Conservatives — with the backing, I have to admit, of many economists — normally argue that the market for labor is like the market for anything else. The law of supply and demand, they say, determines the level of wages..
But labor economists have long questioned this view. Soylent Green — I mean, the labor 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.
I fear, though, that both Krugman and David Henderson are making a false distinction here. It's possible to argue that wages depend upon social forces because those forces affect the position of supply and demand curves.
For example, a wage of, say, $8ph might not attract much labour supply in western economies but the same wage (in PPP) terms would have applicants queuing for miles in a poor country. The labour supply curve in the west is to the left of that in poorer nations. Why?
A big reason is that, in the west, such a wage is regarded as derisory because it would not give us an acceptable standard of living. This is because our ideas of what's acceptable are socially conditioned and so are greater in rich countries than poorer ones. As Smith said:
By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt.
Also, the position of demand curves depends upon social forces. Conservatives would agree that wages depend upon the value of the output created by a worker. But this value is subjective and our subjective valuations are conditioned by social forces. For example, at a wage of $10 million per year there is positive demand for chief executives but not for toilet cleaners. This is because hirers believe that CEOs can create at least $10m pa of value. I would argue that this belief is a contestable ideological one: it exists because boards believe not only that great men can transform company's fortunes but also that they have the ability to spot such men. Both beliefs are questionable. It takes no imagination to envisage a society in which CEOs are paid only moderately because managerialist ideology is weaker.
Here are some other examples:
- IMF research shows that inequality has increased as trades union power has declined, because unions were a constraint upon bosses pay.
- Wages are lower in feminized occupations, even for men - consistent with "women's work" having low perceived value. The fact that this is more true in the UK than Germany hints at a social and cultural basis for the difference.
- A classic paper (pdf) by Kahneman Knetch and Thaler showed that perceptions of fairness are a cause of wage stickiness. For example, people think it fair for a firm to cut wages if it is making a loss, but not if there's mass unemployment in the area.
- Power-biased technical change has contributed to wage inequality. Because low-skilled workers can now be monitored directly - through CCTV, containerization, electronic tills and suchlike - they no longer need to be paid efficiency wages to keep them honest. This means their relative pay has fallen.
All these cases show that Krugman is right to say that wages depend upon social forces and political power. However, this is not an alternative to standard price theory but a complement to it. Forces and power help explain how demand and supply curves are formed.
Now, you might think this agreement with Krugman leads me to sympathize with his call for higher minimum wages. Not necessarily. In a world in which customers and thus employers attach low value to cleaners and care home workers, a state-mandated rise in their pay (which as Bob Murphy says is a different thing from a voluntary pay rise) might well depress demand - especially in the absence of looser macroeconomic policy.
The problem here, though, isn't "natural" laws of economics, but a cultural and ideological climate which attaches low value to some types of work. If this climate were to change - and the demand curve for such labour were to shift outwards - higher wages for such workers would be entirely feasible.