While some people believe that raising the minimum wage increases unemployment, many experts disagree, and demonstrate the contrary view: that higher wages reduce unemployment. (James Galbraith, for one, devotes a large part of a chapter to this in his book Predator State.)
The more liberal economists--concerned about inequality--claim that increasing the minimum wage as they recommend reduces unemployment because:
1) Highly unequal wages cause people to put more effort into competing to attain the few better jobs, than accepting the poorly paid ones. High inequality and High Unemployment are two sides of the same coin, argues Galbraith.
2) Galbraith points to differences between northern and southern Europe. In Northern Europe there is a long history of trade unions and low inequality--and also low unemployment. In Southern Europe, there is a long history of high inequality, and high unemployment.
The more liberal economists--concerned about inequality--claim that increasing the minimum wage as they recommend reduces unemployment because:
1) Highly unequal wages cause people to put more effort into competing to attain the few better jobs, than accepting the poorly paid ones. High inequality and High Unemployment are two sides of the same coin, argues Galbraith.
2) Galbraith points to differences between northern and southern Europe. In Northern Europe there is a long history of trade unions and low inequality--and also low unemployment. In Southern Europe, there is a long history of high inequality, and high unemployment.
3) Raising the minimum wage puts relatively more money in the hands of people who spend all they receive, thereby maximizing the Keynesian multiplier. The effect is economic expansion which creates more jobs. The current low wage structure SUPRESSES job growth by retarding economic growth.
4) Along the lines suggested by one person in a recent NPR program, neither the typical supply nor demand curves for labor reflect the true labor "marketplace." Labor is something very special and doesn't fit commodity models well at all. In a typical commodity market, consumers can choose to consume A, or in many cases substitute nothing or B instead. In a "labor market" labor "producers" (who are normaly "consumers") don't have much choice. (Some do, but not most.) If the labor-power isn't used, it's lost forever, which is a huge loss to the potential laborer. Meanwhile, certain kinds of employer can choose not to hire workers, but others have no choice. Bankers also have considerable influence over whether jobs are created or not.
Ultimately, the uniqueness of labor led John Maynard Keynes to write his great book The General Theory of Employment, Interest, and Money. However, traditionally conservative economists argued that Keynesian theory didn't have microfoundations, so they discarded it and have subsequently created a succession of theories that have all failed miserably to account for real world events (such as Real Business Cycle theory). See Sweetwater Economics. Meanwhile, Hiksian economics was re-branded as Keynesian and is widely used, and the underlying principle in Saltwater Economics. But the real Keynesian economics is even more profound, as now developed further by Minsky and Post Keynesian economics.
Steve Keen has an excellent discussion of how neoclassical economic models don't apply to labor in Chapter 6 of Debunking Economics Revised and Expanded version. The marginalist commodity supply and demand model itself is invalid anyway for technical reasons he discusses in earlier chapters. But it especially doesn't fit labor for reasons such as these:
a) the labor supply curve can fall backwards, showing more employment with less wages, rather than the less as neoclassical theory generally assumes.
b) when employers have greater power than workers, which is almost always, they are unable to compete fairly which the neoclassical model assumes. Jamie Galbraith says flatly in Predator State: there is no labor market. It's more like the labor slaughterhouse. Standard economic theory itself says this tendency needs to be reversed with mechanisms like employee unions, so that employees have negotiating power equal to that of employers, in order for "free market" conditions extolled by pretty supply and demand curves to even apply.
c) labor market actors cannot be aggregated as required for neoclassical analysis because demand (employers) is non-independent of demand (workers). Instead, both are related, as suggested by the simplified Keynesian analysis of item (1) above. When workers have more money, they will spend more, creating the support and need for more jobs.
d) Most workers can't freely choose between leisure and work, as the model assumes. Therefore the
supply curve is not only constrained, instead tending toward zero, it tends back up a lower wages, as in
item (a)
e) The model assumes a 2-sided competition between workers and employers. In reality, there is at least one more actor involved: bankers. Bankers make the loans that make it possible for employers to even think of creating jobs in most cases, and they represent a third divergent interest. They may have more or less money, and if they can get away with it, they may try to constrain the employer in what kinds of offerings can be made, tying the hands of the employer, who have have to decline offers he would otherwise accept, even at the expense of having a business at all (and thereby making use of his own labor-power) if the demands of the
banker can't be met.
f) Also in order to work, neoclassical economics assumes a particular kind of benevolent pre-existing
distribution of wealth. The ultimate claim of neoclassical economics is that markets are welfare-maximizing. But the irony is, they only work if a benevolent distribution of wealth already exists. Keen gives an academic reference but it's easy to understand intuitively. If we're all rich, everything is going to work out fine, otherwise not.
