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Raising the minimum wage improves employment and consumption without big impact on prices

The crisis has been particularly hard on the job. In Spain and Greece unemployment has broken all records. Conventional economists always consider that unemployment is reduced by decreasing wages, like all economic adjustments must be done via prices, in this case the price of labor as stated in the theory of the labor market. This is the way it has been implemented in Europe for austerity. Declining wages as part of the general price deflation was to start moving the economy from below. However, raising the minimum wage can reduce unemployment, not increase it, as mainstream economists think. In this post we review some of the new research on the minimum wage and its impact on economic activity, inequality and poverty.

Improving employment and consumption

The unemployment issue concerned not just Europe but the entire world. Dube has been for over 20 years researching the issue of employment in different regions of the United States and it has been shown that increasing the minimum wage is not only good for jobs but also for consumption. If wages had only been adjusted for inflation and productivity, today it would be $ 23 an hour, three times the current value. If in 60 years the minimum wage stood at 47 percent of the average wage in the U.S., today it has been reduced to 37 percent. So the Obama administration seeks to raise the minimum wage to $10.10 an hour and index it to the rate of inflation. In a recent speech, Obama highlighted the economic and political dangers of growing income inequality. As expected, opponents of the minimum wage increase went away with the usual chorus of economists who defend the mainstream: an increase in the minimum wage will only lead to more unemployment, especially among low-skilled workers.

Minimum Wage Rise and Fall

Minimum Wage Rise and Fall

Increases productivity

Research  indicates that while an increase of 10 percent in the minimum wage initially involves higher costs to the company, these are later offset by the decrease in labor turnover and increased labor productivity adds permanence. Workers earning the minimum wage are generally of the services sector and job rotation produces poor quality care that can be improved if the worker is stabilized at work. Better quality care can also increase customer loyalty and this company that gets the increased costs. Moreover, a gradual increase in the minimum wage does not necessarily affect prices significantly. At the macro level, a 10 percent increase in the minimum wage is associated with an increase of less than half a percentage point in the general price level which belies the conventional assumption that indicates that minimum wage is triggering an inflationary spiral.

Reduce poverty

Another chorus of mainstream economists is that most minimum wage workers are teenagers but 88 percent of workers have an average age of 35 with 55 percent working full time with an annual salary of $15,080, 19 percent below the poverty line for a family of three. Many families depend on these jobs they do in fast food and require public assistance programs at a cost of 7,000 million annually. In these cases, the minimum wage increase is a powerful tool for poverty reduction. But poverty is not the only relevant point of these analyzes. Increased income of the most vulnerable people to help stimulate spending and consumption at a time when demand continues depressed, preventing a robust recovery to strengthen the recovery job. Why against all warnings and choruses of orthodox economics, increasing the minimum wage would improve the level of employment and not worsen it as stated in the troika. The low-income workers spend all their income on consumption, thus increasing their salary has a direct impact on demand and consumption and hence employment. Raising the minimum wage is a policy tool that can help end the crisis. It only needs to reach the ears of the troika.

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