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Would cutting the minimum wage raise employment?


Would cutting the minimum wage raise employment?

by Paul Krugman

It seems that more and more Serious People (and Fox News) are rallying around the idea that if Obama really wants to create jobs, he should cut the minimum wage.

So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

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.

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?

Well, the textbook argument — illustrated in this little writeup — runs like this: lower wages lead to a lower overall price level. This increases the real money supply, and therefore liquidity. As people try to make use of their excess liquidity, interest rates go down, leading to an overall rise in demand.

Even in this case, it’s hard to see the point of cutting wages: you could achieve the same effect, much more easily, simply by having the Fed increase the money supply.

But what if we’re in a liquidity trap, with short-run interest rates at zero? Then the Fed can’t achieve anything by increasing the money supply; but by the same token, wage cuts do nothing to increase demand.*

Wait, it gets worse. A falling price level raises the real value of debt. To the extent that debtors are more likely to cut spending in such a case than creditors are to increase it — which seems likely — the effect of the wage cuts will actually be a fall in demand.

And one more thing: to the extent that people expect further declines in wages and prices, this raises real interest rates, which is even more contractionary.

So proposing wage cuts as a solution to unemployment is a totally counterproductive idea. Not that I expect any of this discussion to make any impact on those proposing it.

* Somebody is going to ask, what about the real balance effect? Doesn’t a falling price level make people wealthy, by raising the real value of the money they hold. The answer is, consider the magnitudes. Before the crisis, the monetary base — the system’s “outside money” — was around $800 billion. (It’s a much more confusing situation now, so I won’t try to parse the current numbers here). This means that even a 10 percent fall in the price level, which is very hard to achieve, would raise real wealth by only $80 billion. Compare this with the effects of the decline in housing and stock prices, which reduced household wealth by $13 trillion in 2008. The real balance effect is totally trivial.

Labor Holds Emergency Meetings To Discuss Senate Bill, May Formally Oppose


Labor Holds Emergency Meetings To Discuss Senate Bill, May Formally Oppose

by Sam Stein

Two of the country’s largest labor groups, the SEIU and the AFL-CIO, are each holding emergency executive meetings today to discuss whether they should support the latest round of health care compromises made by Senate Democrats.

Though there’s no official word yet, early indications based on talks with various officials are that the groups will either formally oppose the legislation or, less dramatically, just not fight very hard to ensure its passage.

Labor leaders are fuming at the concessions that Democratic leadership made in the last few days to win the support of the caucus’s most conservative members, notably Sen. Joseph Lieberman (I-Conn.). A bill that already included one highly objectionable provision (a tax on so-called Cadillac insurance plans) was stripped of a provision beloved by labor: a public alternative to private insurance coverage. Frustration boiled over even further after the leadership succumbed to Lieberman’s demand to jettison even the compromise to the public option ## a proposal to expand Medicare to those as young as 55.

Together, the changes have spurred emotional internal debates about the approach labor should take to the Senate bill. Dennis Rivera, the Health Care Chair at the SEIU, was slated to appear at a Capitol Hill press conference on Wednesday to push for senators not to filibuster reform. He pulled out from the event, which was sponsored by the pro-reform group Families USA, because of uncertainty about the union’s position.

“We just couldn’t do it,” said an SEIU official. “We haven’t even seen the manager’s amendment… At this point, we have to make the final decision about how to proceed. There is an emergency meeting tonight to figure that out.”

The AFL-CIO, likewise, is hosting an executive council meeting to discuss the legislation. Richard Trumka, the president of the union conglomerate, has been one of the foremost champions of a public plan. And on Tuesday, one of his close allies, Leo Gerard, the president United Steelworkers Union, hinted that opposition to the bill is in the offing.

“I believe that the House [of Representatives] has got a good bill,” Gerard told MSNBC’s Ed Schultz. “Hopefully it is going to have to go to committee, we’re going to fight like crazy to make sure that we get a good bill. I’m not prepared to give up. I want to fight and get a good bill out of this. The American people deserve this and President Obama, whose values are right, he deserves this.”

Labor’s stance could have big ramifications. Progressive Senate Democrats held their noses as the legislation was watered down at the behest of Lieberman and others. Off the Hill, however, former Democratic National Committee chair Howard Dean called for the current Senate proposal to be “killed” ## and others echoed his concerns.

The labor community has already poured massive resources into the health care debate. Now there is a growing concern that the money and time may have not been well spent. As one high-ranking labor official emailed the Huffington Post:

“What is really frustrating folks here is that it’s impossible to make and implement plans to pressure senators when the White House and Reid keep undermining the efforts no one from the outside can put any credible pressure on Senators because they know the White House will back that Senator up whatever they do. If the White House is going to cave to a Senator who spent the entire election campaigning with McCain and calling Obama a traitor how are we supposed to have any leverage over anyone?

“If Lieberman ## who has done so many horrible things directly to Obama ## can get away with this on Obama’s signature issue it makes it infinitely harder for us to pressure senators, on issues in the future, because there is no fear of retribution or coercion from the White House. They only pressure progressives, not anyone in the middle.”

Howard Dean: ‘Kill the Senate Healthcare Bill’


Howard Dean: ‘Kill the Senate Healthcare Bill’

Personally, I am in complete agreement only adding that we need to defeat in Democratic primaries all the elected Democrats who have made themselves obstacles to real healthcare reform (including a robust public option) and all Republicans opponents in general elections!