Are the sticky-wage Keynesians right about the employer/employee payroll tax cut?

It's a very astute analysis, but what I find odd about it is that he's primarily campaigning for a cut in the minimum wage, just like a good Chicagoan would. But the minimum wage is far, far stickier than either wages or prices. Employees have memories, unlike objects, so you can cut prices with impunity.

Cutting wages, however, leads to hardships, and if people change jobs because of it, substantial overhead expenses are introduced. The minimum wage, however, has the best memory of all. Changing it requires an act of Congress, a massive undertaking.

If you lower it now for the crisis, it will stay down. It took over a decade to raise it last time. A change with a short sunset might help, but it also causes a lot of economic hardship among workers who are already marginal.

Chicagoans believe that the minimum wage directly cuts jobs, but it also serves in part to shift profits from capital to labor, and Keynesian believe that this is the dominant factor. A ten-cent, or even one dollar, cut in the minimum wage isn't enough to hire another employee. It only pads the profit margin.

That's where the stickiness comes into play. Employers are the ones who accumulate profits, especially when the workers they hire are near the minimum wage. That's just capitalism: profits go to capital.

That also makes employers better able to withstand the losses that come during economic downturns. They have many more options, from spending down reserves to borrowing to putting off captial improvements. A minumum-wage employee is "sticky" because there's not a lot of gap between where they already are and outright poverty.

I find that Chicago school economists generally underestimate that stickiness. In the case of the payroll cut, that's not really going to improve employment one way or the other. It's really just a stimulus plan, and what we're really waiting for is for the economic dam to burst on the enormous reserves that employers are already sitting on.

Small changes to wages don't influence that one way or the other. It's just time before those with the reserves realize that they're undergoing opportunity cost. PamPerdue 63 months ago.

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