Wage rates and jobs: myths and magic

Abstract

Chapter 6 deals with two controversial topics, namely is trickle-down theory no longer relevant, and does an increase in the nominal wage rate (with productivity constant) increase unemployment? Many people have pointed out that the real wage rate, as measured by the nominal wage rate (W) divided by the Consumer Price Index (CPI) has not increased over the last 40 or 50 years along with labor productivity. In other words, it appears as though trickle-down no longer functions. However, the CPI inflation rate was biased upward annually by 1.1 percent for decades, and even now is biased upward by about 0.6 percent. This means that the real wage rate, W/CPI, has been biased downward. When economists adjust for the CPI bias, the result is that the real wage rate has increased with productivity, but by a slightly smaller percentage. Thus, it appears as though trickle-down is not dead. One idea that is strongly ingrained in conventional economic thinking is that an increase in the minimum wage rate causes firms to hire less labor, thereby increasing the unemployment rate. This, however, is a microeconomicconclusion. The macroeconomic perspective is that a higher minimum wage rate will increase income for the poor significantly, thereby increasing aggregate demand. The latter, in turn, will increase output and jobs in the economy. A back of the envelope calculation suggests that this increase in jobs might significantly offset any initial direct loss in jobs. However, we do not know the overall net effect.