by From Lars Syll It has been more than eight years since many of the United States’ cashiers, dishwashers, janitors, lifeguards, baggage handlers, baristas, manicurists, retail employees, housekeepers, construction laborers, home health aides, security guards, and other minimum-wage workers last got a raise. The federal minimum wage now stands at just .25. In real terms, these workers’ earnings have declined by nearly 13 percent since the last hike, in 2009—and have fallen by over one-third since 1968, when the real federal minimum wage was at its peak of .38 in today’s money (although only .60 then) … Opponents of the minimum wage have long invoked economic theory to claim that the measure destroys jobs. “Just as no physicist would claim that ‘water runs uphill,’ no
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from Lars Syll
It has been more than eight years since many of the United States’ cashiers, dishwashers, janitors, lifeguards, baggage handlers, baristas, manicurists, retail employees, housekeepers, construction laborers, home health aides, security guards, and other minimum-wage workers last got a raise. The federal minimum wage now stands at just $7.25. In real terms, these workers’ earnings have declined by nearly 13 percent since the last hike, in 2009—and have fallen by over one-third since 1968, when the real federal minimum wage was at its peak of $11.38 in today’s money (although only $1.60 then) …
Opponents of the minimum wage have long invoked economic theory to claim that the measure destroys jobs. “Just as no physicist would claim that ‘water runs uphill,’ no self-respecting economist would claim that increases in the minimum wage increase employment,” the Nobel Prize–winning economist James Buchanan wrote in The Wall Street Journal in 1996. “Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests.”
Strong stuff, but wrong stuff. That view is rooted in either ignorance or dishonesty …
It is important not to mistake the labor market on planet Econ 101 for the labor market on planet Earth. The predictions of this model are not akin to the laws of physics, and alarm bells should go off anytime an economist, even a Nobel laureate, claims that they are.
The predictions of any economic model are only as good as the assumptions behind it. And the assumption of perfect competition is a bad approximation for real-world labor markets …
There are, obviously, a lot of policymakers, presidents and economists still arguing in the Buchanan-Econ-101-style. Intimating that one could solve economic problems by low (minimum) wages, in these dire times, should really be taken more as a sign of how low the confidence in our economic system has sunk. Low wages don’t save neither competitiveness nor jobs.
What is needed more than anything else in these times is stimulus and economic policies that increase effective demand.
On a societal level, low minimum wages and general wage cuts only increase the risk of more people getting unemployed. To think that one can solve economic crises in this way is a turning back to those faulty economic theories and policies that John Maynard Keynes conclusively showed to be wrong already in the 1930s. It was theories and policies that made millions of people all over the world unemployed.
It’s an atomistic fallacy to think that a policy of keeping wages low would strengthen the economy. On the contrary. The aggregate effects would, as shown by Keynes, be catastrophic. They would start a cumulative spiral of lower prices that would make the real debts of individuals and firms increase since the nominal debts wouldn’t be affected by the general price and wage decrease. In an economy that more and more has come to rest on increased debt and borrowing this would be the entrance-gate to a debt deflation crises with decreasing investments and higher unemployment. In short, it would make depression knock on the door.
The impending danger for today’s economies is that they won’t get consumption and investments going. Confidence and effective demand have to be reestablished. The problem of our economies is not on the supply side. Overwhelming evidence shows that the problem today is on the demand side. Demand is – to put it bluntly – simply not sufficient to keep the wheels of the economies turning. To suggest that the solution is low (minimum) wages and unemployment compensations is just to write out a prescription for even worse catastrophes.