Saturday, February 16, 2013

Krugman: Minimum Wage Increases are "Actually Good Policy"

Here's the latest from NYT's Paul Krugman minimum wage increases are "actually good policy." How does he reach this conclusion. He starts off:
I’m doing this kind of backwards...
I agree with him on this point.

But, then he goes on:
First, as John Schmitt (pdf) documents at length, there just isn’t any evidence that raising the minimum wage near current levels would reduce employment. And this is a really solid result, because there have been a *lot* of studies. 
Here, Krugman is using sloppy and improper methodology. Both Albert Einstein and Richard Feynman would laugh at him for trying to pull this off.

From there, using bad scientific methodology, he goes on to deny a praxeological deduction:
We can argue about exactly why the simple Econ 101 story doesn’t seem to work, but it clearly doesn’t — which means that the supposed cost in terms of employment from seeking to raise low-wage workers’ earnings is a myth.
This is no different than saying:
We can argue about exactly why the simple story "1 plus one equals two" doesn’t seem to work, but it clearly doesn’t — which means that the supposed adding of one and one to come up with two is a myth.
Murray Rothbard explains precisely the truth, which Krugman is trying to deny:
All demand curves are falling, and the demand for hiring labor is no exception. Hence, laws that prohibit employment at any wage that is relevant to the market (a minimum wage of 10 cents an hour would have little or no impact) must result in outlawing employment and hence causing unemployment.
If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to disemploy, permanently, those who would have been hired at rates in between these two rates.[...]
The advocates of the minimum wage and its periodic boosting reply that all this is scare talk and that minimum wage rates do not and never have caused any unemployment. The proper riposte is to raise them one better; all right, if the minimum wage is such a wonderful anti-poverty measure, and can have no unemployment-raising effects, why are you such pikers? Why you are helping the working poor by such piddling amounts? Why stop at $4.55 an hour? Why not $10 an hour? $100? $1,000?
It is obvious that the minimum wage advocates do not pursue their own logic, because if they push it to such heights, virtually the entire labor force will be disemployed. In short, you can have as much unemployment as you want, simply by pushing the legally minimum wage high enough.


  1. He's a walking cartoon character and a near perfect contrarian indicator. Why this buffoon continues to wield so much influence despite being consistently wrong really defies logic.

  2. Pleading to popularity/authority is a fallacy Krugman. That is all.

  3. Let's look at a example:

    You are a lemonade stand entrepreneur. You own a single lemonade stand that is open for 10 hours a day and you employ 1 minimum wage employee.

    You charge $2.00 per cup of lemonade and on an average day you sell 100 cups of lemonade.

    Your Revenue per day is $200.00

    Your Costs are Labor $ 72.50
    & Supplies $ 17.50
    Profit $110.00 Not Bad!!!


    Let's say you need to adapt to the new minimum wage of $9.00

    All things remaining the same

    Your Revenue per day is $200.00

    Your new Labor Costs are $ 90.00
    & Supplies $ 17.50
    Profit $ 92.50 STILL Not Bad!!!


    If you are a petulant brat of an owner you could fire your employee. That would lower your labor costs from $72.50 to $0.00. Of course it would also lower your revenue from $200.00 to $0.00.

    Seems pretty clear to me that the wiser course would be to pay your employee the $9.00 per hour and earn your $92.50 Daily Profit.


    The fact is that not all things are equal. The fact is that if you implement a 24% increase in minimum wage you will be increasing aggregate demand in the market that you are selling your lemonade. If it is a perfectly elastic market aggregate demand would rise 24%. But it is NOT a perfectly elastic market. Let's say for example that aggregate demand by 10%.

    That means that Lemonade sales would rise from 100 cups to 110 cups.

    That means that your new Daily Revenue would be $220.00
    Your Labor Costs would be $ 90.00
    Your modified Supply Costs would be $ 19.25

    That means that your profit level under the $9.00 minimum wage is: $110.75

    How about that? That onerous increase in the MINIMUM WAGE has cost you NOTHING. It has resulted in a modest increase in profit from $110.00 to $110.75.

    So, shut the hll up and raise your employees wages.

    1. Not sure if serious...?

    2. Based on figures you conjured out of... thin air?

      " The fact is that if you implement a 24% increase in minimum wage you will be increasing aggregate demand in the market that you are selling your lemonade. "

      Says who?

      You are basically referring to a market where the owner attracts no competition in spite of having a very high rate of profit. Which firm would that be, then?


      also before you even try referring to any studies read that.

    4. 1. False choice between keeping employee and shutting down business. Minimum wage increase could make other options -- such as machines -- a more economical choice. Introducing lemonade vending machine!

      2. Ignores losses in productivity throughout economy due to reduced profits (thus reduced business investments).

      3. Ignores fact that owner is also a consumer, and that his demand is reduced.

      4. "Aggregate demand" is erroneous concept, there is demand for specific goods and services. AG says nothing about how much demand for lemonade will change.

      What you propose is that inefficient use of scarce resources will make us all wealthier. A something -for-nothing machine. Answer Rothbard's query!

    5. seriously? you talk about aggregate demand having increased magically after the owners income has declined, which is what aggregate means.
      Since you are just pulling examples out off your ass, what happens to your example when the owner fires the employee to operate the business themselves, doesn't really want to but the increase in the price was just enough to take the hit in terms of time to cut down on expenses. doesn't do much for your 'aggregate demand' but thats what intervention does for you.

