Since I worked closely on it during the editing process (and because it’s a great piece) I wanted to present some key highlights from a new article on the U.S. minimum wage in The Globalist by George R. Tyler, author of “What Went Wrong: How The 1% Hijacked the American Middle Class and What Other Countries Got Right” and a former deputy assistant U.S. treasury secretary under Bill Clinton:
In both the United States and EU, insufficient aggregate demand has replaced the business cycle as the bugaboo of economists, underemployment its hallmark. And the only place to find inflation is in history books and full employment awaits the next bubble. “We have become an economy whose normal state is one of mild depression,” is how Paul Krugman puts it.
The traditional macro tools seem unhelpful: monetary policy is all-in and fiscal policy remains hampered by politics and excessive public debt. Others solutions such as inflation, negative interest rates or public investment should be pursued, but are not sufficient remedies.
The most promising option is to raise real wages. That proposition won’t puzzle European scholars familiar with the Australian and northern Europe wage determination mechanisms. For decades, these countries have effectively and providentially linked real wages there to productivity growth.
The relatively high marginal spending propensities of lower income Americans suggest the demand impact would be maximized by raising the minimum wage.
Germany will soon be imposing a nationwide minimum wage of €8.50 an hour ($10.50 or so), which will spur domestic demand. The latter would be a step in the right direction of moderating its hot-button current account surplus.
In Australia, the minimum wage exceeds U.S. $11 adjusted for purchasing power. Yet, its growth in GDP has exceeded the United States for years and Australia has an unemployment rate of 5.8%, below that of the United States. Labor participation is also higher than in the United States. Clearly, a high minimum wage has not destroyed jobs or crippled growth.
The United States should similarly support demand by raising its nationwide minimum wage, now set at $7.25 per hour, which is well below rates abroad. Federal Reserve Bank of Chicago economists have concluded that a $1 increase in minimum wages would raise incomes in affected households by $250 per quarter and spending even more the following year.
Raising the minimum wage floor will ratchet up wages for as many as 30 million other employees. Moreover, research by economists such as Arindrajit Dube is concluding that raising minimum wages can even have a tiny positive impact on employment, with employer costs ameliorated by reduced labor force turnover.
Importantly, both Germany and the U.S. should adopt the Australian and French policy of indexing minimum wages to productivity growth as well as inflation.
That step would also see the bizarre American taxpayer subsidy to low-wage employers like McDonalds or Walmart wither away. A Democratic Congressional study found that last year public healthcare subsidies alone averaged $3,015 for each Walmart employee in the typical state of Wisconsin. Other subsides raise the total to as much as $5,800 per employee.
Raising labor costs will slow job creation, but an extensive analysis by economists at the International Labor Organization recently concluded that the impact on aggregate demand in the European Union (EU) of a broad one percentage point real wage increase was nonetheless sufficient to raise employment on balance.
Above all, the weight of decades of evidence in Australia and northern Europe document that linking wages to productivity growth in this fashion will not jeopardize U.S. competitiveness or engender wage drift.