Paul Krugman: Walmart's visible hand

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 labour 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 labour 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 organise into unions, will have the same effect.

But labour economists have long questioned this view. Soylent Green - I mean, the labour 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 neighbouring 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 labelled 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 unionisation. 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.

The retailer's wage hike seems to reflect the same forces that led to the Great Compression, albeit in a much weaker form. Walmart is under political pressure over wages so low that a substantial number of employees are on food stamps and Medicaid. Meanwhile, workers are gaining clout thanks to an improving labour market, reflected in increasing willingness to quit bad jobs.

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 organise, 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.

The point is that extreme inequality and the falling fortunes of America's workers are a choice, not a destiny imposed by the gods of the market. And we can change that choice if we want to.

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