On the rather simple question of whether banning low-wage employment would increase overall employment, Paul Krugman has offered an answer that refers to the real money supply, liquidity trap, short-run interest rates, Federal Reserve, monetary base, outside money, among other economic concepts we can barely define, let alone measure.
First and foremost, Krugman’s premise that a decrease in minimum wage results in lower wages assumes his conclusion that a reduction in the minimum wage does not increase employment. A lower minimum wage results in lower wages only if it does not increase employment. To the extent it increases employment, many wages w = 0, become positive. The mistake he makes is clear in one of the introductory paragraphs.
Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.
The first and second sentences are not consistent. Those arguing the minimum wage will increase employment are, by definition, not referring to workers in the widget industry that take a pay cut. As I’ve explained in this post, to the extent the employer has a lot of bargaining power to siphon surplus from labor, it should be able to pay heterogeneous wages. To the extent the employer operates in a very competitive labor market, it is difficult to imagine many workers taking a pay cut only because the minimum wage was reduced.
There are ways to contrive an effect where the increase in employment is offset by decrease in the wages of those already working. Typically this assumes the desired conclusion, as above. Additionally, even if this were to be the case, Krugman’s conclusion is channeled through complicated monetary mechanisms that are not well-defined, hard to measure, and embedded with lots of uncertainty.
(It is true that one day someone will write a paper demonstrating how newly employed workers have a high marginal propensity to save because their employment means the price level of goods will fall increasing expected deflation and the present value of debt, which furthers the liquidity trap, resulting in even greater unemployment. The paper might conclude with the “paradox of employment”, where banning employment actually increases employment.)
Krugman also relies upon a conflation between general wage levels and the minimum wage.
But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?
Most people are not employed at the minimum wage, and therefore it seems unlikely that a decrease would somehow trigger a “paradox of toil”, wherein the increase in labor reduces the price level, thereby increasing the real value of debt at any meaningful threshold. By definition the minimum wage is not a general change in wages.
The minimum wage is a 100% tax on all wages w < k. Perhaps instead of increasing k we should reduce the tax rate. Does Krugman believe a decrease in the low-wage tax rate would have contractionary effects in a liquidity trap?