A significant number of economists have begun to realize
that the US economy has been experiencing a state of stagnation in which not
enough demand has existed in order to induce corporations to invest their
earnings in new production. Usually this
situation is addressed by the federal government providing a fiscal stimulus by
funding investments in projects that will provide more economic activity via
the purchase of goods and services. The
stimulus to the economy then comes from the increased sales some companies will
see and the extra wages that will be paid in providing those services. The economy as a whole will benefit to the
degree that the effects of additional production and increased wages are widely
distributed. There is no guarantee that
increased production will generate spin-off production directly, but it is
certain that a large fraction of any increase in wages will be spent and
contribute to general economic activity.
Given the above reasoning, it would seem most efficient
to directly increase wages if one wishes to stimulate the economy. One can try to accomplish this effect by tax
cuts, but those tend to go preferentially to the highest tax payers who are the
least likely to spend any largess in stimulating the general economy. One could conjure up a tax cut that would
deliver money directly into the hands of lower income people, or one could
declare a tax holiday that would benefit some sector of the population
preferentially. In this case, consumers
who are also debtors will tend to use much of the extra income to help pay off
bills, particularly if the increase in income is viewed as temporary.
It would seem that the most efficient way to inject money
directly into the economy is to increase the wages of people who have no choice
but to spend the money. Fortunately (or
not) the US has a large number of workers living at or near the poverty line who
are in great need of the means for increased consumption. An efficient way to boost the economy, and by
so doing provide income to those most in need, would be to increase the minimum
wage. Presumably, the greater the
increase, the greater will be the stimulus.
Such a move is said to produce severe economic
consequences. Businesses will be affected
with higher wages costing some to raise prices, some to eliminate workers, and
some to close up shop. However, the increase
in wages will show up as increased activity which will have a counterbalancing
effect. Will such a move improve the
economy and the life of its workers, or will it diminish both? No one really knows. Small changes in minimum wage or large
changes that were only applied locally have led to arguable results. What one needs to understand the dynamics is
for a large increase in minimum wage to be applied throughout the entire
economy and to observe the long-term results.
Fortunately, South Korea seems poised to perform that experiment for us.
An article in The
Economist titled Promising the Moon
in the paper edition (a play on the name of the new President of South Korea)
became the more relevant South Korea tries to boost the economy by hiking the minimum wage online. South Korea might seem an unlikely nation to
pursue such a policy. The country has
long been blessed with high growth rates that reflected its ability to produce
high-value goods that sold well throughout the world. But all growth brings with it problems. One is the inequality that inevitably comes
with capitalism. The dependency on
export-driven growth can also leave a nation too vulnerable to the whims of
international markets. The goal of the
new President, Moon Jae-in, is to address both issues by increasing the minimum
wage by about 55% by 2020.
“On the face of things, the South Korean economy is doing well. Growth
has averaged 3% annually over the past six years, a decent outcome for a period
when global trade was sluggish. Income per person is about two-thirds of
America’s, up from a third 25 years ago. The unemployment rate is just 3.6%.
South Korea spends more as a share of GDP on research and development than
almost any other country.”
“Nonetheless, poorer Koreans resent rising inequality….A study by the
International Monetary Fund last year found that the top 10% of South Koreans
receive 45% of total income—a greater concentration than in other big economies
in Asia. The proportion has risen sharply over the past two decades as the
wages of the rich have grown faster than those of the poor….Adjusted for inflation, household incomes
fell last year, something that in recent decades had happened only in the wake
of financial crises.”
“The bet is that the jump in wages will feed through to stronger
consumption, particularly as low-earners tend to spend more of their pay than
the rich do. In addition to propping up growth, stronger consumption would make
South Korea less reliant on exports and so less beholden to the whims of China
and America, Mr Moon predicts. It should also help reduce inequality.”
The article provides this chart to help place what South
Korea intends to do in comparison with policies in other countries.
Since The Economist
is quite conservative in its economic principles, it suggests that disaster
might be the outcome. Let us hope
not. History tells us that a required
minimum wage provides a very stable floor to wages. The only way to improve the wages of the
lowest-paid workers is to raise that minimum.
The interested reader might find the following articles
informative:
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