Does Walmart Prove Minimum Wage Laws Will Help Workers?

In a recent column Paul Krugman has one of the most curious arguments supporting the minimum wage that I’ve ever seen from a professional economist:

A few days ago Walmart, America’s largest employer, announced that it will raise wages for half a million workers. For many of those workers the gains will be small, but the announcement is nonetheless a very big deal, for two reasons. First, there will be spillovers….Second, and arguably far more important, is what Walmart’s move tells us — namely, that low wages are a political choice, and we can and should choose differently.

Some background: 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.

But labor economists have long questioned this view. …[B]ecause workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.

…[Walmart’s justification for its wage hike] echoes 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.

What this means, in turn, is that engineering a significant pay raise for tens of millions of Americans would almost surely be much easier than conventional wisdom suggests…

The point is that extreme inequality and the falling fortunes of America’s workers are a choice, not a destiny imposed by the gods of the market. And we can change that choice if we want to.

As with all of Krugman’s jaw-dropping pieces, other economists have jumped in on this one too. For example, David R. Henderson challenges Krugman’s history of unions and his claim that supply and demand don’t work when it comes to labor, and in the comments of his post points people to my own assessment of the minimum wage empirical literature that is decidedly more nuanced than Krugman’s summary.

However, in this post I want to focus on two other points that I haven’t seen Krugman’s critics address. First, it is a very strange argument to say, as Krugman does, that since we observe Walmart raising wages voluntarily, that therefore having the government force other firms to do so involuntarily won’t cause any major problems.

Look, Target just announced that it will lay off thousands of workers as part of a package to save $2 billion over two years. So should Stephen Moore write an op ed arguing that the government should require all existing firms to lay off thousands of workers, because the possible downsides are obviously smaller than what conventional wisdom suggests?

Or, if my Target analogy is too extreme for you–even though it’s exactly what Krugman did with Walmart–try this one: Chick-fil-A doesn’t serve food on Sundays. So that means the government could pass a law forcing all fast food restaurants to stay closed on Sundays, since clearly the gains to the workers (in the form of more time with their families) is higher than any potential downsides, such as convenience to consumers and paychecks for the workers. Right?

But moving beyond the absurdity of the basic premise of Krugman’s piece–namely, looking at a particular decision by one company in the market and then enforcing it upon every firm in the market–let’s focus on his other trademark, where he accuses people of swallowing naive economic doctrines that sophisticated thinkers like Krugman know are wrong.

Specifically, Krugman is rolling at his eyes at those conservatives–who, he admits, actually can find some economists out there to back up this view–who think supply & demand works in labor markets the same way it works in the butter market.

Indeed, I have found an economics textbook that pushes exactly this kind of simplistic view–even down to the specific example of a “butter mountain”! Here is a screenshot from the textbook that I grabbed from Google Books:

Man, this textbook does EXACTLY what Krugman is complaining about, doesn’t it? In case some readers are using their smart phones and the above screenshot is hard to read, let me summarize: The text’s discussion first uses supply & demand to illustrate the problems of a price floor in the butter market, and explains how historically this caused the European Commission to find itself “the owner of a so-called butter mountain, equal in weight to the entire population of Austria.” Then, after explaining how price floors screw up agricultural markets, it goes right into the minimum wage, saying “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.”

Those of you familiar with my critiques of Krugman over the years, will not be surprised to learn that the above textbook discussion comes from…Paul Krugman’s micro text (co-authored with Robin Wells). So when in his op ed Krugman admitted that the conservatives who thought you could analyze the minimum wage the same way you look at price floors on butter could actually cite some economists to support this view…one of those economists would be Paul Krugman.

Let me conclude this post by saying that in economics, as in other disciplines, there are varying degrees of sophistication. Sometimes you have to teach beginners things that are not quite right, in order to get the underlying lesson across, and then only later (for example students who are econ majors or those getting advanced degrees) do you introduce more nuances. So my problem isn’t that Krugman might fairly be arguing that the simplistic things we teach in Econ 101 are not the end of the story for what government policymakers should do.

Rather, my problem is with the tone and spirit of Krugman’s discussion. The casual reader would have NO IDEA that Krugman himself in his own textbook first talked about butter mountains, and then moved right on to minimum wage causing unemployment. (Go click the Google Books link and look around; there are no caveats surrounding the discussion.) Indeed, this is so much standard operating procedure for Krugman that I went looking for it. It’s not that I had this butter mountain example in my back pocket. No, I Googled “krugman wells minimum wage” to see what they said about it in their book, and foundJeremy Hammond’s discussion.

For those readers who still might think I’m exaggerating just how outrageous Krugman’s behavior here is, go look again at the discussion from his op ed, particularly this sentence: “Setting a minimum wage, it’s claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains, wine lakes and so on.” That is not a standard talking point. In my textbook, for example, I don’t use the term “butter mountain” or “wine lake.” No, the reason that example was in Krugman’s head, is that he was remembering how he himself treated the issue in his own textbook. It is really something amazing to behold.