Tatsat Chronicle Magazine

How Minimum Wages May Raise Unemployment

October 15, 2021

Higher minimum wages, according to neoclassical economic theory, will lead to fewer employment

Wages stagnation is now widely accepted across the political spectrum as the country’s main economic concern. Since 1979, earnings for the great majority of American workers have remained stagnant or decreased, as EPI has documented for nearly three decades (Bivens et al. 2014). Despite a 149 percent increase in real GDP and a 64 percent increase in net productivity during the same time span, this is the case. In short, for the last three and a half decades, the potential for adequate, broad wage increase has existed, but these economic gains have not trickled down to the great majority.

Aggregate variables that have contributed to excessive unemployment for much of the previous four decades, as well as others that have propelled the financialization of the economy and excessive CEO pay rise, are examples of policies that have hampered wage growth. Policymakers can help deliver broadly shared wage growth by prioritising full employment—thus tightening the labour market and forcing employers to offer pay raises to attract and retain workers—and by enacting tax and other policies that ensure that economic gains do not disproportionately benefit the top 1%.

Keeping interest rates unchanged until wage growth reaches 3.5 to 4%, enacting employment programmes targeted at hard-hit communities, increasing public investment in transportation, broadband, R&D, and education, and reducing the US trade deficit are all policies that will help create jobs and reach full employment.  Raising the minimum wage, updating overtime rules, strengthening collective bargaining rights, regularising undocumented workers, ending forced arbitration, securing workers’ access to sick leave and paid family leave, closing race and gender inequities, awarding government contracts only to firms that adhere to wage, health, and safety laws, and tackling workplace abuses such as misclassification and wage theft are all things policymakers can do to help wages grow.