The long-promised GOP jobs strategy turns out to be based on lowering wages to increase jobs. According to "Spend Less, Owe Less, Grow the Economy — Executive Summary" published in the Joint Economic Committee — Republicans:
"Decreasing the number and compensation of government workers. A smaller government workforce increases the available supply of educated, skilled workers for private firms, thus lowering labor costs [overall]."
The idea is clear. Decreasing government employment increases the number of educated and skilled jobseekers, thereby driving down wages for all workers by lower the offer. There being more bidders than jobs, the increased number of bidders competing with each other for limited offers will be inclined to accept a lower offer.
The GOP strategy is being played out in the states, where GOP governors are cutting taxes on business to make their states more attractive to businesses in order to lure businesses to the state. Cutting state government employment and reducing wages and benefits for existing workers lowers wages prevailing in the state, making the state more attractive to businesses. Reducing the power of unions and collective bargaining in their states also reduces the bargaining power of workers there. It is assumed that this will create more jobs in the private sector "by reducing labor cost." One wonders whether they have forgotten that workers are also voters who may not appreciate the lower pay scale and reduced benefits and protections.
The race to the bottom is on.
Where is the demand to come from, you ask? Ricardian equivalence, which Prof. Bill Mitchell dispatches at the link.
Here is what they say: "Keynesians hold that fiscal consolidation programs are contractionary in the short term, because they reduce aggregate demand. However, large government budget deficits create expectations for higher taxes to service government debt and affect the economy in the short term as well as the long term. Consequently, fiscal consolidation programs that reduce government spending decrease short-term uncertainty about taxes and diminish the specter of large tax increases in the future for both households and businesses. These “non-Keynesian” factors can boost GDP growth in the short term as well as the long term because:
• Households’ expectations of higher permanent disposable income create a wealth effect, which stimulates purchases of consumer durables and home buying thus driving up personal consumption expenditures and residential investment in the short term.
• Businesses expecting higher after-tax returns boost their investment in non-residential fixed assets in the short term."
How is the UK doing with that?
(Hat tip to Ezra Klein, Prosperity through lower wages?)