Krugman seems to think that the French are better off overall because they work less and spend more time with their families. He grants that this makes them poorer but “to the extent that the French have less income than we do, it’s mainly a matter of choice.”
Not really. Krugman must believe that we need government to tell us to spend time with our families. Consider this rundown of French labor law: “Statutory working hours in France are 35 actual hours worked per week. Maximum working hours are 10 hours per day and 48 hours per week. Over a 12-week period, the maximum is an average of 44 hours per week…. Hours worked in excess of statutory working hours are counted as overtime. Overtime pay is at least 10% more than regular pay and 25% more in most cases. The regulatory limit on overtime is 180 hours per year, which increases annual working hours to 1,780, which works out to 39 hours per week for 45 weeks. Government authorization is required to exceed this overtime limit. In addition to extra pay, working overtime may also give employees a statutory right to extra time off. Extra time off in lieu of overtime pay is also a possibility. Time off in lieu of overtime pay must be added to the statutory time off entitlement.”
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“Really? Consider this rundown of French labor law”
France is a democratic country. If that’s the way the French want their labor laws to be, then that’s the way they want to them to be. The French can change their laws in the future, if they choose to do so. That they have chosen to have such laws is part of Krugman’s point.
Did the French people vote directly on those laws, or did they simply vote for the representatives who voted on those laws? A bit of a difference there.
Even if they voted directly, that still means that the majority of people were forcing these laws on the minority. Another question with political decision making is this: even for those who vote or favor such laws, do they realize the economic consequences of such laws when they vote? Would they actually go into a voting booth and vote for something that would cause them to be poorer financially, but have more time for other things?
“France is a democratic country.”
Which is precisely what’s wrong with democracy, at least when individual rights aren’t protected — i.e., democracy is nothing other than mob rule.
The same thing has happened in the US, of course, as the right to life, liberty, and property that the Constitution was supposed to uphold does no such thing. Instead, we are subject (as in subjects not citizens) to millions of laws (and the confiscatory taxation that goes along with them) that trample our freedoms — all the more so when a government whose primary responsibility is to provide security instead creates an ever-growing need for security and then promptly fails to provide it, laying the blame elsewhere in order to justify even more curtailments of our freedoms.
You’ve correctly identified the heart of the problem Frank – that France is a democracy.
“If that’s the way the French want their labor laws to be”
“The French” have no desires. That’s a meaningless label. It’s not like they’re some amorphous blob that emits opinions. French people are individuals. Some like the laws, some hate them, some are indifferent.
The problem is while “The French” are individuals, their laws are not. Surely you wouldn’t argue that just because some French (or even a majority) want a certain type of work schedule that they must all abide by it? Do you really see societies as such featureless morasses of humanity?
Hello there,
There’s a great post at Luskin’s blog that takes on Krugman:
http://www.poorandstupid.com/2005_07_24_chronArchive.asp#112264486396798546
Best regards,
Chris. F. Masse
Democracy is two wolves and a sheep voting on what to have for dinner as Bbenjamin Franklin put it.
In addition to the labor laws, another way in which the French government indirectly forces people to work less then they would have wanted to in a free society, is the high tax rates in Ffrance. Nobel laurate Edward Prescott have made a interesting study in which he argues that virtually all differences in hours worked between the G7-countries (USA, Japan, Germany, Britain, France, Italy and Canada) can be attributed to differences in marginal tax rates. I personally think that he somewhat underestimates the role of working hours laws, but his findings clearly is consistent with sound economic theory .
There’s confusion on both sides of the issue of labor law. Socialists are generally ignorant of the negative affects of government intervention but at the same time free-marketers don’t take into account how the labor market differs from markets for most other goods.
For example, let’s say a minimum price of $15 were imposed on shares in the stock market and reverse-splitting were prohibited. What would happen? Stocks priced under $15 before the law would see substantial drops in volume; few people would continue to buy at the inflated prices. But impose or raise the minimum wage and most workers see their nominal wage go up! (Yes, it may be true that over time their purchasing power returns to normal, but they do get some benefit.)
