Minimum Wage in The United States - Reasons For Economic Controversy

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:

    Write to the point: say immediately what you want to say most, even if it doesn’t “come first.” There are three reasons for doing this. First, you will then have said it, even if nothing else gets said. Second, your readers will then have read it, even if they read no more. Third, having said it, you are likely to have to say something more, because you will have to explain and justify what you chose to say.
    Bill Stott (b. 1940)

    I should like to know what is the proper function of women, if it is not to make reasons for husbands to stay at home, and still stronger reasons for bachelors to go out.
    George Eliot [Mary Ann (or Marian)

    Under weak government, in a wide, thinly populated country, in the struggle against the raw natural environment and with the free play of economic forces, unified social groups become the transmitters of culture.
    Johan Huizinga (1872–1945)

    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.)