Raise Profits by Raising Wages?

Abstract

So long as the marginal propensity to consume out of is greater than that out of profits, any rise in wage rates at the expense of profits will the aggregate marginal propensity to consume-since the marginal propensity to consume out of will receive an increased weight relative to that out of profits-thus raising the level of income that can be supported by a given level of investment and federal expenditure. And the marginal propensity to consume out of will be higher than the marginal propensity to consume out of profits so long as the average wage income is lower than the average profit income, which may be expected. This for two reasons: (1) the marginal tax rate on high incomes is higher than that on low incomes; (2) the evidence shows that the marginal propensity to consume out of disposable income is lower at higher disposable incomes. It is occasionally asserted that wise business policy would favor increasing wage rates at the expense of profits, since the consumption effect would the general level of activity and reverberate to the benefit of profits. The argument runs as in the previous paragraph until an increased level of income is proved a consequence; then the conclusion is drawn that higher aggregate profits will accompany the higher income level. Whether or not the last step of this argument is taken with tongue in cheek, it is interesting to see whether total profits can be raised through decreasing the relative profit share of income and, if they can, what the conditions are under which they may be so increased and whether these conditions may likely prevail. Mathematically it can be shown that there are conditions, extreme but not unreasonable conditions, under which the raise profits through higher wages argument is valid; the conclusions mathematically arrived at can be demonstrated verbally. The analysis here is entirely static: the values of all economic variables are assumed to be mutually determined by simultaneous solution of demand functions and economic identities. For simplicity, all functions are taken as linear. The conclusions can be stated as follows: 1. So long as government expenditure and investment are constant a rise in wage rates at the expense of profits will increase aggregate income but decrease profits, if the marginal propensity to consume out of is less than unity. 2. When we complicate our system by admitting relationships between, e.g., investment and income, or government expenditures and