Further wages are “sticky” downward. *Part* of this is due to government and government-backed unions, but a large part of that is due to the *social* taboo on lowering wages instead of laying off workers. Rothbard noted in America’s Great Depression p.45 “Generally, wage rates can only be kept above full-employment rates through coercion by governments, unions, or both. Occasionally, however, the wage rates are maintained by voluntary choice (although the choice is usually ignorant of the consequences) or by coercion supplemented by voluntary choice. It may happen, for example, that either business firms or the workers themselves may become persuaded that maintaining wage rates artificially high is their bounden duty. Such persuasion has actually been at the root of much of the unemployment of our time, and this was particularly true in the 1929 depression.”
Also, labor markets suffer from a lack of transparency, since people jealously guard the knowledge of how much they’re earning. In all other markets, it is generally easy to observe spatial price gradients, even if it takes a clever arbitrageur to exploit them.
I could go on, but the upshot is that labor markets are substantially less efficient than most other markets, meaning the usual economic theorems don’t apply as easily, even to free and mostly free markets. Labor laws, which would have obvious and disastrous consequences in other markets, have non-obvious and difficult-to-predict effects on labor markets.
None of this makes the free market arguments wrong, just incomplete and less convincing.
You are all giving Krugman far too much credit for his column which was, in a word, flawed.
Here is what Krugman should have written:
1. The French economy is stagnant and does not generate enough jobs for its citizens. The French unemployment rate is 66% higher than that of the U.S.
2. Being an unemployed Frenchman is not a choice or side affect of French worker’s spending more time with their families.
3. Most importantly, French people are not more happy or satisfied as their American counterparts as Krugman suggests. In fact, its quite the opposite.
We’ve detailed all of these arguments using many of Krugman’s same sources.
Krugman’s French Connection or Les Miserables?
The only people in the world who believe the French are having happy family fun seem to live in the ivory towers of downtown New York.
Unfortunatley, the labour market is riddled with externalities and other market imperfections. That means that what the French would really do freely is not what government regulation is stopping. What it is intefering with is actually a distorted labour market. So we just can’t tell, based on those observations in isolation.
Uuh! I don’t know Senator Rick Santorum but the assumptions of this article do not seem very realistic for anyone who’s ever been living in France ….
The fact that wages are on average lower in France than in England or Germany is certainly not a consequence of a choice! You may say the people have perhaps a culture of enjoying life despite that fact. It has little to do with the “35hours” anyways since working time has been reduced (in 1999) without even touching wage level. Wages are mostly consumed through high taxes of course (19.5 VTA, wealth tax if possessions are over 720 000 euros, 50% income tax ceiling, etc…). The inefficiency of State is terrible.
The French welfare system has never reached that impressive quality. It’s mostly old equipment, not sufficiently trained personal, disruptions and lack of personal made worse through numerous strikes. In the countryside there’s insufficient infrastructure, etc… ( I know this level of State paid health care hardly means anything to many people in the world anyways but … I guess Americans just have to imagine how every US military plane budget could be spent to build a new hospital for instance…:).
Official government schools in the French “province” (not everyone lives in Paris) have a mediocre reputation. People do mostly prefer the (semi-) private schools if they can afford it.
But the question is what kind of a choice do the French really have?! … Revolution perhaps.
There is no true democracy in France as State servants get special privileges that allow them both, to run for office more easily than the privately or self-employed citizen, and meanwhile to be represented in parliament way beyond their actual proportion in the active population.
This being said, one should remember that the amount of state employment is already between 25% and 30% of the active population! (The government has even been forced by its audit organization to create a new agency to count state employment, since the figures had never even been centralized before 2000!).
