Monthly Archives: February 2014

Does the Minimum Wage Stimulate the Economy?

There is a common argument in favor of the minimum wage. It goes something like this:

If we raise the minimum wage, workers will have higher wages. Thus, they will spend more on goods, and this demand will stimulate the economy.

There are a few problems with this line of thinking.

1) This assumes that the economy should be shifted toward consumption from investment. Since investment is geared toward the future, it is possible such a policy, if correct, could have the consequence of lowering the amount of goods in the future.

2) Even if the minimum wage is raised, for any sense to be made of this argument, the aggregate amount going to workers in wages has to be increased. If the basic argument against the minimum wage is right, that a price control on wages creates unemployment, then it is not necessarily the case that aggregate wage payments will initially go up, which is what is needed to “stimulate the economy.”

3) Ok, what if we drop, for the sake of argument, the claim that unemployment will cause aggregate wage payments to go down (or stay at the same level)? We have to immediately recognize that an increase in aggregate wages is still hard to stipulate. For example, if business A decides to increase wage payments, that’s less money it can spend on other factors of production, such as capital. In other words, it has to decrease payments to its suppliers, and these other businesses will end up reducing their own workers’ wages.

4) For aggregate wages to go up, then, it seems, that this money has to ultimately be taken out of payments to natural resources. Aggregate payments to natural resources has to go down. But an arbitrary allocation of money away from natural resources toward labor hampers the market’s function in economizing and allocating resources to their most highly valued ends. TheĀ  resulting allocation will be inferior to the market allocation, and goods of lesser value will be produced since a less efficient combination of resources will be employed in creating those goods. The minimum wage will have the unintended consequence of producing lower quality goods for the very people who want it, even if it increases their wages.

#4 is my own line of thinking – as far as I know, I have not seen it in other Austrian works I have read (I might simply not be very well read though!). What do you guys think about this?

Photo Credit: Annette Bernhardt via Compfight cc