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Lowering the minimum wage

Paul Krugman asks, “Would cutting the minimum wage raise employment?” The macroeconomics discussion is interesting, if over my head.

But, politically, of course nobody’s going to cut the minimum wage. Can you imagine the unpopularity of a minimum wage cut during a recession? I can’t imagine that all the editorial boards of all the newspapers in the country could convince a majority of Congress to vote for this one, whatever its economic merits.

Which makes me wonder why the idea is being discussed at all. Is it an attempt to shoot down a minimum wage increase that might be in the works? Krugman mentions that Serious People are proposing a minimum wage cut, but he doesn’t mention who those Serious People are. I can’t imagine that they’re serious about thinking this might happen.

P.S. Mark Thoma links to more on the topic from Rajiv Sethi and Tyler Cowen.

P.P.S. I posted this at the sister blog to see if anyone could tell me how anyone could be considering minimum wage cuts as a serious political option. Nobody bit, but Tom Beecroft wrote that “it’s a theoretical economics argument, rather than a political reality argument.” That makes sense, but it still seems to me that something more is going on here than a dispute over pure theory. As a political scientist, it just seems funny for me to see people debating a policy that has no chance of being implemented. There must be something else going on here.

21 Comments

  1. Richard D. Morey says:

    I don't think it is unusual at all. Thought experiments have a long history in science, and the fact that some experiments cannot (practically) be done has never stopped scientists from thinking about the experiments. Thinking about the implications of an theory, even in practically impossible situations, helps one to better understand the theory (and perhaps the difference between theories).

  2. Will says:

    I agree with Tom Beecroft, I see this more as a theoretical kerfuffle rather than a serious policy debate. It seemed to me that most of the blogs that discussed the idea over the last week did so from an ideological or theoretical perspective, without any sort of practical game plan for implementing a change (on either side). I think it was brought to the fore more as a criticism of the status quo than a call to action.

  3. Mike@pvl says:

    Paul frequently engages in nutpicking on his NYT blog, this is just another example of throwing out a controversial topic to bait his opponents. Unfortunately, because there is a wide consensus regarding the existence of an inverse relationship between the minimum wage and employment, this time people bit and now there is a little web back and forth going on.

    Of course, way back when Paul also believed that raising the minimum wage would increase unemployment (http://www.pkarchive.org/cranks/LivingWage.html) but now argues that we are in depression times, so these rules longer apply. I think. He isn't clear on that, even in his most recent post on the topic (http://krugman.blogs.nytimes.com/2009/12/16/minimum-wages-a-few-clarifications).

    My personal belief is Paul finds these sorts of arguments fun, and gives him another chance to portray his rivals as stupid and heartless by citing some macroeconomic goblity gook instead of engaging in any real debate. It's an ego game. You can't look for logic and consistency in Paul's NYT posts, there simply isn't any. Pure punditry.

    My response to the analysis he keeps linking to: "I’m surprised the linked AS-AD analysis comes from Economics 101. Since it requires a perfectly vertical aggregate demand curve, I assumed it was from Literature 203: Myths and Folktales." It is, of course, waiting moderation.

  4. Ben Hyde says:

    The right is under a lot of pressure to float some suggestions for what to do about jobs. When you lack the votes it's more likely you will reveal what you really think should be done, rather than what is politically practical.

    The minimum wage is possibly the purest example of what the government can do in aid of smallest economic actors. That is what, in practice, distinguishes Left from Right. The Right is always talking "seriously" about removing these regulations that aid small economic actors and how it will be a great thing; and no doubt it will be a great thing for big economic actors. It is part of what Hershman calls the perversity rhetoric popular on the right, e.g. if you help the unfortunate you actually make things worse – e.g. the argument that lead to the poor houses.

    "Serious people on the Right" talk about this all the time, just as they always talk about reducing taxes on capital, eliminating consumer protections, etc. etc. It is very effective – while they may not achieve the first order goal there are plenty of second order goals that are made easier.

    For the Right to advocate leveling, reducing, eliminating the minimum wage is entirely consistent with their philosophy and aspirations so that it might be highly unlikely in the current time frame is the least of their concerns.

  5. OGT says:

    That's pretty much how economists spend their time, which is not completely unrelated to the mess we're in.

  6. Rajiv Sethi says:

    Andrew, speaking for myself, I think that the debate is important regardless of it's current political relevance because it exposes deficiencies in certain models and modes of reasoning. Economics is going through a bit of a precarious time and the future direction of the discipline may be up for grabs. This alone is enough to incentive to push and probe existing models to see how well they hold up. I'll post a longer and more careful response on my blog at some point.

