Capital And Labor Both Suffer Under Minimum Wage Mandates

It should not be overlooked that, in addition to the direct rise in institutional unemployment, second-round effects in terms of lower output and real national income and a new redistribution thereof to the benefit of households with a lower propensity to save are likely to impact negatively savings and investment. Although one cannot predict how US families will shape their savings and investment patterns in the future, statistics show that over the last three decades only the two top income quintiles recorded positive saving rates consistently. The average savings of the two bottom income quintiles have been stubbornly negative while the gap between the top and bottom income groups’ savings has actually widened (graph 3).

Graph 3: US Average Savings by Income Quintile


If past saving trends continue, the contemplated minimum wage hike is likely to depress further the relatively low savings propensity of US households. The latter save only about 8 percent of their disposable income, part of a long-term declining trend since the early 1970s (OECD data). Moreover, this lasting decline has gone hand in hand with a persistent slowdown in private investment, capital accumulation, and labor productivity. It is obvious that the US economy should be spared another government intervention in the form of a massive minimum wage hike which can only reinforce these trends and undercut the rise in standards of living. Moreover, if minimum wages actually depress savings and hamper capital accumulation how could businesses respond to a mandated increase in wages by substituting more machinery for labor, as claimed by certain pundits? With impaired investment and capital stock, this would only be possible in specific cases and not for the overall economy. As a matter of fact, the causality runs in the opposite direction: capital accumulation and technological improvement support higher wages whereas mandatory minimum wages undermine them.


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