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Should we cut the minimum wage?

The idea of cutting the minimum wage is gaining credence in some quarters as an answer to unemployment. Paul Krugman is not amused:

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

More on precisely how a minimum wage cut would interact with the specific conditions of this recession here.

By Ezra Klein  |  December 16, 2009; 12:03 PM ET
Categories:  Economic Policy  
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Comments

"The idea of cutting the minimum wage is gaining credence in some quarters as an answer to unemployment."

Yeah, the quarters who never took Economics 101 or got a D in the course. And, of course, the quarters who never set foot in college, like Limbaugh and Beck...

Posted by: Gatsby10 | December 16, 2009 12:51 PM | Report abuse

Yup, pay cuts for poor people. That's just what we need.

[\snark]

Posted by: leoklein | December 16, 2009 1:11 PM | Report abuse

I think Krugman misses the point here. No one is advocating that workers accept lower wages. Rather the point is that the unemployed can accept employment at a wage lower than the current minimum wage. This means that a currently unemployed worker who can only produce $6 worth of widgets per hour can now accept employment at say $5 per hour, instead of sitting at home and collecting welfare. This is especially helpful for teenagers and high school dropouts, the mainstay of the unemployed.

Posted by: EconGuru | December 16, 2009 1:12 PM | Report abuse

What businesses, if given a bunch of $5 an hour teenagers and uneducated, will jump start the economy?

Posted by: JkR- | December 16, 2009 1:16 PM | Report abuse

Gee, why don't we make the minimum wage a million bucks? Then we'll all be rich!

Posted by: sold2u | December 16, 2009 1:25 PM | Report abuse

So I'll fire my employees who make $6 per hour and hire 'em back for $5! Even better, since the work is seasonal/temporary, I won't have to fire them in the first place. Even better still, since the $6 people are going to $5, I can move the $7 people to $6!

What's not to like?

Posted by: leoklein | December 16, 2009 1:29 PM | Report abuse

I don't understand Krugman's logic. Why does a reduction in the minimum wage mean that "everyone takes a pay cut"? Think about it the other way around: When the minimum wage is increased, does "everyone" get a raise?

Posted by: tomtildrum | December 16, 2009 1:40 PM | Report abuse

tomtildrum: "Think about it the other way around: When the minimum wage is increased, does "everyone" get a raise?"

Yes, exactly! You're finally getting it!

Posted by: leoklein | December 16, 2009 1:47 PM | Report abuse

"if some subset of the work force accepts lower wages, it can gain jobs"

This is a clear fallacy and typical of Krugman's deceptive streak. A person without a job is the person that benefits from the new job being created, not a person with a job. People really need to stop listening to that guy.

Just like increasing the amount you pay for unemployment lowers the salary of everyone that is working, employing 120 people at $5/hr is better than employing 100 people at $6/hr.

The other benefit is that there is a lot of work that needs to be done that is not worth the cost of paying someone minimum wage to do it. If cleaning something is worth $220/week to me in improved profits, but it costs me $240/week to get it cleaned, I'm not going to hire anyone. If I can get someone to do it for $200/week, I get to make $20/week in profit, and someone gets to provide work worth that much.

Posted by: staticvars | December 16, 2009 2:48 PM | Report abuse

Cutting minimum wage may reduce unemployment in some places, but increasing the minimum wage will improve our overall economy.

If you were working twenty years ago, check how your old job is being done today. In most cases worker productivity is up because production methods have improved.

Visit a fast food place and examine the automation that has taken over many former tasks.

With wages becoming a smaller percentage of costs, changing minimum wage either way has a lesser effect than previously.

For example, if labor is 20% of a company's basic cost, a 10% increase in total wages will increase total cost only 2%. Since most employees make more than the minimum there will be a diminishing trickle up effect; i.e., while the minimum wage worker will see a 20% increase, the middle income worker may see an increase of only a few percent, if at all.

Add to this the effect of increasing the minimum wage workers disposable income, most of which will be spent, and the total effect is amplified.

Also, holding down minimum wage lessens management's incentive to reduce labor costs in an effort to improve profits.

Finally, having one minimum wage is problematic. I see at least two possibilities--permanent and temporary/probationary--with a clear definition of the two, the former being higher than the latter.

Posted by: oldfuzz1938 | December 16, 2009 2:52 PM | Report abuse

This is insane. Simply insane.

I guess if we all agreed to work for nothing, we'd have the security and comfort of guaranteed employment, eh?

This "economic analysis" is akin to the nonsense that Stalinists used to peddle in defense of communist collectivization. Being collectivized is much better than being a peasant! And hey, less than the minimum wage is better than being unemployed! It's nonsense, and it'll collapse your economy.

What happened to the America of Henry Ford, where somebody understood that in a civilized country, workers are also customers? The only place where workers aren't also customers is in the freaking Third World!

I swear, Fox News is determined to turn this country into a Banana Republic. I am so sick and tired of these Banana Republicans.

Posted by: theorajones1 | December 16, 2009 3:32 PM | Report abuse

i'll take a decrease in minimum wage if i get a benefit package of full health care insurance, 2 week paid vacation, sick pay, and a continuing education package.

Posted by: jeeze56 | December 16, 2009 3:45 PM | Report abuse

If any Democrat proposes this stupid idea, it will be the death of the Democratic Party. I want to see which person is crazy enough to put out a bill to cut the minimum wage.

Posted by: ATLGuy | December 16, 2009 3:52 PM | Report abuse

At the same time, maybe you could jumpstart the private sector economy by cutting taxes and government spending.

Posted by: albamus | December 16, 2009 4:00 PM | Report abuse

I never hear this argument put forward by people who actually make the minimum wage.

I suggest that the economists and columnists and executives who are putting forward this idea all take a HUGE pay cut themselves and then wait to see if their employers hire more economists, columnists or executives with the money they save.

Posted by: margaretmeyers | December 16, 2009 5:05 PM | Report abuse

The chutzpah of the Faux News crowd in proposing a cut in the minimum wage is not surprising. After all they have managed to convince a sizable percentage of their viewing base to go on the street protesting against their own economic and social interests. Why won't Faux News also succeed in getting their base to demand a lowering of their own minimum wage? Corporate fascism here we come!

And if wages are depressed here, won't it have a parallel effect in the foreign labor market? Workers in China will also see their wages depressed, so won't we be back to square one? Why don't the corporations just simply tell us to work for nothing, then we'd all be employed. See, that's easy!

But then who pays the taxes so government can subsidize healthcare, infrastructure, and other social needs? Will the corporations then also pay 100% in taxes to the government? As someone said on the thread this is shock doctrine, but on steroids.

Posted by: zizi1 | December 17, 2009 7:13 AM | Report abuse

tomtildrum is correct. Krugman and Klein are both dishonest (and/or stupid, it's hard to tell the difference).

Cutting (or abolishing) the minimum wage doesn't cut *everyone's* pay, yet that's how Krugman plays it.

According to the gov, less than three percent of *hourly paid workers* earn the minimum wage. For Klein's acolytes, that means everyone else earns *more*, and would be almost entirely unaffected by a minimum wage cut.

Posted by: msoja | December 17, 2009 1:53 PM | Report abuse

As usual, Mises explodes Krugman (and Keynes (and little Klein)).

http://blog.mises.org/archives/011267.asp

Posted by: msoja | December 17, 2009 2:37 PM | Report abuse

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