Paul Krugman on the Real Meaning of the Walmart Wage Hike

One of the side effects of Walmart's recent announcement that it will raise wages for half a million workers is that other companies will probably be compelled to follow suit. And while these raises are not going to result in huge gains for workers, there is plenty of meaning to be gleaned from Walmart's decision, Paul Krugman writes in Monday's column. "Namely, that low wages are a political choice, and we can and should choose differently."


Conservatives, and yes, Krugman admits, many economists, have long treated the labor market like any other market, one that is subject to the law of supply and demand responding rationally to those forces. According to this scenario, artificially raising wages will hurt employment. Here's the problem with that thinking: "The labor force is people," Krugman writes. "And because 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."

Evidence?

First, there is what actually happens when minimum wages are increased. Many states set minimum wages above the federal level, and we can look at what happens when a state raises its minimum while neighboring states do not. Does the wage-hiking state lose a large number of jobs? No — the overwhelming conclusion from studying these natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment.

Then there’s history. It turns out that the middle-class society we used to have didn’t evolve as a result of impersonal market forces — it was created by political action, and in a brief period of time. America was still a very unequal society in 1940, but by 1950 it had been transformed by a dramatic reduction in income disparities, which the economists Claudia Goldin and Robert Margo labeled the Great Compression. How did that happen?

Part of the answer is direct government intervention, especially during World War II, when government wage-setting authority was used to narrow gaps between the best paid and the worst paid. Part of it, surely, was a sharp increase in unionization. Part of it was the full-employment economy of the war years, which created very strong demand for workers and empowered them to seek higher pay.

The important thing, however, is that the Great Compression didn’t go away as soon as the war was over. Instead, full employment and pro-worker politics changed pay norms, and a strong middle class endured for more than a generation. Oh, and the decades after the war were also marked by unprecedented economic growth.

Krugman sees some of the same forces reflected in Walmart's recent wage hike. The retailer has been subject to political pressure, given that many of its employees cannot live on what they make and are compelled to go on  food stamps and Medicaid. The economic recovery has led to a better labor market giving workers more choices and a  willingness to quit bad jobs. But, still Walmart could have continued to resist, and it didn't.

The lesson to be drawn is that raising wages is easier than we have been led to believe, and, more importantly, taking steps to create the kind of society a vast majority of Americans want to live in—a much more equal society—is just not that hard. It's a choice and the corporate overlords and their political puppets can make it.

Don't believe the hype.

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