Paul Krugman And Walmart’s Market Wage

Jim Huffman Dean Emeritus, Lewis & Clark Law School

If you have read any of the last hundred or so columns by the New York Times’ celebrated Nobel laureate Paul Krugman, you will know pretty much what his next column will say. He beats the Keynesian drum with a repetitive vengeance to the delight of those who prefer taxing and spending over serious thinking about how government policy affects the entrepreneurs and business people who constitute our national economy.

But he does occasionally turn his attention to microeconomics as he did in Monday’s column titled “Walmart’s Visible Hand.” Krugman is commenting, of course, on Walmart’s recent decision to raise its minimum wage to $9 this April and $10 by next February. “[W]hat Walmart’s move tells us,” concludes Krugman, is “that low wages are a political choice.”

Krugman goes on to explain, and debunk, the commonplace theory among conservatives that wages are a simple function of supply and demand, just like the price of butter. (He is clearly chagrined to acknowledge that “many economists” agree with these misguided conservatives.) The gist of his counterargument is this: ‘And because workers are people, wages are not, in fact, like the price of butter.’ But he does not stop with that – he goes on to offer some evidence.

What is his evidence for concluding that supply and demand do not dictate wages (or that government imposition of a higher minimum wage will not curtail employment)?

First, he references studies showing that “moderate increases in the minimum wage have little or no negative effect on employment” in comparison to neighboring states that do not raise their minimum wage. If by moderate he means a few percentage points then it is not surprising that there would be little or even no effect given the multitude of other factors affecting the labor market. But Krugman is not advocating moderate increases. Indeed he recommends raising the minimum wage by “a substantial amount.” Perhaps he is thinking of something like Seattle’s more than 50 percent raise, over a period of years, to $15 per hour. It will be interesting to observe what supply and demand has to say about that.

Second, he cites history. The strong middle class and narrowed wage gap of the 1950s was, says Krugman, “created by political action,” namely government control on wages, unionization and a full employment economy that led to “strong demand” for workers. Wait, did he say “demand?” Unless we’re talking about government-mandated unionization, two of the three factors Krugman mentions are supply and demand at work. A booming economy always raises the demand for workers and unions give workers greater bargaining power by allowing them some control on supply.

This strong middle class endured for a generation, says Krugman, because “pro-worker politics changed pay norms.” This is another way of saying that a generation of employers ignored market forces and just did the right thing by their workers. Oh, and by the way, writes Krugman, “the decades after the war were also marked by unprecedented economic growth.” Hmmm. Do you suppose that had any effect on demand for labor?

Finally Krugman gets to Walmart which has been “under political pressures” to raise its wages. What interests Krugman is that even while “these pressures don’t seem all that severe … , Walmart is ready to raise wages anyway.” His explanation is that Walmart finally has come to accept what “critics of its low wage policy have been saying for years: Paying workers better will lead to reduced turnover, better morale and higher productivity.”

For folks who have built one of the country’s most successful businesses, they were mighty slow getting to this realization. Or maybe something changed in the market place. Well, what do you know? According to Krugman, “workers are gaining clout thanks to an improving labor market, reflected in increasing willingness to quit bad jobs.” Is there any chance Walmart’s decision to raise its lowest wage has anything to do with workers quitting due to low wages, or just not accepting the jobs in the first place?

Like Larry Kudlow, who Krugman attacks in a recent blog post, I’m no economist. But it does strike me that Krugman employs a lot of supply and demand explanations to support his thesis that wages are a political choice and that a substantial increase in the minimum wage will not have a negative effect on employment. To the extent that his Nobel status and regular appearance on the opinion pages of the New York Times give him influence among those who would like to make those political choices, can it be because he “has elevated flamboyant wrongness to a kind of performance art.”

Oh wait, that is Jonathan Chait’s line about Kudlow’s continuing influence over conservative thought, approvingly quoted by Krugman in the aforementioned piece. So let’s just say that Krugman once again lets politics overcome what he must surely know about economics.