Ultimately, the uniqueness of labor led John Maynard Keynes to write his great book The General Theory of Employment, Interest, and Money. However, traditionally conservative economists argued that Keynesian theory didn't have microfoundations, so they discarded it and have subsequently created a succession of theories that have all failed miserably to account for real world events (such as Real Business Cycle theory). See Sweetwater Economics. Meanwhile, Hiksian economics was re-branded as Keynesian and is widely used, and the underlying principle in Saltwater Economics. But the real Keynesian economics is even more profound, as now developed further by Minsky and Post Keynesian economics.
Steve Keen has an excellent discussion of how neoclassical economic models don't apply to labor in Chapter 6 of Debunking Economics Revised and Expanded version. The marginalist commodity supply and demand model itself is invalid anyway for technical reasons he discusses in earlier chapters. But it especially doesn't fit labor for reasons such as these:
a) the labor supply curve can fall backwards, showing more employment with less wages, rather than the less as neoclassical theory generally assumes.
b) when employers have greater power than workers, which is almost always, they are unable to compete fairly which the neoclassical model assumes. Jamie Galbraith says flatly in Predator State: there is no labor market. It's more like the labor slaughterhouse. Standard economic theory itself says this tendency needs to be reversed with mechanisms like employee unions, so that employees have negotiating power equal to that of employers, in order for "free market" conditions extolled by pretty supply and demand curves to even apply.
c) labor market actors cannot be aggregated as required for neoclassical analysis because demand (employers) is non-independent of demand (workers). Instead, both are related, as suggested by the simplified Keynesian analysis of item (1) above. When workers have more money, they will spend more, creating the support and need for more jobs.
d) Most workers can't freely choose between leisure and work, as the model assumes. Therefore the
supply curve is not only constrained, instead tending toward zero, it tends back up a lower wages, as in
item (a)
e) The model assumes a 2-sided competition between workers and employers. In reality, there is at least one more actor involved: bankers. Bankers make the loans that make it possible for employers to even think of creating jobs in most cases, and they represent a third divergent interest. They may have more or less money, and if they can get away with it, they may try to constrain the employer in what kinds of offerings can be made, tying the hands of the employer, who have have to decline offers he would otherwise accept, even at the expense of having a business at all (and thereby making use of his own labor-power) if the demands of the
banker can't be met.
f) Also in order to work, neoclassical economics assumes a particular kind of benevolent pre-existing
distribution of wealth. The ultimate claim of neoclassical economics is that markets are welfare-maximizing. But the irony is, they only work if a benevolent distribution of wealth already exists. Keen gives an academic reference but it's easy to understand intuitively. If we're all rich, everything is going to work out fine, otherwise not.
5) Speaking of Denmark, the experience of Denmark shows that, In the long run, it pays to push for high wages. Capitalists will find some way to make money anyway with higher value products and services, there will be even fuller employement, and everyone wins. Only bottom feeder type capitalists hope to win by driving up demand by lowering labor costs endlessly. Those bottom feeder capitalists are the ones that now run the USA, and currently running it into the ground. Something like Denmark, with high wages, high employment, high statisfaction, and high quality products, is the way to go. Galbraith speaks with great passion about this.
*****
After a long argument with those who fear increasing the minimum wage might lead to higher prices for them...
I realize, I support a "living wage" minimum wage precisely because I value human dignity. It might be nice to save 10 cents on a Latte, but knowing the barista has to work 80 hours to support an independent life...would rather ruin it for me.
It's not just an anti-poverty, program It's a matter of equity.
It follows from a deep understanding of how economies actually work that the incomes people receive is primarily a measure of their power within human society. The only way that wage workers at the bottom of the higerarchy are going to get a fair wage would be through a class-representative union that had corresponding power to negotiate (such as through a closed shop which is impossible in "right-to-work" states). Barring that, people at the bottom need a government intervention to keep from literally being starved to death (through the extreme version of the Iron Law of Wages in which people don't get enough to survive...not the employer's problem...they say get another job.)
Possible the best government intervention would somehow enable class-representative and worker-governed unions for all people.
Next perhaps would be full scale wage and price controls.
Finally, the minimum thinking measure, which even the slightest sense of human decency requires, is an independent living supporting minimum wage for all people, and one which is normally limited to 32 hours per week with an absolute maximum of 40 hours per week.
Is this more than some people need? Perhaps. But working people should not be forced to share expenses to live...that is yet another form of slavery.
*****
The letter below calling for $15 minimum wage is signed by numerous leading economists, from the near left Dean Baker to the centrist right billionaire Clinton staffer Laura Tyson. Are there more conservative economists? Yes, and economic institutes are funded by wealthy people.
