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Friday, July 14, 2006

Who Gets the Cookies?

Paul Krugman answers questions about his call to raise the minimum wage in his latest column and discusses some of the evidence underlying his concerns about rising inequality:

American Economy Suffers From Government Short-Sightedness, Paul Krugman, Money Talks: Paul Krugman responds to readers' comments on his July 14 column, "Left Behind Economics"

Bill Kruse, Orinda, Calif.: You've written quite a lot in recent years about rising income inequality in the U.S., yet you haven't said too much about what should be done about it. Now, in today's column, you advocate an increase in the minimum wage as a good start. Nothing else is mentioned.

What makes you think that an increase in the minimum wage would make a significant contribution to reducing income inequality? You've downplayed the significance of the minimum wage in past writings. Moreover, recent empirical research by David Neumark points to serious long-term negative effects of minimum wage increases, particularly for young people. These include decreased labor market experience and accumulation of tenure and diminished training and skill acquisition. So, many young people who are exposed to increases in the minimum wage end up several years later with substantially less earning power, which probably contributes to more, not less, inequality.

What other ideas do you have to reduce income inequality?

Paul Krugman: More to come in future columns. I've been looking at some length ... into how the New Deal managed to create a more equal society, and will have more to say soon....

Michael Chapnick, Oakland, Calif., via Singapore: From my microeconomics courses in grad school, professors said that a minimum wage is bad for the labor market and leaves workers behind.

While I agree that the minimum wage should be increased, I think it would be helpful if you could explain in economic terms, the affects on overall employment as a result of an increase in the minimum wage and why the minimum wage increase would not be harmful. ...

Paul Krugman: The available research suggests that the U.S. minimum wage right now is low enough that increasing it has very little effect on employment, but raises incomes at the bottom. Also, a falling real minimum wage seems to act as a sort of undertow, dragging down wages some ways up the scale. Obviously the minimum wage by itself isn't enough to serve as the centerpiece of an equalizing policy, which would have to involve a whole range of actions...

Julie Tighe: As usual, your commentary is on the money. ... Its too bad this administration is more concerned with reclassifying workers to distort this problem and make it appear that low-wage jobs, like those at McDonald's, are a part of the middle class, when their buying power simply doesn't support the Labor Department's definition.

I wish more people who actually understand economics would talk about it instead of simply letting politicians, who often know even less, paint a picture they only want you to see through rose colored glasses. Thanks for giving America a chance to see the other side of the Bush administration's spin.

Paul Krugman: The original Piketty and Saez paper is at http://elsa.berkeley.edu/~saez/pikettyqje.pdf (warning: PDF). The updated data are at http://elsa.berkeley.edu/~saez/TabFig2004prel.xls (Excel file).

Look first at Figure 1, for a quick snapshot of the rise and fall of middle-class society in America. Then check out Figure A2 for the experience of the top one percent versus the rest. Table A4 shows that even at the 90th or 95th percentile, things haven't been all that great, that the big gains were only at the very top.

Median family income is at http://www.census.gov/hhes/www/income/histinc/f06ar.html. Income by education is at http://www.census.gov/hhes/www/income/histinc/p24.html. I've been kind of surprised at the lack of media attention to the decline in incomes for the highly educated over the last few years.

Edward Lazear's remarkably misleading take on inequality is at http://www.whitehouse.gov/cea/lazear20060502.html.

Also, last month the Congressional Budget Office suggested that increasing inequality may be helping push up tax receipts, declaring that "growth in incomes in 2005 may have been concentrated more than expected among higher-income taxpayers, who face the highest tax rates. Additional data from tax returns for 2005, which will start to become available later this year, will help CBO identify more clearly the sources of growth in taxable income." See the whole report at http://www.cbo.gov/showdoc.cfm?index=7184&sequence=0.

    Posted by on Friday, July 14, 2006 at 01:01 PM in Economics, Income Distribution, Policy, Politics | Permalink  TrackBack (0)  Comments (39)

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