Thursday, December 17, 2009

The Rorschach Test that is the minimum wage

Any discussion of the minimum wage turns into a Rorschach test for the ideology of the commenter. The latest discussion on whether lowering the minimum wage will have any impact on unemployment in this recession is typical. Everyone's wrong, and wrong for reasons that precisely reveal their ideological shortcomings. Here's a list of links.

Glibertarian Bryan Caplan reveals why microeconomics is just useless at analyzing the economy at a macro scale. If you cannot understand that spending equals income at an economy wide level, you'll spout a lot of two sentence nonsense.

Paul Krugman gets some crude Keynesianism right, but fundamentally he cares more about the Progressive agenda than anything else.

Gary Becker trots out old Chicago school critiques of Keynes, which may or may not have anything to do with what Keynes said. U Chicago sucks at Macro.


Here's the post-Keynesian view.

Lowering the minimum wage in the current environment will have no impact on unemployment. Ordinarily, minimum wage laws reduce employment by pricing very low skilled workers out of the labor market. But in this environment, with very low aggregate demand, workers who are very productive cannot get hired either. Therefore, labor being priced out is obviously not the problem.

If the minimum wage is lowers, firms already hiring minimum wage workers may lower their wages. In this instance financial assets in the private sector are getting shuffled between entities. If the new entities have a lower propensity to spend, this may reduce aggregate demand (increase private sector savings ) more making things worse. I believe that corporations save more than low income workers, so this effect will be negative. There aren't that many minimum wage workers in the economy, though, so the negative effect will probably be too small to show up.

Reducing the minimum wage does nothing to increase the Federal deficit, and thus fund the net savings that the private sector is still trying to scrape together.

Comments about NAIRU etc are besides the point since interest rates only matter to the extent that the provide the private sector with income.


Blogger Misaki said...

Lowering overall wages (not just the minimum wages) would increase consumption, and therefore employment if and only if it also lead to a decrease in prices through what was mentioned somewhere in this discussion, Pigou effect. Lowering minimum wage, if it doesn't lead to increased hiring (which it won't if product prices for businesses hiring minimum wage workers stay the same), will decrease total employment since as you mentioned "corporations save more than low income workers", and high income workers spend less of their income than low income workers.

One of the reasons businesses are reluctant to do this is the price of energy and gasoline.

But anyway: by selectively lowering wages for full-time work, unemployment would decrease.

Especially since only 42% of the general public support gov't spending to create jobs, and 52% oppose. (Q. 18)

11:44 PM  

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