Tuesday, May 4, 2010

James K. Galbraith On The Minimum Wage

Galbraith demolishes many pillars of the conventional wisdom in his book The Predator State. One of his more interesting discussions centers on the effect of raising the minimum wage. The conventional wisdom would predict that the effect would be to eliminate jobs and raise the level of unemployment. Galbraith argues that the data indicate just the opposite. When the minimum wage is raised unemployment actually goes down. His explanation for why this happens is not totally convincing at first consideration. He argues that making employees more expensive to employers requires them to use their employees in a more efficient manner. In principle, this can be a win-win situation: the employee ends up with a more satisfying and more responsible job, and the employer reaps the benefit of greater productivity. This claim becomes more credible when Galbraith describes what is referred to as "The Scandinavian Model."

"The Scandinavian countries are the most egalitarian capitalist economies on earth. They have nearly universal unions, high minimum wages, and a strong welfare state. But as trade campaigners often neglect to acknowledge, they also are highly open. They practice free trade. Business there is free to import, export and outsource. Business there is free to hire and fire, change lines of business, and otherwise conduct itself as it sees fit.....There is, however, one thing you are not free to do: you are not free to cut your wages. You are not free to compete by going after cut rate workers, either native or immigrant. You are not free to undercut the union rate. You have to pay your workers at the established scale, and if you cannot do that and earn a profit, too bad for your business. The effect of this on business discipline is quite wonderful."

Given this environment the Scandinavian countries enjoy prosperous economies and usually among the lowest unemployment rates in Europe.

This approach ties into the overarching issue of whether our economy should be producing more highly skilled jobs worthy of a living wage, or reducing tasks to their minimal scale so that ever cheaper labor can be sought to perform them. More on that later.

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