Please read also the speech Mr. Vincent Bénard (Institut Hayek)gave recently about Gramscism in France…
http://www.fahayek.org/index.php?article=1250
Georgist,
You assumed incorrectly regarding the minimum wage example you mention: If you raise minimum wage to $15, as in your example, few EMPLOYERS would continue to buy at such inflated prices IN EXACTLY the SAME MANNER stock purchasers would not buy the overinflated stock. This translates into more people out in the street, looking for a job few can ill-afford to pay. You assumed employers will not act in the same manner as any other buyer, but you are absolutely mistaken. Employers are NOT stupid.
You had the answer right at your fingertips, and yet decided to go with the same, tired, old cliché.
You also assume people cannot figure out a labor market just because people hide their earnings, but this is absurd – you do not figure out a market by knowing how much people make RIGHT NOW, but by how much EMPLOYERS are offering and HOW MANY PEOPLE respond to such offers. Is the same with anything else: you do not care how much it cost Maytag to build a washing machine, you only care if the price is right for you. One does need to know what is the price for a metric ton of oranges, you care if the price of ONE POUND of oranges is right for you. The same with employers and employees – employers do not need to know exactly how much people are making (which would amount to an enourmous collection of data, I might add), but care only if enough of the right people accept their offer. If they do not, then they raise the offer. If too many, they know people are ready to settle for less.
Even if labor markets were less efficient (which they are NOT), there is absolutely no economic reason to conclude a free market cannot handle a labor market if it can handle everything else.
Francisco, let’s first take a breather here. I’m on your side. I believe in free markets. I specifically said that the free market arguments are not incorrect. There’s no reason to spew all this hate and invective in my direction. I do appreciate you actually making an argument, unlike Stephan Kinsella when faced with criticism.
First things first: it’s interesting that you, from the theoretical realm, claim that hikes in the minimum wage will cause employers to lay off lots or workers. It’s true that drastic hikes in the minimum wage will do this, but no one advocates that. In the real world, minimum wages hikes have almost universally caused workers to get a pay raise. No amount of Rothbard is going to dig you out of that hole: how do you account for that fact, if the labor market is efficient, and factors earn their marginal value? Did the law *cause* workers to become more productive? Did workers coincidentally decide to work harder every single time the minimum wage was hiked? That’s quite frankly absurd. And even if employers laid off most of their min. wage workers and hiked the wages of the rest, you’re still not out of the maze: why were those few workers being paid the minimum wage if their labor was, all along, worth more?
Further, if labor markets were just as efficient, as you claim, how can you reconcile that with the concealment of wage data? Are you saying distribution of information has no effect on market efficiency? When you say that employers don’t desire to know current wage contracts for individuals, you’re wrong (employers try to find this out all the time; surely you’ve heard the story of a couple asking the first black Supreme Court justice how much he was being paid to mow the lawn) but more importantly, you’re missing the point. The inefficiency isn’t on the employer side, but on the employee side. If workers aren’t able to easily observe “overpaid” workers and undercut them, overpaid labor can prevail for a very long time. And I don’t know where you get the idea that employers try to offer just enough so that they get enough applicants; they offer MORE than that amount, and take the “best”, who is usually someone who has connections. How you can reconcile the importance of “knowing the right people” with your claim that labor markets are efficient, I don’t know.
Finally, there’s the point about wages being sticky downward, which you didn’t address, probably because you couldn’t. If any price is sticky downward, the market is going to be inefficient.
Let me just say in conclusion, I’m not saying the free market “can’t handle it”. I’m just saying if you rely on efficient markets to prove your point, don’t bother. Free market proponents would do well to adapt their arguments to the unique aspects of the labor market in order to convince socialists and moderates. If you can’t explain why wages rise after a minimum wage, don’t bother arguing.
Hi Georgist:
Earlier you posted “But impose or raise the minimum wage and most workers see their nominal wage go up!” Assuming you are limiting this “most” category to those earning under this minimum wage, and assuming, for sake of argument you are not mistaken, I’ll take a swing at an answer.
