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Tuesday, February 19, 2013

Minimum wage increases as self-executing fiscal stimulus

All the usual suspects are crawling out of the woodwork to attack the President's State of the Union idea of raising the minimum wage. Their reasoning is always based on the most infantile use of economic theory as one can imagine. Sometimes simplicity is the best answer. This is not one of those times. Below is a comment I made on another site reacting to the quoted sentence.  


". . . yes the higher pay for minimum wage workers comes mostly out of other workers' pockets." 
Is there any empirical evidence for this at all? I doubt it. If there is any competition in an industry, employers have to compete for talent. It is far more likely that a minimum wage increase pushes wages up generally in a reverse cascade effect, because to compete for talent a premium over the minimum for higher-level jobs is necessary. The impact on the employer is moderated if not eliminated by (1) the fact that for most employers their competitive position will not be affected at all, since it applies to all their competitors as well (who most likely have a similar level of dependence on low-wage labor); (2) morale and productivity will improve at the bottom of the scale, with turnover and training costs reduced and benefiting the employer; and (3) the people with the highest marginal propensity to spend (and the least propensity to spend it outside the country on ski trips to Saint Moritz and condos in Nice) will have more money to spend, thereby increasing demand for many of the employers' goods and services and protecting their profit levels and top-executive compensation.
Applying Econ 101 analysis to the complex effects of requiring all employers who use low-wage labor to pay them more than a race-to-the-bottom wage is simple-minded in the extreme.
Forget being nice or ethical. Raising the minimum wage, at least at the very low, below-poverty-line levels that we have had for many years, should be every bit as stimulative to an economy as a tax reduction for lower-wage workers only. The President 's proposal to go to $9.00 from $7.25 over a couple of years means a minimum wage worker's wages will go from $14,500 to $18,000. That's not going to be stimulative? 

The libertarian argument against the minimum wage as a matter of principle fails of its own logic. It is based on  a state intervention that attributes complete legal control over all revenues gained employing labor to the employer. If the employer can find someone of limited capacity and desperate enough circumstances to do the work at 50 cents an hour, hey, that's freedom, baby. The minimum wage applies only when the employer has prevented workers the freedom to organize so they can equalize the bargaining power between employer and worker. Besides the fact that it is the state that assigns legal control over the revenues requiring labor and creates the form of organization, the corporation, that allows amalgamation of the employer's power, it is also the state that assists with the power of force the employer in resisting collective bargaining.

Who knew libertarians have such a weighted view of when the state can intervene and when it cannot?

Yes, $9.00 per hour.

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