No one will be surprised to learn that even an economist with liberal creds as unblemished as Paul Krugman’s must toe the neo-classical line on structural unemployment:
Given that minimum wages—that is, binding minimum wages—generally lead to structural unemployment, you might wonder why governments impose them. The rationale is to help ensure that people who work can earn enough income to afford at least a minimally comfortable lifestyle. However, this may come at a cost, because it may eliminate the opportunity to work for some workers who would have willingly worked for lower wages. . . . Most economists . . . agree that a sufficiently high minimum wage does lead to structural unemployment (Krugman and Wells Economics 2013:655-656).
Obviously this is not all that Mr. Krugman or Ms. Wells have written about structural unemployment. And, yet, it is nevertheless noteworthy.
It is noteworthy because nowhere in their decisive chapter on unemployment do M. Krugman and Wells do so much as footnote some of the other considerations involved in structural unemployment, in particular the Average Total Revenues, Marginal Costs, or Marginal Profits at which any sector is eager to maintain or even expand its operations.
To mention only the most obvious consideration, were wages the only or even the primary consideration in the Marginal Profit of any enterprise or sector, it is clear beyond doubt that no manufacturing whatsoever would take place in most of western Europe, Great Britain, Ireland, or North America. Clearly, however, manufacturers not only believe that they can earn better returns by locating their operations in these “high wage” locations, but that doing so improves their overall productivity, efficiency, and competitiveness. Are they mistaken?
No. These manufacturers and sectors know that “high wages” are balanced out by other savings – such as average worker productivity and proximity to end markets – that more than account for the “high wages.” Would these employers employ more workers in their plants or sectors could they offer them a lower wage? Not necessarily. In fact, they would only employ additional workers in the case that doing so could maintain or increase current rates of profitability, which would only be true if the cost of hiring an additional worker at a lower wage would permit them to lower their price sufficiently to attract per unit buyers sufficient to cover the cost of that additional worker. In other words, we would also want to know whether the sector or manufacturer could lower prices sufficiently to attract an additional buyer to cover the cost of producing an additional unit.
However, as M Krugman and Wells know as well as or better than anyone, the factors governing consumers’ willingness to buy an additional unit at a marginally efficient lower price is governed by a wide range of factors in addition to the wage of a worker who helped produce the item; not least whether workers in aggregate enjoy sufficient wages to purchase items even at a reduced price.
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