First of all, prices and wages at equilibrium occur on the margin. That means that there are employers who are willing to pay more than the market presently dictates. They are willing to pay this new higher minimum wage. They will pay it because to them it is just like a market with a reduced supply of labour. They can afford to pay more, so they will. But we must consider the employers on the margin. They would not be willing to pay this minimum wage so they would definitely want to lay off their employees earning below this minimum wage.
If for any reason it is more “acceptable” either through social reasons or coercion to not lay off all employees who are no longer economic to keep on, then these marginal companies will keep these employees on for the time being and eat the losses themselves if they can do it without going under. As time goes on, however, where a company would have hired at a lower wage, it instead does not, when an employee leaves, his replacement is not re-hired. Those who remain will be asked to do more. This will continue until inflation eats away at real wages and again makes it economic to hire at this minimum wage. Or until this marginal employer goes under. Minimum wages can perhaps increase the real wages of some for a while, but overall, it must reduce employment in these lower wage jobs until inflation again eliminates the impact of the law.
In other words, the benefit of any minimum wage increase is only temporary, and only helps some workers at the expense of other workers.
Too short an answer, I should probably add a little to it. A minimum wage increase is effectively a loss of productivity because the employer is paying more for the same amount of work (Georgist is right that they don’t automatically become more productive).
But of course, there are various consequences because of the increase, and that’s where the complexity of the consequences comes into effect. Employers could hire fewer low-wage workers in the future and expect current employees to take on more responsibility. They could cut expenses elsewhere in the business to pay the difference, and thus the businesses they buy from would have to deal with lower sales. They could increase the prices of their goods or services to their customers, and let their customers decide where to cut back on expenses. They could always try to increase productivity somewhere else, and sometimes they do, but you can’t expect productivity increases on demand.
Ultimately, the initial action of the increase should be obvious, you pay more for the same amount, not because of economic changes in supply and demand, but because of political enforcement of a law. The consequences of the increase are diffused because of the different responses businesses employ. Nonetheless, the consequences are still real, and nothing to cheer about.
If arguments against minimum wage increases are weak, it’s because the economy is complex and difficult to explain. If you’ve got a better way of explaining it, let me know!
Paul Edwards: I would have to submit that you’re misusing the idea of consumer surplus. If I am willing to pay $5/lb for chocolate, its market price can nevertheless stay at $2/lb for a very long time. But if someone is trying to make a profit off of some input (by buying it at some price and selling it such that the gain in price exceeds the amount paid) in a free market, that surplus, in which someone gets a “good deal” won’t last very long. The existence of any input on a free market, continuing to be bought after a relevant price floor is imposed, means that that market is inefficient. Therefore, the existence of large numbers of min wage workers who see a pay raise is proof that the labor market is not efficient.
And keep in mind: people who use min. wage labor are competing with other sellers who don’t. So the min. wage employer is going to have to eat some, if not all, of the mandated increase. Therefore, Michael Clem, some of your and Paul’s ideas don’t work. As for being reluctant to hire workers later because of an effective min. wage, either due to law or social pressures, that proves my point. Sure, there are ways around the barrier. Sure, businesses on the margin will fail. But clearly, such a process of weeding out the inefficient is itself much more inefficient than in any other market.
And so I agree with your conclusion: the economy is difficult to explain, and it only gets harder with inefficient markets, which was my point all along: Austrians and neoclassicals need to build up a more comprehensive case against labor intervention. And to do that, they need to more precisely account for real world labor phenomena such as min. wage laws appearing to “increase” the marginal value of labor.
Hi Georgist:
I must reluctantly confess that i did not follow your rebuttal to my argument. Are you saying that my argument only applies to the market in consumer’s goods, but not to producer’s goods? Yet you don’t seem to object to my comment that there are marginal demanders of labor who will cease demanding this labor at the artificially raised minimum wage.
Further, I have to say that your comment “Sure, businesses on the margin will fail. But clearly, such a process of weeding out the inefficient is itself much more inefficient than in any other market” is funny. From this comment i am taking you to suggest that a minimum wage induced business failure is something good. Such things certainly can’t be good for employment statistics for earners in any income category. Nor can it be good for the economy in general, as otherwise productive people become unproductive. Of course, this is the typical result of any government intervention in the market.
