Walmart’s Visible Hand
Walmart’s Visible Hand
By: Paul Krugman
A few days ago Walmart, America’s largest employer, announced that it will raise wages
for half a million workers. For many of those workers the gains will be
small, but the announcement is nonetheless a very big deal, for two
reasons. First, there will be spillovers: Walmart is so big that its
action will probably lead to raises for millions of workers employed by
other companies. Second, and arguably far more important, is what
Walmart’s move tells us — namely, that low wages are a political choice,
and we can and should choose differently.
Some
background: Conservatives — with the backing, I have to admit, of many
economists — normally argue that the market for labor is like the market
for anything else. The law of supply and demand, they say, determines
the level of wages, and the invisible hand of the market will punish
anyone who tries to defy this law.
Specifically,
this view implies that any attempt to push up wages will either fail or
have bad consequences. Setting a minimum wage, it’s claimed, will
reduce employment and create a labor surplus, the same way attempts to
put floors under the prices of agricultural commodities used to lead to
butter mountains, wine lakes and so on. Pressuring employers to pay
more, or encouraging workers to organize into unions, will have the same
effect.
But
labor economists have long questioned this view. Soylent Green — I
mean, the labor force — is people. And because workers are people, wages
are not, in fact, like the price of butter, and how much workers are
paid depends as much on social forces and political power as it does on
simple supply and demand.
What’s
the evidence? First, there is what actually happens when minimum wages
are increased. Many states set minimum wages above the federal level,
and we can look at what happens when a state raises its minimum while
neighboring states do not. Does the wage-hiking state lose a large
number of jobs? No — the overwhelming conclusion from studying these
natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment.
Then
there’s history. It turns out that the middle-class society we used to
have didn’t evolve as a result of impersonal market forces — it was
created by political action, and in a brief period of time. America was
still a very unequal society in 1940, but by 1950 it had been
transformed by a dramatic reduction in income disparities, which the
economists Claudia Goldin and Robert Margo labeled the Great Compression. How did that happen?
Part
of the answer is direct government intervention, especially during
World War II, when government wage-setting authority was used to narrow
gaps between the best paid and the worst paid. Part of it, surely, was a
sharp increase in unionization. Part of it was the full-employment
economy of the war years, which created very strong demand for workers
and empowered them to seek higher pay.
The
important thing, however, is that the Great Compression didn’t go away
as soon as the war was over. Instead, full employment and pro-worker
politics changed pay norms, and a strong middle class endured for more
than a generation. Oh, and the decades after the war were also marked by
unprecedented economic growth.
Which brings me back to Walmart.
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