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Evidence indicates that the price elasticity of demand for labor is quite high, at least 3. That is, an increase in average wages of 1% would lead to at least a 3% decline in the number of hours of work demanded by employers. Labor economists believe, however, that the price elasticity of supply is very low. The reason is that although a fall in the wage rate reduces the incentive to work more hours, it also makes people poorer and less able to afford leisure time. The strength of this second effect is shown in the data: the number of hours people are willing to work falls very little — if at all — when the wage per hour goes down.

It’s on p.173-4 of my edition of this. If indeed this is true, then it means:

  • Almost the entire payroll tax is eaten by workers. And since poor people pay the payroll tax right on the first dollar of wages, and it is phased out in part for some of us at higher wages, then it is a wholly regressive and burdensome tax on workers.This should not surprise people. It’s a “myth” that you and your employer “share” the payroll tax 50-50. The reality is that your money wages are lower by almost the entire size of the payroll tax you pay. 
  • And once you recognize THAT big ugly, ask yourself “who bears the burden of employer provided health insurance?” Who bears the burden of increased workplace safety requirements? Or any cost imposed on firms?
  • It should not surprise people that the measured unemployment impacts of the minimum wage are disputed – from large and negative to small to zero (but certainly not positive). If you drew a picture you might conclude precisely the opposite – but given the fact that workers do not change their behavior much when their compensation changes, then firms have MORE tools at their disposal than simply reducing hours or staffing when labor costs go up. Of course, this raises the question of why they don’t just do this at the outset. My point is that they would have a greater ability to reduce training, reduce non-wage benefits, and so on when the labor supply curve is relatively inelastic. 
  • If the payroll tax, as our author indicates, is eaten almost entirely by workers, then on what theory are we operating to suggest that the minimum wage is not also eaten by workers? Monopsony models?

Have a nice weekend.

One Response to “Weekend Ponderance: Who Said It?”

  1. Harry says:

    I am not going to buy his book, and I will check with my government-run library to see if they have bought a copy before I order it, assuming it makes my scheduled reading list.

    Thank you for extracting the subject to discuss, which leads to a question: Is the point that social security taxes should be progressive? If so, then this defeats the eighty-year old pretense that Social Security was not a welfare program, an axiom of American progressives/liberals/socialists.

    Also, does Krugman imagine every small businessman, who has broken the fifty-employee nut, is like Oskar Schindler, presiding over his laborers making pots? Before Schindler found his conscience, he was a National Socialist. Has this movie shaped Paul Krugman’s idea of economic freedom, and has it led him to believe there is the Direktor and the accountant and then the workers?

    The business people I know best in the first place have been subject to the same onerous payroll taxes as their employees for a good part of their lives, even though after they have found success for the company, which continues to let its employees prosper, finally passed the $115,000 cap on regressive Social Security taxes, federal unemployment taxes, et cetera. I used to keep up on this because I filed Form 940 and the rest and paid the taxes, but I am a little rusty on the new details.

    I do know that is tougher to do business today, and I wish Mr. Krugman would let up, take a long cruise on a tanker, go fishing, and reflect on humility.

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