114). Powell concludes his article with the appropriate remark that, “Unfortunately, Krugman the pundit writes from a fantasyland that should embarrass Krugman the economist.”

Indeed.

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6 Comments

  1. nlcatter

    more lies by GOPtards

    Reply
    • Jeremy R. Hammond

      You should take the time to actually read the article.

      Reply
  2. Luis Pérez

    Excellent article! However, I digress in regard to the effect of inlflation.

    “… Krugman constantly calls for more inflation, which doesn’t just redistribute income away from workers to the wealthy by robbing them of the purchasing power of their wages…”

    I think inlfation redistributes income from the wealthy to the workers. Whatever savings the wealthy have in currency is diminished in value and distributed away to the population at large where the currency circulates. Of course, the effect of this inflation on the livelihood for the workers is not increased as has well been seen in Argentina and Venezuela.where poor and middle class people are disentivised from saving for the future (buy now not later) to protect from the ever increasing rise of prices and the wealthy see their investments wither away.

    Reply
    • Jeremy R. Hammond

      Thanks for your comment. It doesn’t make sense to say that wealth is redistributed from the wealthy to the working class via inflation because the currency the wealthy hold in savings is diminished in value. The currency the working class hold in currency is also diminished in value! And the working class don’t have the same disposable income as the wealthy, i.e, a greater proportion of it must go towards buying food, paying rent, etc., while the wealthy can diversify, invest in assets, etc. The financial elites and government cronies who receive the newly printed money first are able to spend it before the resulting rise in prices that rob the working class of the fruits of their labor. I’ve blogged on this previously. Please see here for example:

      “The Rich Man’s Recovery and the Federal Reserve”

      https://www.jeremyrhammond.com/2013/09/13/the-rich-mans-recovery-and-the-federal-reserve/

      Reply
      • Luis Pérez

        You are right! This is the way it works in the US. However, I was thinking more of the situation in Venezuela and Argentina where the government prints money and transfer it directly to the poor to buy their loyalty thus causing huge yearly inflation.

      • Jeremy R. Hammond

        I see. Yes, I can’t speak to the different situations there.

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