Dear Paul Krugman: Please Explain Labor Demand Elasticity in Puerto Rico

Paul Krugman and a surprisingly large portion of Leftish economists have staked out a position that labor does not act like any other commodity, such that higher minimum wages have no effect on demand.  I have had people on the Left tell me that this absurd, common-sense-offending position is actually "settled".  So explain Puerto Rico:

Another problem is that just 40 percent of the population [of Puerto Rico] has a job—or is even looking for one. That figure has plummeted in recent years. In the United States as a whole, it is 62.9 percent....

The report cites one surprising problem: the federal minimum wage, which is at the same level in Puerto Rico as in the rest of the country, even though the economy there is so much weaker. There are probably some people who would like to work, but because of the sickly economy, businesses can't afford to pay them the minimum wage.

Someone working full time for the minimum wage earns $15,080 a year, which isn't that much less than the median income in Puerto Rico of $19,624.

The report also cites regulations and restrictions that make it difficult to set up new businesses and hire workers, although it's difficult to know just how large an effect these rules might or might not have on the labor market.

By the way, the fact that the author thinks this is "surprising" just goes to show how far this anti-factual meme of a non-sloping labor demand curve has penetrated.

As pointed out in several places today, Puerto Rico has a surprising number of parallels to Greece.   It seems to have zero fiscal restraint, it has structural and regulatory issues in its economy that suppress growth, and has its currency pegged to that of a larger, much richer nation.  It is apparently facing a huge $70+ billion potential debt default.


  1. mesaeconoguy:

    Puerto Rico is actually worse off than Detroit,

    and S&P downgraded them further Friday.

    They can, however, likely file bankruptcy, which Greece cannot do.

    But don’t worry, Paul Krugman will be right about this one too – in the end, and according to Keynesian economics, if you’re going to go bankrupt, go really, really bankrupt, forcing your creditors to rescue you and/or allow discharge of your unpayable debts in bankruptcy.

    [We just need more stimulus.]

    That, and raise the local minimum wage to $300/hr.

  2. random geek:

    The surprise is that it was cited.

  3. Onlooker from Troy:

    Don't overlook the next paragraph about the large underground economy which is a direct result of the min wage and the other govt meddling.

    This should indeed be a great case study to demonstrate the folly of the min wage and other govt interference, and yet I doubt it will convince many (if any) of the economically ignorant state worshipers. For them it's much more of a religion than anything else.

  4. poitsplace .:

    The people on the left know that higher wages impact wages. They blame it for off-shoring. But they've been brainwashed to the point that they can ignore that fact and just recite their economic doctrines for both issues...sometimes even within the same sentence.

  5. Jim Collins:

    Come on! You know that if you disagree with Krugman, you are just a shill for the evil Koch brothers and can be ignored. (sarcasm meter pegged)

  6. Matthew Slyfield:

    No, disagreeing with Krugman just means that you have at least two brain cells to rub together.

  7. joe:

    Krugman is perpetually peddling the story that minimum wage increases will not increase the unemployment rate.

    He cites numerous studies that show that the unemployment is not increased - each study based on empirical evidence. Granted each of these studies are done by left wing leaning organizations so it is no suprise that they show the unemployment does not increase.

    However, each of these studies - even with the left wing bias - All show that hours get cut. Which of course Krugman never acknowledges.

  8. mesaeconoguy:

    Correction: PR cannot currently file Chapter 9 bankruptcy. Congress is debating allowing a territorial exception for PR.

    IL and CA and other states have a close eye on this.

  9. PJ:

    Thanks for the blog. Well written
    It is easy to promote socialist policies in a big country where there are enough big producers who can soften the impact.

    The effect of these policies is much more visible in small nations and territories such as Greece and Puerto Rico.
    No wonder, Krugman keeps on insisting on handing over more and more power to federal government, to hide the effects of his leftist agenda.

  10. hcunn:

    Krugerrands were made of gold. Krugmanlands are made of lead.