Focus on Wages First, Hiring Second?

Average Worker's Paycheck Clearly business is reluctant to hire and I am of the opinion that until there is a reason to hire — i.e., a need to increase capacity likely driven by an increase in aggregate demand — business has no reason to hire.  Productivity is up, profits (corporate profits anyway) are up, demand is down.

Conservatives fight increases in government spending that would stimulate the economy which, in my humble opinion again, is stubbornly misguided and harmful, but they look to protect tax cuts and subsidies.

What would happen if in return for higher wages to current employees, business interests were given tax incentives?  Make it an attractive proposition to business by pegging it to prime interest rates so that these incentives remain in force while rates are low.  In short, provide an incentive for increasing existing compensation by offering tax breaks to businesses that do so.

Some of this already happens, usually on a case-by-case bargain, when government subsidizes local business development.  Offering tax breaks to keep your widget factory domestic rather than moving overseas, for example, is in part a cost of labor issue at work in the global economy.

Policy makers have proposed schemes that offer tax credits for new hires.

National Industrial Recovery Act Blue Eagle Logo NRAThe Hire Act potentially offers a 6.2% payroll tax incentive up to $1000  for new hires and that works out to just over a $17,000 hire.  Still doesn’t make much sense unless you were about $1000 away from making that hire in the first place.  With uncertain long-term considerations about such a commitment, I don’t see much of an incentive in these programs.

If you don’t need a worker, you don’t need a worker.  Giving a tax incentive on a marginal increase to existing workers should give policy better options that will be more attractive to employers.

Keep in mind that I am not considering an increase in the minimum wage, but rather offering an incentive to increase the wages of workers already employed.  It isn’t a very subtle difference.  First of all the plan targets current workers and subsidizes an incremental increase, not a full hourly wage.  Secondly, in our current economy, I would think an increase in minimum wage would slow hiring at those lowest, entry level jobs.  (Granted, less than 3% of workers, but still jobs.)

Back in the 1930s, the Roosevelt Administration attempted something like this with the National Industry Recovery Act, but the trade off wasn’t tax cuts, it offered regulatory perks.  The results were not all that great either.  The goal was admirable, the approach flawed.  It did not get to the heart of the matter.

We are in a similar situation today.  We have an economy stalled on a lack of demand.  Finding a way to get money into the market is key and people seem to think that tax cuts pump money into the market.  That doesn’t happen when the people getting cuts already have money.  My scheme, however, proposes a way to mix tax cuts with higher wages.  The incentive for business is a more secure workforce that can help stimulate demand and growth.

We need a labor economist here, but I am curious about what that would do to the labor market.  Would it, for example, help retain more jobs?  What would it do to the domestic labor market overall?

I am thinking out loud again and it seems to me that incenting an increase in wages for those workers fortunate to have a job would put money into the economy, thereby increase demand, and thus increase demand for labor as business expands to meet the increased demand.

Yes?  No?  Just thinking out loud.


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