Reducing Labor Costs Boosts Job Creation

With unemployment insurance taxes rising substantially in our state this year (one employer told me her UI taxes were tripling) and workers' comp premiums climbing 7.6 percent, the cost of adding workers is going up. Our state's highest-in-the-nation minimum wage also squeezes the job market for entry-level workers, as employers perform their routine cost-benefit analysis before hiring.

So I found this brief blog post provocative. Economist Bryan Caplan suggests that wage cuts can be good for the economy by increasing demand for labor.

1. Cutting wages increases the quantity of labor demanded.  If labor demand is elastic, total labor income rises as a result of wage cuts. 

2. Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers' income.  So unless employers are unusually likely to put cash under their matresses, wage cuts still boost aggregate demand.

As I said, provocative stuff and part of a larger discussion than I'm prepared to go into here, though some of you might enjoy following Caplan's argument with Paul Krugman.

For our purposes today, I'll suggest two different points, taking some liberties by pegging off Prof. Caplan.

1. Boosting compensation costs - including mandating a high minimum wage, UI and workers' comp - clearly reduces hiring.

2. And, raising taxes to keep state worker compensation high will assuredly depress private sector hiring.

Today's report of increased jobless claims continues to drive home the importance of a recovery led by private sector employment growth.