Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 6 The Economics of Labor Markets
Chapter 20 of 36 Income Inequality and Poverty
Section 14 of 20
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Political philosophers have various views about what role government should take regarding distribution of income.
Most people believe at the very least government should
· try to help the most needy
· provide a "safety net" to prevent anyone from falling too far
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Here we will review some of the options policymakers consider to reduce poverty and provide a safety net
· minimum wage laws
· welfare
· negative income tax
· in-kind transfers
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Minimum wage laws
Advocates of a mandated minimum wage view it as a way of helping the working poor without any government cost, because employers pay.
Critics view it as harming those it is intended to help because, per Figure 5, it creates unemployment.
A high minimum wage
· forces the wage above the level that balances supply and demand
· raises the cost of labor to businesses
· reduces the quantity of labor firms demand
· results in higher unemployment among lower-skilled workers
· contributes to inflation, business owners must raise prices to cover the higher costs
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With a mandated minimum wage
· workers who remain employed benefit from a higher wage, but maybe not enough to cover higher prices
· those who might have been retained or hired at a lower wage are worse off, because they lose or do not get jobs
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The magnitude of these effects depends on the elasticity of demand.
Advocates of a high minimum wage argue the demand for unskilled labor is relatively inelastic.
So, a high minimum wage reduces employment and raises prices slightly.
Critics of the minimum wage argue, and most data supports their argument, the demand for unskilled labor is relatively elastic.
So, a high minimum wage reduces employment and raises prices.
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Grok:
In economic theory, a binding minimum wage raises wages for low-skilled workers but reduces employment due to lower labor demand, making the net effect on the total wage bill (wages × employment) ambiguous—it depends on labor demand elasticity.
If inelastic (< 1), the wage increase outweighs the job loss, boosting total wages; if elastic, total wages paid drop.
Empirically, based on extensive U.S. and international studies, labor demand is typically inelastic (elasticity ~ -0.2 to -0.3), leading to smaller disemployment amount than total wages paid, especially for low-wage groups.
However, long-run effects may include more automation or price pass-through (product price increases), offsetting wage gains.
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How was the employment situation in Argentina affected when Juan Peron raised the minimum wage?
Gemini:
When Juan Perón raised the minimum wage during his presidency (1946–1955), it significantly boosted workers' purchasing power and improved their living standards in the short term.
However, the economic policies behind the wage increases contributed to long-term inflation and instability that eventually harmed employment.
Short-term effects
Increased real wages:
Between 1945 and 1949, Perón's policies led to a 22% increase in real wages for workers, backed by government enforcement of minimum wage laws and price controls.
The share of national income going to wages also rose significantly.
Improved standard of living:
The wage hikes, combined with expanded social security and benefits like paid holidays and medical care, led to an improved quality of life for the working class.
Initial economic boom:
These changes were initially financed by Argentina's export revenue from the post-World War II economic boom, which helped drive Perón's redistributive policies.
Long-term effects
Inflation outpaced wages:
By 1950, wage growth pushed prices up.
After Perón's overthrow in 1955, inflation eventually outran wage increases, reducing workers' real income.
Stagnant growth:
Over time, populist policies that redistributed income and favored special interest groups led to stagnant productivity and poor economic growth.
Inflationary spending:
Perón's spending was not supported by sufficient investment, and his government's response was to print money, which caused high inflation.
This destabilized the economy and discouraged savings and capital investment.
Restrictive labor market:
The strengthening of labor unions under Perón, while initially beneficial for workers, eventually created an inflexible labor market that hindered the economy in the long run.
Loss of purchasing power:
While real wages increased in Perón's first years, a downturn after 1949 and subsequent periods of instability eroded much of that gain, and prices for basic goods soared.
See Figure A for GDP growth information
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advocates of a high minimum wage
takai saitei chingin no yōgo-sha
高い最低賃金の擁護者
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