Reasons For Economic Controversy
Classical economics argues that the quantity of labor demanded increases as the price of labor falls. Each firm must evaluate the potential to make a profit from each worker hired; if the workers cost less, then more profit can be made from hiring more workers at a lower price. Therefore, by setting a lower boundary to wages, a minimum wage law prevents firms from offering jobs below the minimum and increases unemployment.
In Keynesian economics the perspective is very different. Although employers and workers set their wages in nominal terms, they are unable to predict the exact purchasing power of those wages. The value of the real wage can only be known "ex post" -- long after the workers have been paid. Neither unions nor government authorities know the real wage and can only approximate it by regulating the nominal wage. The real wage is the purchasing power of wages when adjusted for inflation, but inflation--the purchasing power of money and therefore of wages--depends on total levels of investment.
Investment, in its turn, depends upon consumption, and consumption depends upon the marginal propensity to consume (savings rate) across all income categories. In an "underconsumption" scenario, the transfer of income from entrepreneurs and rentiers (those with higher incomes) to the working class (via union wage agreements and minimum wages) can actually lead to an increase in total consumption and higher demand for goods--leading to increased employment.
However, the resulting higher price levels may spur several forms of political and institutional responses that blunt or negate this tendency. For one, inflation tends to transfer income from bond holders (rentiers) to wage earners. For another, entrepreneurs may, under conditions of oligopoly be able to blunt the effect of rising wages by using their market power to raise prices fast enough to prevent real gains among workers. And finally, the central bank may intervene to defend price levels by increasing interest rates, which will tend to curb investment and decrease the demand for labor.
Without choosing from among these perspectives, it is sufficient to say that minimum wage increases are unlikely to have a simple linear effect on employment. The interconnection of price levels, central bank policy, wage agreements, total aggregate demand creates a situation where the conclusions to be drawn from macroeconomic analysis will be highly influenced by the underlying assumptions.
Read more about this topic: Minimum Wage In The United States
Famous quotes containing the words reasons for, reasons, economic and/or controversy:
“Adolescents, for all their self-involvement, are emerging from the self-centeredness of childhood. Their perception of other people has more depth. They are better equipped at appreciating others’ reasons for action, or the basis of others’ emotions. But this maturity functions in a piecemeal fashion. They show more understanding of their friends, but not of their teachers.”
—Terri Apter (20th century)
“One of the reasons for the failure of feminism to dislodge deeply held perceptions of male and female behaviour was its insistence that women were victims, and men powerful patriarchs, which made a travesty of ordinary people’s experience of the mutual interdependence of men and women.”
—Rosalind Coward (b. 1953)
“According to our social pyramid, all men who feel displaced racially, culturally, and/or because of economic hardships will turn on those whom they feel they can order and humiliate, usually women, children, and animals—just as they have been ordered and humiliated by those privileged few who are in power. However, this definition does not explain why there are privileged men who behave this way toward women.”
—Ana Castillo (b. 1953)
“Ours was a highly activist administration, with a lot of controversy involved ... but I’m not sure that it would be inconsistent with my own political nature to do it differently if I had it to do all over again.”
—Jimmy Carter (James Earl Carter, Jr.)