Keynesian Politics and the Minimum Wage
By David Henderson
Last month, Alex Tabarrok posted an interesting piece on the failure of Keynesian politics. Let’s posit arguendo, he said, that Keynesian economics is correct: during a recession, if the government increases aggregate demand using tax cuts or government spending increases, the economy will recover. The problem, says Alex, and he quotes prominent Keynesian Paul Krugman admitting the problem, is that in a democratic society, the policies that Keynesians advocate are unlikely to be followed. What to do?
Alex proposes automatic stabilizers that kick in when there’s a recession. That’s not new, and he doesn’t claim that it’s new. Milton Friedman and other Keynesians (Milton was a Keynesian in the 1940s and early 1950s) wrote about this back in the 1940s and early 1950s.
Alex also advocates increasing wage and price flexibility. But he’s a little vague about those details and there’s one big piece of wage flexibility that the government could have, not by imposing a law, but by repealing a law. I refer, of course, to the minimum wage. The minimum wage sets a lower bound that, even in good times, prevents the least-productive workers from finding work. In recession times, it’s even worse.
Keynesians in the golden age of Keynesianism were quite critical of the minimum wage and were sympathetic to its victims. One of Paul Samuelson’s best lines in the 1970 edition of his textbook was his comment about a proposal to raise the minimum wage from its existing level of $1.45 an hour to $2.00 an hour:
What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?
Keynesians Gunnar Myrdal in the 1940s and James Tobin in the 1960s and 1970s were also critical of the minimum wage.
In 1973, for example, Tobin stated:
I am against minimum wage legislation and have said so. It diminishes job opportunities, ceteris paribus, and it is an inefficient and haphazard tool for income maintenances or redistribution. At the same time, it does contribute to the existence of a Phillips trade-off, at least in the short run; this is because it makes for asymmetry in the response of wages to changes in demand and in rates of inflation.
In other words, Jim Tobin was making the argument I’m making. The “have said so” refers to this passage from a 1965 article, “Improving the Economic Status of the Negro”:
People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures, or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulation is that the intended beneficiaries are not employed at all.
It would be nice to see some Keynesians follow in their predecessors’ footsteps.