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James K. Galbraith: Raising the minimum wage would boost demand and give millions a better wage

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.

If there’s—one thing most economists agree with is there’s not enough demand in the economy. People just don’t have enough money to buy stuff. And that mostly has to do with stagnant wages, and then unemployment, although the two things are awfully connected with each other. Well, is there one thing that could be done to deal with this quickly?

Now joining us with a proposal is Professor James K. Galbraith. He teaches at the LBJ School of Public Affairs at the University of Texas at Austin. He’s also the author of many books, including The Predator State and Inequality and Instability. Thanks for joining us, James.


JAY: So what would be one thing that could be done in terms of public policy that would start dealing with this issue of wages?

GALBRAITH: Well, as you know, for many years now a great many of us have been saying that the government should be in the business of creating more jobs directly or indirectly with an expansionary program. And we have been blocked on that avenue, basically. At the moment, the debate has been dominated by debt and deficit worriers, one might even say hysterics. What I propose, therefore, is a measure that would not involve increasing federal budget expenditures and would in fact modestly reduce the deficit. And that proposal is to raise the minimum wage and to raise it very substantially.

JAY: How much would you raise it?

GALBRAITH: Oh, I would say $12 an hour from the present, you know, and change. So a very substantial amount, enough to make a material difference in the lives of a large part, of a substantial part of the working population, and therefore to change their household balance sheets to give them a substantial increase in purchasing power. That’s the idea behind this suggestion.

JAY: So let’s examine the consequences of this. First of all, what would be the effect on wages generally that are now somewhat higher or higher than the minimum wage? If you do have this kind of floor at $12, what does that do to wages throughout the economy?

GALBRAITH: Well, for most people who are being paid substantially more than that, the effects would be very small. For manufacturing in general, the effects would be practically nil, because there are almost no manufacturing jobs that are being paid less than that now. So we can—most people would not see this directly in their paycheck. A significant number of low-wage workers would. A significant number of women workers would. And it would improve conditions vary significantly in the relatively low-wage parts of the country. It would not make much of a difference in New York, but in the south of Texas the effects would be, you know, substantial—anyway, they would be material. So that’s, I think, broadly how I’d answer that question.

To take a specific example, I’m told that the average wage in construction in the state of Texas has been driven down to about $10 an hour by a process of outsourcing, basically, of labor, so that you have a lot of small contractors who are mainly using migrant labor and hiring it out on a daily basis. And this would have a significant effect on that structure of jobs. It would improve it by making those jobs more stable, making them more attractive to people who are documented residents, and giving the people who are in that business a much better shot at a moderately decent standard of living.

JAY: So the two obvious arguments are going to be the issue of what happens to small business and inflation. So let’s start with small business. There’s a lot of marginal, borderline small businesses, especially in the service sector, that are probably going to argue they couldn’t go from $7 to $12.50. What do you make of that?

GALBRAITH: Well, I think that that’s true for a certain number of small businesses. Would it have a net negative or positive effect on small businesses generally? Well, we can look around the world, and we do observe countries—there are countries in Europe, for example, which have very much higher minimum wages than we do and which have thriving small businesses sectors. So you’ve got to weigh the effect against what you call the marginal small business against the fact that the customers of small business would have significantly higher incomes, and they would be going in and providing a stronger demand for the products and services provided by small business. So while there would be a pressure on one part of that sector, there would be advantages for other small businesses in the sector as a whole. I don’t think there’s any clear reason to believe that the sector as a whole would be smaller, that there would be fewer jobs. There might even be more.

JAY: And there’d be more because there’d be more demand.

GALBRAITH: Yeah, sure. I mean, we observe this. The fact is that in the countries which have compressed wage structures, somewhat more compressed than ours, where the bottom of the wage scale is higher than it is here, there’s no shortage of small businesses in those countries. It’s not something which is driven out by having a decent minimum wage. On the contrary. But the structure of small businesses is somewhat different from what it is here.

JAY: So the argument is, even while there are some small businesses who perhaps might go out of business or not be able to make it as a result of this, overall there’d be a net gain of jobs because there’s a net gain in demand.

GALBRAITH: Well, I’d say—I’d be a little more modest than that. I’d say you cannot make a persuasive argument that it would be fewer. I think there’s a reasonable chance there would be more, but I’m not going to make a dogmatic claim. Yes, some small businesses would be affected, and I understand that the people who run those businesses would be unhappy about this. But I think that is true of any change that you make in any policy in the country. If you have a problem of mercury pollution and you put in a rule that says you can’t put mercury in the groundwater, someone who’s putting mercury in the groundwater has to change their way of doing business or go out of business. That is true of any public policy whatsoever.

