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Does Paul Krugman Realize That He Just Emasculated the Case for Minimum-Wage Legislation?

Here’s a letter to the New York Times:

Paul Krugman today unintentionally undermines the case for the minimum wage.  He does so by writing that “When the economy is strong, workers are empowered.  They can leave if they’re unhappy with the way they’re being treated and know that they can quickly find a new job if they are let go.  When the economy is weak, however, workers have a very weak hand, and employers are in a position to work them harder, pay them less, or both” (“The Fear Economy,” Dec. 27).

In other words, when the economy is strong, competition among employers ensures that they pay and treat workers well.  In economists’ jargon, employers have none of the “monopsony power” that is necessary for minimum-wage legislation to work.  Yet even when the economy is weak and employers enjoy monopsony power, employers’ ability to work their employees harder means that a higher minimum wage can be offset by worsened working conditions.  In economists’ jargon, the existence of monopsony power is a necessary but not a sufficient condition for minimum-wage legislation to improve the well-being of low-skilled workers.

To recognize, as Mr. Krugman does, that employers can change how hard they work their employees is to recognize just how weak is the case for a higher minimum wage – a case built on the naïve assumption that the one and only response that employees experience from a higher minimum wage is to be paid that higher wage.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030