City Desk

Matt Yglesias Doesn’t Want You to Get a Raise

Matthew Yglesias and Real WagesLast 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.

Photo by Matt Yglesias via Flickr/Creative Commons BY-SA 2.0)

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  • IMGoph

    What's a "can driver"?

  • duh

    you don't want to know @IMGoph

  • erik

    leave the ombudsman alone, he's just doing his job. though i thought copy editors were supposed to catch grammar errors and typos.

  • name

    "...making workers better off"

    Wrong. Making a small subset of workers better off for a very short period of time, i.e. until the costs of the goods they are most likely to buy, increase.

    In the case of people at the minimum wage level that means food, rent and alcohol. These price levels are very carefully tracked and indexed to regional median incomes. So any gains accrued at the minimum wage level quickly disappear, however, those who earn between minimum wage and median wage suffer from both no wage increase and an increase in costs.

    You've pushed people down economically who've just barely raised themselves off minimum wage. Effectively all you've done is accumulated more people at the subsistence level.

    Somewhat unsurprising is the fact that those who hire minimum wage workers suffer the most, because these are the lowest margin businesses. Think you're local McDonald's franchiser or independent restaurant owner who probably makes somewhere around the median income. They will likely respond by cutting employees and hours to maintain their own economic levels in the face of rising prices, resulting in lower employment levels.

  • MP

    @name: This post (and the original one by Yglesias) is not about the minimum wage; if Yglesias wanted to have that discussion he could have written a different post. Instead he proposed an entirely imaginary scenario, really two different scenarios which he conflates: 1) raising everyone's salaries by an equal amount (billionaires included, as if that would be desirable), and 2) raising total earnings - profits included - across the economy by an equal amount (as if that would be possible).

    Min. wages and their effects on employment are an entirely different can of worms. The likely effect you suggest is the micro theory at least, one that can and has been tested; the most famous study by Card and Krueger (linked above) found that not to be the case in practice.

  • Sharpie

    Matt boasts that he has never taken an economics course. Yet he writes absolute crap fairly often. Embarrassing.

  • Sharpie

    Allow me to rephrase, since saying that Matt writes crap is admittedly a little cheap:

    Matt boasts that he has never taken an economics course, which is perhaps why so many of his blog posts sound like he debating the answers to Econ 101 problem sets in the freshman dining hall.

  • David Lloyd-Jones

    Good article. Nails one of Matty's unusual blunders accurately.

    From the Civil War to the oil crises from the '70s on, every spell of inflation coincided with an increase in labor's share of GDP. More wages and fewer "rents," (the economic term for essentially unearned income plus some) is good for the middle class and good for America.

    Taxing working people, but leaving the high-earning makers and consumers of information free to pay whatever taxes they feel like declaring, is a suicidal way of structuring an economy. Throw in a major part of that tax, the Social Security check-off, that is regressive, i.e. both flat and capped, and you have a self-destroying economy that is cruel as well as suicidal.