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Don't lower the minimum wage!

Charles Lane, of the Washington Post, has written an op-ed suggesting (along with two other ideas) that the federal government should lower -- yes, lower -- the minimum wage.

Fortunately, Nobel Prize winner Paul Krugman 'splains it all (in a mixture of easy- and hard-to-follow sentences). Krugman says:

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.

The Atlantic Wire links to several other online sources that trash Lane's (and Fox News' and the Wall Street Journal's) proposal. My favorite: "By that logic, a recession demands that the poor earn less but that the CEOs more directly responsible for the downturn deserve bonuses."

This entry was posted by Edward at 9:02 PM, 16 December 2009 | Categories: Wage & Hour

The picture above was made in 1914 by the Birmingham Engraving Co. This reproduction is from the Library of Congress Prints and Photographs Division Washington, D.C. 20540 USA.

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