JAY: And what do you make of the inflationary effect? The argument will be that the prices in the service sector will go up in order to deal with the minimum wage, and that this minimum wage may have a general effect on raising wages, in the sense that people in the next tier or two up from minimum wage wouldn’t be as threatened, you could say, of falling out of a job, because they’re going to fall out of a job at a higher minimum wage, which may give them a little more confidence to fight for higher wages. Now, a lot of people might think that’s a good thing. On the other hand, is that an inflationary thing?

GALBRAITH: The second argument, I think, is true, and I think it is a good thing. It would strengthen people in the lower tiers who are not actually at the minimum.

I do not see an ongoing effect that would produce inflation. I’m not proposing indexing this minimum wage to the rate of inflation. There would be an adjustment. Again, those businesses which are affected, some of them would raise their prices and some of them would make other adjustments, but I don’t see that being a widespread effect in the economy.

So I think the inflation worries here are really very minor. It would not affect, obviously, the price of manufactured goods generally. It would not affect the price of manufactured imports. It would not affect the price of oil. It would not affect the interest rate. It would not affect anything which is a really major determinant of inflation in our experience in this country. And it would not generate the kind of cycle of what used to be called a wage-price spiral, where one powerful unionized industry raises its wages and set a pattern for the others. I think that for those who are already better paid, there would be no effect on their bargaining position at all.

JAY: It’s interesting. In Egypt, the higher minimum wage is one of the rallying cries of the workers movement in Egypt. Do you see this as a sort of rallying cry here?

GALBRAITH: Well, I am learning a little bit, I have learned some from looking at the experience of other countries. And one of the things you observe—and this is particularly true in Latin America—is that in places where the minimum wage has been used as a substantial tool of improving labor market conditions—it’s true in Brazil, for example—you get a substantial reduction of inequality and a substantial reduction of deep poverty. And we’re in a different situation in this country, because we are a much richer country, but the same principles would apply here. This would generally improve social conditions. And there are very little evidence of the kinds of harms that people who have been employed to oppose increases in the minimum wage claim that there are.

JAY: Now, this—likely to be practical about all this, practical politically—. This isn’t very likely to pass at a federal level, given the state of paralysis of federal politics, so I would think you’re talking state by state. And can this happen state by state, in the sense that—do you start getting competition—this state’s minimum wage is too high, so it’s not competitive with this other state that isn’t? And am I right, do you think, that this would likely have to be done state by state?

GALBRAITH: Well, first of all, I am proposing this as a rise in the federal minimum wage. And historically, increases in the federal minimum wage are very popular. They are—they tend to be resisted for a long time, but they carry a lot of political heft.

There is, of course, also the possibility, as you say, of doing this at the state-by-state level. We have experience with that. And, in fact, there have been very good studies of the effect of increasing minimum wages in states which are right next door to other states which don’t do it. I mean, there is a famous study by the economists David Card and Alan Krueger (Alan Krueger, as you probably know, is presently the chair of the Council of Economic Advisers in the Obama administration, so he’s a very reputable, mainstream, middle-of-the-road guy) which compared rising minimum wages in Pennsylvania as compared to New Jersey at a particular moment in, I think, the 1970s. And what they found, actually, was that in the part of that area, Philadelphia, Camden—metropolitan area—where the minimum wage went up, more jobs were created than in the part where it didn’t go up. So there was no evidence from that study that jobs migrated simply to take advantage of a lower minimum wage.

JAY: Yeah, I think there’s another study done by one of the scholars at the PERI institute which compared, I believe, McDonald’s on two sides of the border, one being Washington, and the higher minimum wage in Washington. And on the other sides of border, in fact, the place that had the higher minimum wage weathered recession a little better than the one that had the lower minimum wage.

GALBRAITH: Well, I think that’s what you would expect. One of the effects of a higher minimum wage is that people do not quit their existing jobs quite so easily. They hang on to them. They’re more valuable, those jobs. And so firms save training costs and transition costs that they would otherwise incur.

So this is not the simpleminded process that economic textbooks sometimes display in a simple supply-and-demand diagram. There are secondary effects on the way businesses operate, as I’ve just described, and also on the incomes of the population and on their spending power. And those have to be taken into account. And they cut, in this case, very much in favor of the proposal.

JAY: Well, we’ll see whether this spring Occupy—all the various places Occupy occupies takes up this issue of higher minimum wage. Thanks very much for joining us, James.

GALBRAITH: A pleasure. Thank you.

JAY: And thank you for joining us on The Real News Network.


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James K. Galbraith teaches at the LBJ School of Public Affairs, The University of Texas at Austin. He is a Senior Scholar of the Levy Economics Institute and the Chair of the Board of Economists for Peace and Security. The son of a renowned economist, the late John Kenneth Galbraith, he writes occasional commentary for many publications, including Mother Jones, The Texas Observer, The American Prospect, and The Nation. He directs the University of Texas Inequality Project, an informal research group based at the LBJ School, and is President this year of the Association for Evolutionary Economics.