Recently, some people have argued that the minimum wage should be reduced to employ more people. Krugman has posted several responses to this proposal. Since I've linked them, you may read his analysis of this proposal.
We do know that from the view of an individual employer, he/she will likely argue that if they paid their employees less, they'd be able to hire people for more hours. Whether this leads to more income overall is questionable. Though that is a question. From Econ 201 (literally), minimum wage lies above the equilibrium wage in the labor market, by definition otherwise you don't need minimum wage. This then leads to a quantity supplied of labor greater than the quantity demanded by employers. This is usually as far as the analysis is taken. What about the view from the economy as a whole?
Recall that a 'factor of demand' that is, one of the 'things' that affect demand for goods in the economy is income. Now income and a wage are two different things, but let's just say that a cut in wages is a cut in income and vice versa (this is the assumption that minimum wage critics use). Higher minimum wage leads to more income and then leads to more goods being demanded. In turn, since the demand for labor is what's called a 'derived demand,' the higher demand for goods by workers leads to higher demand for labor by employers. In this way, a higher minimum wage can lead to more people being employed than before the minimum wage was increased.
People will counter with:
1. Higher minimum wage will lead to lower profits for the employer.
Perhaps. Not clear though given the higher sales from people having more income. Let's say it does lead to lower profit. Yes, the employer will buy less stuff. Though, I suspect the minimum wage employee will spent a greater percentage of his/her income than will the employer, though there will certainly likely be cases where this is not so.
What strikes me about this entire argument is how self-serving it is.
The July 18, 2009 issue of the Capitol Times notes the following:
""The source of wealth has changed over the past 30 years; corporations have become the engine of inequality in the U.S.," says Sam Pizzigati, associate fellow at the Institute for Policy Studies in Washington D.C. "In the past, wealth came from ownership: Today it comes increasingly from income."
The highest incomes come from executive pay at top corporations. In 2007, the ratio of CEO pay to the average paycheck was 344 to 1, lower than the record 525 to 1 ratio set in 2001, but substantial.
This year's ratio is estimated to decrease to 317 to 1. In the '60s, '70s and '80s, the average ratio fluctuated between 30 and 40 to 1.
Over 40 percent of GNP comes from Fortune 500 companies. According to the World Institute for Development Economics Research, the 500 largest conglomerates in the U.S. "control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 percent of the sales, and collect over 70 percent of the profits."
Corporations systematically created a wealth gap over the last 30 years. In 1955, IRS records indicated the 400 richest people in the country were worth an average $12.6 million, adjusted for inflation.
In 2006, the 400 richest increased their average to $263 million, representing an epochal shift of wealth upward in the U.S.
In 1955, the richest tier paid an average 51.2 percent of their income in taxes under a progressive federal income tax that included loopholes. By 2006, the richest paid only 17.2 percent of their income in taxes. In 1955, the proportion of federal income from corporate taxes was 33 percent; by 2003, it decreased to 7.4 percent. Today, the top taxpayers pay the same percentage of their incomes in taxes as those making $50,000 to $75,000, although they doubled their share of total U.S. income.
"Over the past 30 years, the income of the top 1 percent, adjusted for inflation, doubled: the top one-tenth of 1 percent tripled, and the top one-one-hundredth quadrupled," says Pizzigati. "Meanwhile, the average income of the bottom 90 percent has gone down slightly. This is a stunning transformation."
Meanwhile, wages for most Americans didn't improve from 1979 to 1998, and the median male wage in 2000 was below the 1979 level, despite productivity increases of 44.5 percent. Between 2002 and 2004, inflation-adjusted median household income declined $1,669 a year. To make up for lost income, credit card debt soared 315 percent between 1989 and 2006, representing 138 percent of disposable income in 2007. "
