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A Living Wage for Capitalism

Higher nominal wages for low-paid workers can boost real earnings, increase consumer spending, and help make housing more affordable. And insofar as raising the minimum would increase companies’ wage bill, it would create a stronger incentive to replace labor with capital, which could lay the foundation for renewed productivity growth.

LONDON – At 3.6%, unemployment in the United States remains near its lowest level since the late 1960s. There are even signs that people who had previously dropped out of the labor force are being attracted back into it as employers scour a tight labor market for the marginal employee. Consistent with this news, US Federal Reserve Chair Jay Powell has pointed out that wage gains are finally accruing to lower-paid workers.

In another nod to lower-paid workers, in July, the US House of Representatives passed a bill to boost the federal minimum wage from $7.25 per hour to $15 per hour (an increase that would be phased in over seven years). But the legislation has no chance of passing the Republican-controlled Senate. Moreover, the Congressional Budget Office estimates that a $15 minimum wage would lead to job losses for 1.3 million lower-paid workers.

One heard similar objections in the United Kingdom back in the spring of 2016, when then-Prime Minister David Cameron’s government introduced its National Living Wage policy. Yet, over the past three years, there have been no signs of a reversal of employment gains. And in recent months, wage growth has started to pick up after a decade of stagnation, with the Resolution Foundation now predicting that real (inflation-adjusted) average weekly earnings in the UK could exceed their August 2007 peak of £513 ($660).

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