    6. 52% net margin :))

      Dude, you can't hold all variables constant except one and use that as a logical basis to advocate a certain policy. It doesn't work that way in the real world. I see this all the time in finance and economics.

    7. You failed to account for the non-wage expenses of hiring this individual: insurance, Social Security/Medicare, health. Whose handling all of the administrative overhead associated with having a business? Little blue men?

      I also see that you're assuming the owner is working for free. Who would be willing to work 10 hours a day (or more), risk his capital, and take no salary for himself? Quite the philanthropist!

      $2 for a cup of lemonade? No, thank you.

    8. 1) If you are selling lemonades for $2.00 with that kind of profit margin, the first thing that will happen is that someone will start selling lemonades right next to you for $1.00. Then your revenue is zero, unless you also sell for $1.00 (assuming you don't have some kick-ass secret lemonade recipe). Now, your profit is $10, which is a little closer to reality.

      2) Continuing with your example, with a minimum wage of $9, you are now out of business and you employee has lost his/her job. Let's say you decide to raise your prices to stay in business. You raise it to $1.50. What will be your revenue? We can't tell, because we don't know the demand curve. But you will surely sell less at this price, so let's say you sell 75 cups for a total revenue of 112.50. Your profit is $7.50. Is this enough to convince you to stay in business? We don't know.

      3) Firing your employee will not reduce your revenue to zero. You can simply man the lemonade stand yourself.

      4) "...if you implement a 24% increase in minimum wage you will be increasing aggregate demand in the market that you are selling your lemonade." I think you are trying to say that the workers will now have more money and will therefore buy more lemonade. I am not sure how we jumped from one lemonade stand to a whole industry. Your non-seqeuitor notwithstanding, there is no guarantee the workers will buy more lemonade. Maybe they don't like lemonade. May be they spend their money in a different town. There is absolutely no guarantee that you will sell more lemonade if workers are making more money.

      5) In conclusion, your example has demonstrated NOTHING other than your economic ignorance.

    9. Anonymous offers a link to a comprehensive and recent meta-analysis of research on the effects of minimum wage policy on low skilled employment which convinces me the effects are overall negative.

    10. Why be a cheapskate and only raise it to $9? Why not $100 and then the demand will be increased so much that everyone is rich! It worked when Puerto Rico raised their minimum wage, right?

    11. The answer is easy. You start importing lemons from Santa Claus' workshop in the North Pole and hire the Easter Bunny at below minimum wage since he's not a human and thus can be exploited like that. Seriously, as long as we're just making things up out of thin air. Though the other responses are all solid, they make the mistake of engaging your nonsense with counter-argument. Making up numbers out of thin air is just telling a made-up story. There's no point to a rebuttal because I can just as easily make up a counter-story where aliens invade and we're all forced to make lemonade for them! Take that economics!

      But here's your real contribution:
      "If you are a petulant brat of an owner you could fire your employee."

      This in a nutshell is the leftist statist perspective (not excusing the right-wing perspective, only this view seems to be exclusively held on the left). We're going to force you to do something, and if you object, you're being petulant. When I watched Jon Stewart regularly, this was a viewpoint he and his leftist guests (meaning the ones that were leftist) often shared. Forcing the rich/business owners to pay more SHOULDN'T have a negative effect because the rich/businessmen should not only take it, but be thankful for it. If decreasing the returns on investment, through force (law), decreases investment, it's because those investors are "petulant". How selfish of them! They should praise the state that threatens them. Be grateful it doesn't demand even more! These people actually resent the idea that people would resent them for subjugating them. Don't you know that community-minded means doing what you're told (through threats of violence - law) and being happy about it? Because these leftists always envision themselves (or those they support) at the helm, they truly can't conceive why people would react negatively to being forced to do something that the leftist KNOWS is for the greater good (which is defined by whatever the leftist determines is good).

      If being forced to do something for the communal good isn't enough motivation to generate praise and thanks, rather than resentment and reduced output, then the secondary motivation that should inspire these positive responses to force is you should be grateful we don't take even more! This nation was the most prosperous when the top tax tier was 50,60, even up to 90%! That alone should generate gratitude; that we allow you to keep as much as we do!

    12. Just to demonstrate that ladcrp is even more radical than Krugman, we can use his own model to show that he lives in fantasy land. Using his model, if the minimum wage were raised 240% to $24.65 per hour, then cost of lemonade supplies would rise 100% to $35.00, and aggregate demand would rise 100%, resulting in 200 cups of lemonade selling daily at $2.00 per cup.

      That means that your new Daily Revenue would be $400.00
      Your Labor Costs would be $ 246.50
      Your modified Supply Costs would be $35.00

      That means that your profit level under the $24.65 minimum wage is: $118.50

      In other words, using his model, as the minimum wage is increased, profits will also increase.

      But even Krugman knows that this is absurd, which is why he argues against a $20.00 minimum wage. But he fails to tell us why.

  4. ladcrp,

    The only thing you have done is prove you can do simple map, fix a sample to your liking and use basic terms of macroeconomics with an amateur economist' understanding of their meaning. Profitability of 100%+ is not even remotely realistic in the real world.

    So, instead of me shutting up, you shut the fuck up, and stop trying to run the lives of those of us who are productive. I'm not a puppet for your social planning schemes.

  5. This is officially the kiss of death for the pro minimum wage increase crowd.

    "Brazil is doing great"

    "Argentina is doing great"

    "Create a housing bubble"

    "We need more stimulus"