Category Archives: labour market

Law of demand in the labour market ?

There was an interesting article on CNN-money today, on increasing the minimum wage to boost the US economy.  Whats interesting about this article is it goes beyond the problem of unemployment into the closely related problem of underemployment. Many Americans today are doing jobs which are very low paying.

Dr Paul Osterman of MIT argues that raising the minimum wage is the way to go to improve the economy, he is backed by Paul Sonn of the National Employment Law Project action fund and Alan Krueger potential new American chief economic advisor. (I find that encouraging). William Dunkleberg who represents the National Federation of Independent Businesses disagrees, he says raising wages will reduce the demand for wages and result in more unemployment. (I am strongly sensing a libertarian here, who the Keynesian in me tends to disagree with.)

We have all seen this argument before, allow the markets to deal with themselves and lead to the optimal wage. Any interference is counterproductive. What if I find more displeasing are some of the comments advocating frugality and saying you should be able to live off 7.5 dollars an hour without demanding more. So let me point out what I disagree with rather than just cribbing! (You should stop me when I go off on those rants).

Firstly, since when did we start thinking that wages should be determined by what people can live off ? I know people in Africa living off less than a dollar a day, so should that be the new wage ? Alright now that is done away with! I want to ask, why do businesses exist ? They exist to serve a demand. A demand which arises from the same workers they pay. Right now interests rates in the United States are very low, (yes I know the banks are still unwilling to lend, but that would change too if large consumer demand is perceived) I would suspect that the lack of ¬†incentive to produce doesn’t arise from a lack of availability of funds but from the perceived lack of demand from the population. Out of work or underemployed people aren’t going to create the demand required by the economy.I know, it is very similar to the economics during the depression, that’s even better reason to not make the same mistakes again. YES, the solution is to raise their wages and give them the confidence to spend more, a perceived consumption demand coupled with low interest rates should boost confidence to increase investment too. This could also additionally lower the onus on government spending to drive aggregate demand. (Don’t the libertarians have a problem with that too ? , Well you cant have it all your way !) .

I am not saying raising the minimum wage is a sure shot solution to the slump in the economy and the debt crisis, but it definitely is a step in the right direction.

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Posted by on September 28, 2011 in Economics, keynes, labour market, Politics


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