Paul Krugman commented today on the minimum wage and whether or not lowering the minimum wage would raise employment. My comment:
Dear Dr. Paul Krugman,
I agree that the argument against minimum wage that you are presenting is incorrect. However, I think you are presenting a straw man. That, surely, is not the Austrian/Neo-Classical argument against minimum wage (see: Vedder & Gallaway, “Out of Work”).
Wages, in a free-market, are based on productivity. By artificially raising wages, you are cutting into the marginal revenue per worker, to the degree where hiring that worker proves to be unprofitable. Thus, the result is an overall decrease in employment. Otherwise, the macroeconomic explanation is simple and hardly denied (my textbooks have always argued that minimum wage can be counteracted by spreading hours, which is still complete bollocks, but at least the authors concede the point): a price above the equilibrium (or, market price) creates a surplus of labor.
Minimum wage was actually not introduced by Franklin Roosevelt. Minimum wage was concocted by “friend of the market” (and largest peacetime deficit spender, to that point in time) Herbert Hoover. The unemployment figures are very clear, and empirically prove my point. Unemployment skyrocketed in late 1930 and 1931, not in 1929. Unemployment during the first two years of the contraction was actually rather similar to our current unemployment figures (sometimes even less!).
In any case, I hardly need historical evidence to support my point. I work for minimum wage, and so I know how dire the fact that I can’t compete with more productive workers by lowering the wage I offer myself at is. In any case, the aggregate demand argument denies its keystone. That is, the need for wages. If the firm can’t afford the wages, and therefore goes bankrupt, where will the consumer get the money to spend?
Krugman posted another gem today, about Spain:
What’s the difference between lowering nominal wages and devaluating the currency? In both cases, real wages fall. The main difference is that inflation harms everyone and confiscates savings, while reducing nominal wages does not. Seems like Paul Krugman is playing everyone as stupid.
Jonathan
I believe that when we do suggestions about minimum wage, we need to consider all kind of effects. Unfortunately, the debate is about what the minimum wage would be (for example €800 or €700) whereas I believe that the great question should be if there should be any law that will determine a limit to wages. I strongly believe that no government should set a minimum wage, because it’s decision would lead to frustration. Furthermore, anytime that economic situation changes, the Parliament (you call it Congress) should vote for another law that it’s going to set another minimum wage. When the economic situations changes again, the Parliament should change the minimum wage again. Of course this is difficult to occur since the Parliament is not that flexible. Furthermore, I believe is inefficient to pay some people to do something that we can have for free: That is the wages rates.
I cannot understand how a certain person or group suggests what the right minimum wage is . You can work for €3 per hour one month, €14 per hour the next month, €12 per hour the month after that, you can be unemployed for one moth, next you can work for €11 per hour etc. Minimum wage has no scientific basis and it should be removed.