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Last Friday, Slate’s Matt Yglesias came up with a rather unique interpretation of labor economics, musing about “the Left’s big mistake about real wages and the economy.” Addressing no actual person or piece of legislation coming from the left (or anywhere else for that matter), Yglesias warns that raising the salaries of everyone in the country would be a disaster:
The way a given worker or class of workers improves his real wages is by persuading his boss to give him a nominal raise that outpaces the growth in the cost of living. But the way the economy as a whole works is that my income is your cost of living. If Slate doubled my salary, I’d be thrilled. But if everyone’s boss doubled everyone’s salary starting on Monday, we’d just have one-off inflation. As it happens, a little inflation would do the macroeconomy some good at the moment. But the point still holds that while “you get a raise” is the way to raise your living standards, “everyone gets a raise” is not the way to raise everyone’s living standards.
Since no one has proposed such a thing, it’s hard to tell what exactly prompted Yglesias’ admittedly “hazy generalization.” Is he arguing indirectly against President Barack Obama‘s proposal to raise the minimum wage? Maybe not: There is a whole economics literature on minimum wages, and saying this would open up discussion to things like testable hypotheses and empirical evidence. As Seth Ackerman suggests in Jacobin, Yglesias appears to simply be trolling the left by setting up a bogus straw man.
But setting aside the fact that Congress isn’t likely to mandate an across-the-board wage hike for everyone in the United States, Yglesias makes the glaring error of conflating wages with earnings. Wages—what workers earn—are only one component of all earnings, which include other things like profits (to businesses) and rents (to landowners). True, somehow mandating an equal increase in nominal earnings everywhere in the economy would have no net effect, because nobody’s purchasing power would change. It would just be monetary sleight-of-hand: the equivalent in a closed economy of saying one dollar is now worth 10 dollars (Brazil tried to do this to tame inflation in the ’80s by introducing a new currency called the “cruzado novo,” worth 1,000 old cruzados; it didn’t work). But because wages and earnings are not the same, doubling the wages of employees without doubling the returns to capital for employers would have real world, redistributive effects, making workers relatively better off. Yglesias further ignores the net positive effect on aggregate demand of workers getting a raise and then going out and spending it—which could be useful in, say, getting a country out of a recession.
None of this is leftist, it’s all pretty basic classical economics.
In an email, Yglesias responds, “As you say, it’s not about a specific proposal and I don’t mean to say that people’s wage and salary demands don’t matter. But when people say that ‘real wages have stagnated for 20 years’ what they mean is the nominal wage increases won by waiters and [cab] drivers haven’t kept up with the increasing price of health care, college tuition, and (in the DC area and other major coastal cities) housing. You need to address that, in large part, by making that stuff cheaper.”
That’s a valid, if entirely obvious point: nominal wages (the amount on your paycheck) matter less than purchasing power (how much stuff you can buy with that paycheck) when determining living standards. But simply saying so wouldn’t be baiting and contrarian. Perhaps next time he can warn us of the dangers of legislating a national bedtime or abolishing money or something.