Krugman versus Krugman on Labor versus Butter
By David Henderson
In my recent post “Krugman’s Priceless Economics,” I criticized a recent column by Paul Krugman in which he argued against thinking about labor markets in terms of supply and demand. I quoted the following from his article:
Specifically, this view [that wages are set by supply and demand] implies that any attempt to push up wages will either fail or have bad consequences. Setting a minimum wage, it’s claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains, wine lakes and so on. Pressuring employers to pay more, or encouraging workers to organize into unions, will have the same effect.
But labor economists have long questioned this view. Soylent Green — I mean, the labor force — is people. 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.
I had no reason to wonder why he decided to use butter as an example of a good for which price floors create a surplus. I assumed that it occurred to him off the top of his head or that he had seen it in a past economics lecture or economics textbook.
Well, it turns out that he did see it in an economics textbook. In fact, he (or his co-author) wrote it in an economics textbook. The example is from Microeconomics by Paul Krugman and Robin Wells.
Not only did Krugman and Wells write the example of price floors creating surpluses but, more important, given his current view, they used that example to explain how a price floor called the minimum wage creates a surplus of labor, with this important difference: whereas governments buy the surplus butter, no government buys the surplus labor.
And this textbook is not from the 1990s, when Krugman often used standard price theory to explain the problems with government interventions. This textbook is from 2009.
Now that I’m hat-tipping Robert Murphy, I should point out that he makes an important point about the absurdity of using private voluntary behavior, as Krugman did, to argue from government imposing that behavior economy wide. A quote from his piece:
[I]t is a very strange argument to say, as Krugman does, that since we observe Walmart raising wages voluntarily, that therefore having the government force other firms to do so involuntarily won’t cause any major problems.
Look, Target just announced that it will lay off thousands of workers as part of a package to save $2 billion over two years. So should Stephen Moore write an op ed arguing that the government should require all existing firms to lay off thousands of workers, because the possible downsides are obviously smaller than what conventional wisdom suggests?