A Higher Minimum Wage Isn’t Monetary Policy, So Matt Yglesias Isn’t Interested
That’s how I should translate this recent post, right?
The problem is that while a given firm can try to convince customers to accept higher prices in exchange for higher wages, in the economy as a whole this isn’t a matter of persuading anyone to accept anything. The Federal Reserve prevents the price level from rising more than 2 percent per year. The Fed is open to the idea that price increases driven by temporary fluctuations in global commodities should be ignored, but the Fed deems price increases driven by higher wages to be especially alarming. So higher wages have to be processed as some combination of lower profits (which is fine at a time of record profits) and reduced employment (which is not so fine at a time of high unemployment).
On the other hand, at a time of high employment and incipient inflation, everyone would agree that a hike in the minimum wage would just push prices up, which in turn would prod the Fed to tighten more sharply – which in turn would throttle economic growth. Right? Why would a higher minimum wage not backfire in a tight labor market if you’ve got a Fed-centric view of what makes the economy function?
Yglesias suggests at the end that a higher minimum wage might make sense in current market conditions, but only in tandem with a looser money policy. But if he really what he said earlier in the post, then this isn’t correct. If the Fed announced a 3% inflation target, that wouldn’t mean wage hikes no longer “counted” towards that target. A hike in the minimum wage would still, at the margins, make the Fed more inclined to tighten sooner, and hence would be counterproductive. Isn’t that Yglesias’s point?
I think Yglesias has just signed on to the basic conservative case against the minimum wage: that all a higher minimum wage does is increase unemployment and reduce economic growth.
The case for the minimum wage depends on the case for redistribution, a case I think Yglesias agrees with. It starts with an argument that labor is at a bargaining disadvantage vis-a-vis capital in current market conditions, and therefore wages are lower than they might optimally be. It proceeds to argue that wage subsidies, under weak labor market conditions, will be pocketed by capital and/or consumers – the dominant effect will be to hold down pre-subsidy wages. Ron Unz made the case for a substantial hike in the minimum wage here; I won’t repeat his work.
But the point is this. If you hike the minimum wage, one of three things has to happen. Either businesses hike prices to compensate – and you get an increase in inflation. Or the return to capital – profits – drops to compensate – which will, at the margins, encourage capital to move overseas for higher profits. Or businesses have to innovate to figure out how to pay the higher wages without sacrificing profits. But the first option – hiking prices – is only an option if demand is high. If demand is slack – as currently – it’s not. And therefore you need worry much less about the Fed reacting negatively to counteract the effect of a hike in the minimum wage than you would in tight labor market conditions.
As for the two other possible responses – lower profits and/or innovation – yes, they could raise unemployment, but by how much? Innovation could simply mean moving jobs offshore – but that’s not an option for home health aids or construction workers. Lower profits could result in a shortage of capital for investment – but we’re currently many years into an investment glut. And there’s always the possibility that innovation doesn’t just mean moving jobs offshore – it could mean genuine increases in productivity, which make us all wealthier, but in this case the increase would have been “pre-captured” by labor in the form of higher wages rather than, as has been the case over the past generation, being captured by capital in the form of higher profits and by the health-care sector in the form of higher insurance costs. (In fact, there’s evidence that a weak labor market discourages innovation to raise labor productivity precisely because it makes such innovation unnecessary. So it’s not completely nuts to think that a hike in the minimum wage might spur some useful innovation at the low end of the skill scale.)
Meanwhile, the rise in wages at the low end should result in a spike in demand, which would boost nominal growth and therefore result in lower unemployment. I’m not in a position to do the math to figure out which effect would predominate – and neither is Yglesias – but if you simply assume the effect on demand from redistribution is zero then you’re assuming part of the case against raising the minimum wage from the beginning, which is what the conservative case against does.
Is that Yglesias’s view as well?
I know Yglesias thinks it’s really, really important for the Fed to be looser. But that’s not the only policy lever in the universe. Why piss on all the others?