A High-Wage Equilibrium
By Arnold Kling
The system combines low non-wage labour costs and few restrictions on hiring and firing with high unemployment benefits (funded by the state via income tax, not business) and opportunities for workers to upgrade their skills. This provides a high degree of flexibility for employers, while generating a high level of employment and income security.
One of Will’s commenters points to an article written last year by Jamie Galbraith.
The secret is in the wages. If you are a business in Sweden or Norway, there is one thing you are not free to do. You are not free to cut your wages. You are not free to compete by going after cut-rate workers, either native or immigrant. You are not free to undercut the union rate. Successful businesses must, therefore, find other ways to compete. They do it by keeping productivity high. This means that advanced industries thrive in Scandinavia, while backward ones die out.
This leads me to wonder what would happen if the U.S. adopted a high-wage policy. Suppose we, say, doubled the minimum wage, and enforced it uniformly in all industries and for all workers. What would be the general equilibrium consequences?
For example, the lawn mowing industry could not remain the same. You might see some capital-labor substitution, but there has been a lot of that already. My guess is that the relative price of lawn service would rise. Maybe the net effect is that more people devote leisure time to mowing their own lawns, which is a welfare loss.
Fast food would change. Probably you would see more “do it yourself fast food” (the kind you can pick up at a grocery store) and less of the current fast-food outlet model.
But I don’t see any reason why would see a surge in “advanced” industries, just because the wages of unskilled workers have gone up. I think there has to be a net drop in demand for unskilled workers.
My guess is that illegal immigrants (and perhaps even a fair number of recent legal immigrants) would return to their home countries in droves, because far fewer of them would be hired at double the minimum wage. There would be a welfare loss from that, too, albeit borne largely by people who are not now citizens.
Basically, I think we could make a Denmark-like model work here (not that I would want to). It would serve the purpose of a massive deportation policy, except that the laws that we would be enforcing to get rid of people would be the labor laws rather than the immigration laws.