  7. Nick says:

    Andrew:

    Richard Posner and Gary Becker discussed lowering the minimum wage as a possible way to stimulate employment growth at the end of November:

    "There are other ways of stimulating employment, at lower cost and probably with greater impact. One would be to reduce the federal minimum wage, which over a three-year period beginning in 2007 will have risen from $5.15 to $7.25 an hour–a 40 percent increase. As time passes, unemployment becomes less a matter of layoffs and more a matter of failing to provide jobs for new entrants to the workforce, and a reduction in minimum wage would make these new entrants–inexperienced workers with modest wage expectations–far more employable."

    Dual blog posts here:

    http://www.becker-posner-blog.com/index.html

    Becker is a "serious" fresh-water economist, so Krugman wasn't just arguing against phantoms.

  8. Sanjay says:

    One political reason for supporting a politically unfeasible idea is that it lets you strengthen your appeal with a minority among whom the idea has some support, without the majority holding you accountable for the idea actually getting implemented.
    In this instance: there isn't widespread support for cutting the minimum wage. But I'd bet that whatever such support there is is stronger on the right than on the left. So if you're a conservative, you can fire up your base by saying that you'd love to cut the minimum wage if you could, but your political opponents would rather ruin the economy with government-mandated redistribution. This strategy assumes that your base is listening more closely to your idle musings than the general electorate (who'd only perk up if you actually changed policy).
    Note: I have no idea if this is actually what's going on re: the minimum wage discussion, but it seems plausible to me (especially if, as Krugman says, it's being discussed in conservative popular media and not just among economics insiders).

  9. derek says:

    Are these Serious People agreeing to a wage cut? I thought not. They have a conflict of interest, in that they are of the class that employs, more than they are of the class that is employed, so of course they find Serious ways to approve of cheaper labor.

    It is of course trivially true that cutting wages would result in the volunteer employer class voluntarily employing more labor at the lower rate. A less happy way of putting it is that they would gladly take more labor from more people, if it didn't mean spending any more money for it.

    As a member of the employed class, I favor involuntary employment. The rich should employ all the labor there is in the country to employ, by paying their taxes. That's how FDR ended the Depression: once the money was out of the hands of people who didn't want to spend it, and in the hands of people who did, the economy recovered from its gridlock.

  10. Lord says:

    Serious people advocate this in the hope of some future day when they can. There were no shortage of them opposing the last increase and they were important in preventing any increase for a very long time before that. If someday arrives, they will. If not they have at least built their alliances. Abortion isn't about to be banned, but that doesn't make it less of an issue among the dedicated.

  11. Steve Roth says:

    It's a political ideology argument, using economics theories as weapons.

    Remarkable how empirics haven't entered into this particular skirmish even once.

  12. misolo says:

    There are several important, real-world implications of this discussion, including:

    1. Whether some Very Serious People are able to use demands regarding the minimum wage to block other policies that would actually reduce unemployment and that they oppose.

    2. It is part of the continuing wrangle to see whether macro, at least in respectable academic circles, goes back to being a serious intellectual endeavor or degenerates into muddled thinking in service of partisan quackery. This has very concrete and alarming implications for the effectiveness of future policy-making.

  13. Eric Rasmusen says:

    Mike, above, has the best comment on this. But I'll comment too.

    (1) I expect most PhD economists would get rid of the minimum wage entirely. We'd also get rid of most tariffs. I bet 99.9% of us would get rid of the sugar import quotas that hurt US consumers (fat aside– that *would* go the other way if we want to be paternalistic, but a tax would be better) and Third World sugar producers. None of that will happen.

    Before 1970 the profession was agreed that airlines should be allowed to cut prices and compete. Nobody thought that would happen either, but then something changed in the 70's and Edward Kennedy supported deregulation (a classic political economy story– he wanted to show he wasn't a kneejerk lefty so he could run for president, so he listened to academics and took a political gamble).

    (2) In this case, besides the ordinary reason for getting rid of the minimum wage, there is the Keynesian consideration that maybe we should think about multiplier effects because we're in a recession. That could cut either way, depending on whether incomes of the minimum wage workers rose (most likely I think, in the short run if not in the long run) or fell. That's an interesting consideration to analyze. We're academics, not politicians, so we like interesting questions.

  14. Barry says:

    There's a lot of Overton Window shifting (or attempted shifting) going on. This gives the right some cover to block things which help the majority of American; they can demand something be done first.

  15. misolo says:

    Mike and Eric demonstrate why this debate needs to be had. Standard macro analysis is described by people (trained as economists?) as "goblity gook" when it doesn't support their political views. That's really all that needs to be said.

  16. Add my name to those who think it is important to debate the issue even if it will not (in the short run) affect policies enacted.

  17. What's going on here is an attempt to win public support, and the support of the highly educated and other opinion leaders, for general ideas and type of economics. And that's extremely important.

