In Praise of Net Social Benefits

 

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A weed, Crabgrass, taking root.

When someone says, “if we raise the minimum wage, there will be more unemployment.” That may be true, but their fear of unemployment is not wise. It is better to say, “if we raise the minimum wage, will net social benefits be increased?”

When someone says, “if the Fed had gradually raised the Fed rate over the last two years, there would have been more unemployment.” That may be true, but their fear of unemployment is not wise. It is better to say, “if the Fed had gradually raised the Fed rate, would net social benefits have increased?”

Raising the minimum wage will increase net social benefits in the current environment. I refer to this paragraph from Bruce Kaufman, Institutional Economics and the Minimum Wage: Broadening the Theoretical and Policy Debate, page 444.

“Minimum wage laws may enhance (social) efficiency in another way as well, by protecting not only workers but also “high road” employers who make long-term investments in human capital, physical capital, and R&D. Research shows that productivity is higher at firms using a high performance work system (HPWS) with self-managed work teams, job security provisions, extensive training, employee involvement methods, and formal dispute resolution programs (Appelbaum, Berg, Kalleberg, Bailey 2000). These kinds of organizational investments are crucial for long-run growth but may be seriously impeded by the instability and hyper short-term competition found in competitive markets. A minimum wage law can protect and encourage new forms of work organization, such as HPWS, by putting a floor under competition so “low road” firms are not able to undercut and drive out high road firms.”

The low Fed rate increases the existence of low road firms, as Bruce Kaufman calls them. The result is that they impede healthy organizational investments for long-run growth. Thus, net social benefits are reduced.

If the Fed had gradually raised the Fed rate over the past two years… very gradually… Firms would have been made more socially accountable and efficient. Some low road firms, would have been weeded out. Even though the banks do not want that to protect their own capital ratios, it would have been better for society.

Moreover, financial repression would not have set down such strong roots into the economy. As it is now, we will probably see the Fed rate sit at the ZLB for years. …

Net social benefits from the economy have fallen due to the low standards of excellence and quality reflected in the low minimum wage and the persistently low Fed rate.

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