Paul Krugman’s Laughable Argument that Wages Aren’t Determined by the Law of Supply and Demand

by Mar 3, 2015Liberty & Economy4 comments

Paul Krugman, Laureate of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 at a press conference at the Royal Swedish Academy of Sciences in Stockholm (Prolineserver/Wikimedia Commons)

Paul Krugman makes vain argument that the federal minimum wage should be raised because the law of supply and demand doesn't apply to labor wages.

In his latest New York Times column, Paul Krugman makes another vain attempt to argue that the federal minimum wage should be raised because the law of supply and demand doesn’t apply to labor wages:

Conservatives — with the backing, I have to admit of many economists — normally argue that the market for labor is like the market for anything else. The law of supply and demand, they say, determines the level of wages, and the invisible hand of the market will punish anyone who tries to defy this law.

He goes on to say that “labor economists have long questioned this view” and that “the overwhelming conclusion” from studies of minimum wage laws on employment “is that moderate increases in the minimum wage have little or no negative effect on employment.”

He cites a 2010 study to support this and concludes that the federal minimum wage should be raised “by a substantial amount”.

A few points:

1) Krugman’s conclusion doesn’t follow from his premise. It doesn’t follow that, since studies show that “moderate” increases in the minimum wage have little effect on employment, therefore “substantial” increases in the minimum wage would also have “little or no negative effect”.

In fact, his own source explicitly states that it would be unscientific to extrapolate their results “to predict the impact of a minimum wage increase that is much larger than” the ones Krugman described as “moderate”.

2) Furthermore, his own source–a study of restaurant wages and employment–explicitly notes that they looked only at total employment, and that their data did not permit them to determine “whether restaurants respond to minimum wage increases by hiring more skilled workers and fewer less skilled ones. The estimates in this paper are more about the impact of minimum wage on low-wage jobs than low-wage workers.”

That is a critical caveat since–as Krugman’s own source further points out–previous studies had found that teen employment was indeed adversely affected by minimum wage increases.

3) When Paul Krugman the liberal pundit says he has to “admit” that “many economists” agree that the law of supply and demand does indeed apply to wages, he declines to inform his readers that one of them is none other than Paul Krugman the Nobel prize-winning economist:

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…. Clearly these advocates [of increasing the minimum wage] 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…. 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.”

— Paul Krugman, “The Living Wage: What It Is and Why We Need It“,Washington Monthly, September 1, 1998

“This is what happens when there is a price floor on the wage rate paid for an hour of labor, the minimum wage: 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.”

– Paul Krugman, Macroeconomics2nd Edition (New York: Worth Publishers 2009), p. 128

– Paul Krugman the Nobel Prize-winning economist, Essentials of Economics, 2nd Edition (New York: Worth Publishers 2011), p. 114

The economist side of Krugman’s personality occasionally comes out in his punditry, such as:

“Basic supply and demand analysis says that things like [mass unemployment] aren’t supposed to happen: prices are supposed to rise or fall to clear markets. So what’s this apparent massive and persistent excess supply of labor? In general, market disequilibrium is a sign of prices out of whack; and most people commenting on our mess accept the notion that one or more prices are for some reason not adjusting.”

– Paul Krugman, “The Price is Wrong“, New York Times, March 30, 2013

Yes, for some reason — like the existence of minimum wage laws.

4) On one hand, Krugman argues that the law of supply and demand doesn’t apply, so the minimum wage can be increased without causing unemployment.

On the other hand, he argues that the law of supply and demand does indeed apply, so the Federal Reserve should combat unemployment by creating more currency out of thin air in order to reduce the inflation-adjusted wages of the labor force; e.g.:

“I would add, however, that there’s another case for a higher inflation rate…. It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.”

– Paul Krugman, “The Case for Higher Inflation“, New York TimesFebruary 13, 2010

I rest my case.

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About Jeremy R. Hammond

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  1. Edward Snowedus

    IF the minimum wage is too low, then the impoverished workers apply for government assistance. Meanwhile the corporations demand and get property tax exemptions to locate the businesses and lobby for (“buy”) huge state income tax exemptions.

    Therefore the leaching no-good companies dump the cost of living increases off on the few remaining taxpayers, toasting their record profits. Even anti-union WalMart is increasing base wages to retain Associates (non-entry level) solely due to the cost of turnover/training.

    • Jeremy R. Hammond

      It’s not clear to me what relevance you think your argument has to my own.

  2. Edward Snowedus

    You use Paul Krugman’s own words to make your point: ” what are the effects of increasing minimum wages? …The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.”
    Yet WalMart is willing to pay higher wages to help keep employment steady through reducing ‘voluntary exits.’

    • Jeremy R. Hammond

      And…? I don’t understand your “Yet”, as though you perceived some kind of contradiction. There are many people who earn more than the minimum wage. Most people, actually. It doesn’t follow from this observation that therefore wages are not a price determined like any other by supply and demand, if that is what you are trying to say.


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