Poor Walmart, who has profits that match the GDP of Austria, is feeling picked on again, because Washington D.C. passed a law forcing big box retailers to pay a minimum wage of $12.50 per hour. There are pros and cons economically and socially for such a move, but a comment from an Economics professor at the University of California at Irvine as reported in The Boston Globe, made me understand that old, dead, and rotten economic ideas from the “Supply Side” have risen from the grave to eat all of our brains – again.
David Neumark from UC Irvine argues that raising the minimum wage is bad for workers because it discourages employers from hiring; we’ve heard all this before, and have found that history disproved this model already. It is also known as Labor Market Supply Side Economics, or “Regan-nomics”. It was a dead idea in the 80s, and just became more rotten after the dot.com bubble. Here’s where Neumark goes “zombie”; he states:
“Walmart’s low prices are more important to helping low income workers. We can talk about wages, but if you lower prices, that’s as good as raising wages.”
As Princeton Economist and Nobel Laureate Paul Krugman points out in his blog about New Keynesian Theory titled: “Wage Price Flexibility in a Liquidity Trap, Again, Again, Again”, low wages can only be supported by deflation (he is addressing the Japan experience on another issue). The lack of deflation (or inflation, or anything that creates demand) Krugman argues, is really what is preventing a strong recovery. So here’s my take on the Irvine Professor:
Under new Keynesian models, low prices are as good as raising wages. Except ALL the prices of EVERYTHING have to be lowered. Rents and Mortgages would have to be lower. Housing values would have to be lower. Insurance, daycare, food, utilities and commodities all have to be lowered. There’s a word in Economics for lowering the prices of everything: DEFLATION.
It may be great that Walmart is lowering THEIR prices, but the person making minimum wage at $7.25 per hour on a 25 hour per week average (according the BLS) is still not going to be able to afford their rent, utilities, or anything else. Ironically, it’s rent, utilities and food that is used in the formula for figuring out what the poverty level is (or should be) by the government; not Walmart prices. It’s also widely known that the government formula for the “poverty level” is flawed because it never adjusts for commodity price flux; in other words, the price of corn, beef, pork, (etcetera) changes daily, making price changes in food prices change even more.
Once again, to bring some “life” into the land of the zombies, every Nobel Prize winning economist has said that the reason the economy isn’t recovering is because there is no demand. There is no demand because people cannot afford anything. Deflation is one way to solve this problem, but so is something else: a living wage.