Finally, what makes the impact of government intervention in the markets difficult to explain is that most people are drowning in a vast ocean of fallacies and illogical economic theories. Thankfully mises.org allows people with the inclination, the option to pull themselves up on land and dry off.
Paul Edwards:
I must reluctantly confess that i did not follow your rebuttal to my argument. Are you saying that my argument only applies to the market in consumer’s goods, but not to producer’s goods? Yet you don’t seem to object to my comment that there are marginal demanders of labor who will cease demanding this labor at the artificially raised minimum wage.
That cessation of demanding labor after a minimum wage is easy to explain away, and causes no inconsistencies: If the min. wage is $X, and someone earns $X; and then the min wage is $1.1X and that person is fired, everything makes sense. The problem is when another person doing the same job stays on and sees his wage increase to $1.1X. If indeed his labor increased the value of the product by $1.1X, Austrian economics holds that his wage should have been bid up to $1.1X. But it wasn’t. That leaves us with a few possible explations: 1) His marginal productivity increased after the min wage hike. – doubtful. 2) He and every single other worker historically decided to work harder after a min wage hike – also doubtful. 3) The market is inefficient, meaning his wage gravitated only very slowly toward the labor’s marginal value – this sounds the most likely.
Re: business failure. I’m not saying min. wage induced business failures are good. I’m saying that the faster that market inefficiencies – such as over- and under-paying for inputs – are eliminated, the better. As long as there is social *or* governmental pressure not to reduce wages, it will take businesses longer to respond to market conditions, such as the changes in input values.
Finally, what makes the impact of government intervention in the markets difficult to explain is that most people are drowning in a vast ocean of fallacies and illogical economic theories. Thankfully mises.org allows people with the inclination, the option to pull themselves up on land and dry off.
Well, my point is that telling people that wages won’t go up after a min. wage hike when they plainly do is no way to help people dry off.
One last kick at the cat:
1. That cessation of demanding labor after a minimum wage is easy to explain away, and causes no inconsistencies: If the min. wage is $X, and someone earns $X; and then the min wage is $1.1X and that person is fired, everything makes sense.
Cool.
2. The problem is when another person doing the same job stays on and sees his wage increase to $1.1X.
2a. If indeed his labor increased the value of the product by $1.1X,
If the company freely keeps him on at the higher wage, the value of his labour was already at least $1.1X to the company. It’s just that it only paid what it had to for his labour, which was the market clearing price of X.
2b. Austrian economics holds that his wage should have been bid up to $1.1X. But it wasn’t.
Nope. Austrian economics holds that his wage should have been and was bid up until the labour market for that kind of labour cleared (supply==demand). The market clears at the equilibrium market rate of X, not the artificially high new 1.1X.
2c. That leaves us with a few possible explations: 1) His marginal productivity increased after the min wage hike. – doubtful. 2) He and every single other worker historically decided to work harder after a min wage hike – also doubtful. 3) The market is inefficient, meaning his wage gravitated only very slowly toward the labor’s marginal value – this sounds the most likely.
All three are incorrect. Response to 2b is the explanation: his wage should have been and was bid up until the labour market for that kind of labour cleared (supply==demand). The market clears at the equilibrium market rate of X, not the artificially high new 1.1X.
The Austrian thinking around prices is as follows: there will be people willing to pay more than the market price for a product; there will be people willing to sell for less than market price. But neither will usually have to go to such lengths. Market price is usually somewhere in between the two. It is here where the market clears; where amount supplied equals the amount demanded.
Incidentally, the new minimum wage, in addition to reducing the demand for labour at the new rate, also increases the labour supply by drawing in those who didn’t think it worth the effort to look for work at the market rate, but thought it attractive at the increased artificial minimum wage rate. This further exasperates the over supply and under demand for the labour.
