Walmart's crucial lesson: Paul Krugman on what the retailer's wage hike really means

How the company's pay increase further debunks an old conservative myth

Published March 2, 2015 1:45PM (EST)

 Paul Krugman                                                                                                                (Screen shot, Bloomberg)
Paul Krugman (Screen shot, Bloomberg)

In the two weeks since Walmart announced a modest wage increase for 500,000 of its workers, economists and the business press have spilled much ink analyzing the pay hike's expected consequences for the affected workers and for the broader economy, where many low-wage workers will benefit from the spillover effects of the retail giant's move. Paul Krugman comes at the subject from another angle in his New York Times column today. When the nation's largest private employer decided to pay workers at least $9 an hour, the Nobel Prize-winning economist contends, Walmart helped expose a tired conservative shibboleth for the bunk that it is.

Krugman summarizes that old illusion thusly: "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."

Not so.

The implications of the market fundamentalist view are clear. Government-imposed minimum wage increases -- indeed, government-imposed minimum wages, period -- distort the labor market, kill jobs, and harm consumers, by forcing budget-busting price increases. But Krugman notes that this interpretation is fundamentally flawed. First, the right's horror stories about wage increases have little empirical support. Moreover, Walmart's move underscores that raising wages is indeed a political and social choice -- not one that arises after the market has worked its magic.

But isn't Walmart a private company, boosting worker pay of its own volition? Yes, but as Krugman points out, the wage increase comes after years of political pressure on the retailer, with workers and their advocates noting that Walmart is straining the public coffers because so many of its poorly compensated workers are on public assistance, while an improving labor market has convinced many workers to abandon jobs they don't like. But Krugman writes that Walmart had yet to reach a boiling point -- and it decided to raise wages anyway. The takeaway:

What’s interesting, however, is that these pressures don’t seem all that severe, at least so far — yet Walmart is ready to raise wages anyway. And its justification for the move echoes what critics of its low-wage policy have been saying for years: Paying workers better will lead to reduced turnover, better morale and higher productivity.

What this means, in turn, is that engineering a significant pay raise for tens of millions of Americans would almost surely be much easier than conventional wisdom suggests. Raise minimum wages by a substantial amount; make it easier for workers to organize, increasing their bargaining power; direct monetary and fiscal policy toward full employment, as opposed to keeping the economy depressed out of fear that we’ll suddenly turn into Weimar Germany. It’s not a hard list to implement — and if we did these things we could make major strides back toward the kind of society most of us want to live in.

By Luke Brinker

MORE FROM Luke Brinker

Related Topics ------------------------------------------

Economics Labor Low-wage Workers Minimum Wage Paul Krugman U.s. Economy Wages Walmart Workplace