    If, after the last stimulus, unemployment improves only very slowly, going from double digit to full (natural rate) only after many years, much of the public and opinion leaders may think that non-right wing economics is wrong. They may think not that the stimulus was far too small (which it was), they instead may think the problem was non-right wing economics doesn't work well, and maybe we should elect more Republicans so we can get minimum wage cuts, giant tax cuts for the rich, more shredding of the social safety net, cutting of high social return investments, etc.

    Persuading people of the falseness of right wing economic dogma is very important so opinion leaders and ultimately the public supports it less, so we elect less Republicans, and so that they can do a lot less harm than they have over the last generation.

    A big reason why the Republicans seized power in the late 70s, and kept it by and large for a generation, is because so many people mistakenly thought their ideology was correct, even many well educated people and academics.

    The educated and opinion leaders over time have a great deal of persuasive power over policy, politicians, and through their credentials, media access, etc., the general public.

    If they have dangerous misconceptions, they can use their clout to put in power politicians who will act on those misconceptions. We've learned that at tremendous cost over the last generation.

    Misconceptions that make opinion leaders and then ultimately the public support extremely harmful ideology are very dangerous. They can ultimately create strong public support for very harmful ideas and politicians and opposition to very beneficial ideas and politicians.

    It's crucial to fight dangerous right wing economics misconceptions, because intellectual and public support for, belief in, these misconceptions was crucial to the rise of conservative Republicans and their hold over power for so long.

    For more on this, I recommend Paul Krugman's short book, "Peddling Prosperity".

  18. It's also a matter of credibility.

    One of the great things about the internet and blogosphere is that now when right wing economists say things that are very wrong and dangerous, there's often an immediate response, an immediate clear explanation of why this is wrong for the intelligentsia, and the general public, and this explanation comes from people who are top economists and excellent at explaining things clearly for laymen, people like Paul Krugman, Brad DeLong, and Joseph Stieglitz.

    When this keeps happening again and again and again, it really helps discredit harmful right wing economic ideology and those who promulgate it. It really decreases the persuasion they have and the harm they can do.

  19. duda says:

    So if republicans are the awful enemy of the world, why do they exist in a world where the majority are not the beneficiaries of their evil ways and popular vote is how everything is done? there's a reason democrats will never fully win anything. the extremes of both sides are horrible places to be. It's just a struggle from one side to the other in attempt to find that happy medium that works best.

  20. "So if republicans are the awful enemy of the world, why do they exist in a world where the majority are not the beneficiaries of their evil ways and popular vote is how everything is done?" — duda

    1) Ignorance — The Republicans' greatest ally.

    2) The U.S. is not completely democratic. Senators representing only about 10% of the population can stop a bill desired by Senators representing about 90% because of unequal representation (Wyoming gets the same number of Senators as California) and the filibuster.

    3) Corporations and wealthy individuals can make enormous donations and hire congresspeople for multimillion dollar jobs the day after they leave office.

  21. Jon Linder says:

    I think that there is a tendency of both sides to get pretty dogmatic and just believe what they want to believe – the republicans tend to do it with religious/anti-immigrant issues and the left tends to do it for anti-bigbusiness/anti-establishment issues. While I generally lean left, and certainly would want a more humane health policy and such there are some definate instances where overzealous leftists have basically made matters worse:
    (1) Making the use of nuclear power in the U.S
    so painfully litigous and expensive, we had to rely on fossil fuel even more for our power sources – I mean even the most left leaning European countries had the common sense to weigh
    the environmental concerns in a less hysterical manner and use that resource effectively.
    Of course Obama sanely is not this sort of leftist and am hopeful he does carry thru on his expansion of nuclear energy as he said he would.
    (2) Allow and defend ridiculous
    anti-corporation/anti-insurance settlements. Sure there are plenty of justified cases too but by in large, even the most left-leaning countries ridicule the U.S. for those ridiculous
    settlements. Sure it might only add 1-4 percent
    to our inflated health costs compared to other countries but every bit counts let's be honest.
    We allow this crap because we think of it as sticking it to the big corporations even though
    most of us rely directly or indirectly on them
    thru our jobs, pension plans and so forth. We rather pay the parasites to appease our dogma.

    Both sides don't seem to really care about finding out what's an old wives tale and what actually has any substance….big government is bad, big business is bad, cell phones cause ear cancer, TV's cause eye cancer, ginko prevents alzheimers, if some company slaps "organic" on your produce it's better for you, Y2K will end the world, 2012 will end the world… honestly
    it's sad how gullible people have become on both sides of the aisle.

    Well either way, you know something is going to fix the fact that U.S. garbage collectors at one point earned more than doctors in most countries of the world! Either we can keep our wages up stubbornly and just let dollar devaluation fix it or we can get real.

    Thank god the hard-working mexicans are willing to fill the voids provided by both our left's
    minimum wage stance and our right's drug criminalization stance. Americans didn't need those below wage jobs or the drug tax/job money anyway I suppose.