I agree that the main problem with France is that it is a democracy. One person, one vote does not work as well as the old systems which gave the vote only to those who paid a certain amount of taxes.
Last year the BBC showed a fanta-documentary set about 20-30 years in the future. By then Britain’s old age population has increased so much that workers pay exorbitant taxes to pay for ever increasing pension and health care costs. A political movement is born (with the slogan: “we pay, they play”) which fights for the rights of young people.
It may well happen in reality. If things go on this way, taxpayers will realise that they are being robbed of their money by a “majority” of voters who do not pay any taxes, and they will revolt. Already today about 40% of voters do not pay taxes (See Niall Ferguson’s book “The Cash Nexus”).
One reason why such a revolt has not already happened is that it is much more difficult to stage a tax strike when your taxes are taken out of your paychecks rather than paid “voluntarily” every March 15, as used to be the case. I remember an old Donald Duck propaganda cartoon from 1942 which asked workers not to “forget” to pay their income taxes since March 15 was approaching… Not much chance of them forgetting now.
Most young workers in Britain are already paying the top marginal income tax of 40%. When it starts going up to 50%, 60%, 70% (and it will) they will start fighting for their rights at last.
And to do that, they need to more precisely account for real world labor phenomena such as min. wage laws appearing to “increase” the marginal value of labor.
This wasn’t done? Minimum wage workers do indeed benefit, temporarily, until the economy adjusts to the increase. At that point, either their real wages have been adjusted so that they can purchase the same amount of goods and services as before (or even less, due to the inefficiency caused by the law), or their permanent benefits are paid for at the expense of other workers (unemployment). Nominal wages are illusory.
Paul Edwards: It seems we’re arguing in circles, because I answered this specific objection you’re raising to 2b: you’re thinking that this is a case of consumer’s surplus. It’s not. When consumers purchase goods, it’s possible for the market to stabilize such that someone values something at $5 (i.e., would pay $5 for it if that were the price), yet for the market to clear at $2. If, however, the person is valuing the good as a means to earn a profit, then that person inevitably competes with other people also trying to sell that input for more than they bought it for. You’re right that initially someone may observe that he can buy an input and sell it for more, but as long as there is competition that profit is competed away. Competition stops the market from clearing such that there is a stable profit to be made.
In the example, if it really were the case that someone could be hired for $X, yet they added $1.1X to the product’s value, and the market were efficient, someone would bid away the labor and try to do the same thing with a smaller profit margin. If it is profitable to hire someone at $X AND $1.1X, it means the profit wasn’t being competed away – the market was inefficient.
Michael Clem: I understand there are bad side effects. But under the simple Austrian explanation, minimum wage laws shouldn’t help anyone, not even temporarily. But they do.
Now i finally understand what you’re saying, Georgist, and in the context of the evenly rotating economy I think you’re perfectly right in saying “If, however, the person is valuing the good as a means to earn a profit, then that person inevitably competes with other people also trying to sell that input for more than they bought it for”.
However, across all industries, and at a given point in time, some firms are making more than the going rate of interest on their investment, and others are making the going rate, and the others are just marginal. There will be some who really could stand to pay more and would still make the interest rate. They will keep their minimum wage employee despite the new increase. Those just making the interest rate will come closer to becoming marginal suppliers or else will lay off as well, and the marginal suppliers will have to do something drastic like lay off their minimum wage employees, or else go under.
So i finally understand your point, and it is clear to me that my argument was lacking. But in any event, I think it does boil down to Michael’s conclusion: Some “Minimum wage workers do indeed benefit, temporarily, until the economy adjusts to the increase…or their permanent benefits are paid for at the expense of other workers (unemployment).”
But under the simple Austrian explanation, minimum wage laws shouldn’t help anyone, not even temporarily. But they do.
Somebody help me out here. Doesn’t Austrian economics recognize that changes in the economy don’t occur simultaneously in all parts of the economy? I was sure that I’ve read something to that effect.
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