Obama has plans to pressure companies with government contracts to increase wages. According to the New York Times article about 25% of Americans work for such companies, and Obama sees this as a means of lifting American incomes.
My first thought was that this was very much like Hoover encouraging companies to keep wages and prices up during the Depression, and Tabarrok's first criticism is right along that point.
At a time of 10% unemployment when real wages need to fall this is bad business cycle policy.*
But he has another, more serious, concern as well.
I am more worried, however, about the long term consequences of creating a dual labor market in which insiders with government or government-connected jobs are highly paid and secure while outsiders face high unemployment rates, low wages and part-time work without a career path...Officially, President Obama has a Council of Economic Advisers, which at this point sounds about as influential as a Council of Ethical Advisers would have been for Uncle Joe Stalin.
Moreover, once an economy is in the insider-outsider equilibrium it's very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders... Many European economies found themselves stuck in the insider-outsider equilibrium and as a result unemployment levels in places like France and Italy hovered at 9% or more for decades.
*Brad DeLong disagrees with this point, arguing that instead demand needs to rise. Of course cost and demand are pretty closely related, eh?
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