Economy

Paul Krugman: Why Conservatives Reject Reality About Wage Increases

Hillary Clinton showed she can evolve on the issue. Conservatives, not so much.

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Very few conservatives actually heard what Hillary Clinton said in her big economic speech on Monday, writes Paul Krugman in Friday's column. While many were too busy shouting "Benghazi," others just did not want to hear her core message about how the federal government should help push minimum wage higher.

That is, of course, heresy to conservatives, who firmly believe that Reagan proved that the federal government should never intervene in the free market.

So Krugman sets out to bring people's understanding of what determines wages up to date, homework which Clinton seems to have done.

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Many economists used to think of the labor market as being pretty much like the market for anything else, with the prices of different kinds of labor — that is, wage rates — fully determined by supply and demand. So if wages for many workers have stagnated or declined, it must be because demand for their services is falling.

In particular, the conventional wisdom attributed rising inequality to technological change, which was raising the demand for highly educated workers while devaluing blue-collar work. And there was nothing much policy could do to change the trend, other than aiding low-wage workers via subsidies like the earned-income tax credit.

You still see commentators who haven’t kept up invoking this story as if it were obviously true. But the case for “skill-biased technological change” as the main driver of wage stagnation has largely fallen apart. Most notably, high levels of education have offered no guarantee of rising incomes — for example, wages of recent college graduates, adjusted for inflation, have been flat for 15 years.

Two studies inform the discussion: One is not even new. Economists David Card and Alan Krueger began studying what happens to the labor market when individual states raise the minimum wage twenty years ago.  "Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment," Krugman confesses. "But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America."

To Krugman, and other reasonable people, this indicates that the labor market does not perform like every other market, primarily because workers are people. They do a better job when treated well, have better morale and more productivity. That is good for business! By way of example, look at the Walmart model of high turnover and terrible morale versus that of Costco.

In fact, Krugman suggests, increasing wages as a way to improve business outcomes is not limited to the meagerly paid minimum wage labor force.

Reality bites for those conservatives who continue to cling to outdated notions.