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Effects of Shifts of Aggregate Demand upon Income Distribution:Hyman P. Minsky (May, 1968)

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Effects of Shifts of Aggregate Demand upon Income Distribution:Hyman P. Minsky
(May, 1968)12-p


advantages: with rural areas as a continuing source of labor, the advanta

geously located low-wage industries may in fact be operating with a huge

reservoir of labor, responsive to job opportunities at unchanging mark-ups

over rural incomes

As measured by the coefficient of variation, the spread of hourly earn

ings decreased slightly between 1960 and 1966, after increasing between

1948-1953 and 1953-1960. In spite of this, the coefficient of variation for

weekly earnings increased between 1960 and 1966. Thus, hours worked

were positively correlated with earnings so that the distribution of weekly

earnings had a wider range than the distribution of hourly earnings. Inas

much as it is earnings over a period, not the hourly rate, that is important

in income distribution, the minor drawing together of hourly rates that

occurred during the expansion is not especially significant

Leading Sectors in Generating Aggregate Demand and

Income Distribution

Aggregate demand has a structure which, in turn, generates the partic-

ular (including regional) demands for products and factors. The govern

ment impact upon aggregate demand also has a structure. As long as in

come distribution is a "minor" or, better, an "unmentionable" policy goal

then the impact upon income distribution of the particular structure of

government programs can be ignored. Once the achievement of some

maximum inequality becomes a recognized social imperative, then the

way in which government affects income distribution becomes a factor in

policy decisions

number of factors have combined to create the "shortages in the

midst of surpluses" labor markets of the past 10 to 15 years, and the resul

tant spreading of relative incomes. One has been the peculiar pattern of

government demand. It is only necessary to note how government spend

ing on research and development has grown and to combine this with the

growth of spending on education to recognize that leading sectors, in

terms of the growth of aggregate demand, have generated initial demand

for highly skilled professional and technical labor. Even though to a large

extent the impact of government has been of a stop-go nature, the re

search-plus-education growth has been fairly steady

A second factor in determining the changes in relative incomes has

been the rapid migration from rural areas, in particular the movement of

Negroes from the rural South [7]. This has generated a large-nay, an in

finitely elastic-supply of unskilled and semiskilled workers in the cities

The disturbing results reported by Batchelder [2], that Negro male in

comes deteriorated relative to white male incomes between 1950 and 1960

within the relevant cells, indicates that the data on average wages by in

dustry may obscure increasing spreads of incomes within each industry

EFFECTs oF AGGREGATE Demand SHirrs / 337

A third factor tending to spread relative earnings has been the stop-go

nature of many facets of the economy since world war II. Over this pe

riod, on the whole, the American economy has done well. However, this

overall "smoothness" has been the result of a series of stop-go develop

ments in various sectors. Not only has the country engaged in two "minor

wars, but also the leading sectors have shifted with great rapidity from

general defense, to missiles, to space, to private investment. Each time a

new government program, be it highways or aid to education or moon

shots, gets under way, local excess demand for labor is generated

The impact of new leading sectors upon wages is different from a rise

in employment that takes the form of rehiring previously employed work-

ers and from the expansion of conventional industries. Whenever local de-

mand for labor exceeds supply, wages rise [5, 10]. In addition, wage in-

creases in a sector spill over to other sectors, even in the face of overall

labor market slack. This is so because productivity of labor is a function

of "morale," and a decline in relative wages adversely affects morale.

However, in the presence of slack, wage increases in the following sectors

will be lower than in the leading sectors.

If a series of stop-go shocks occurs and if these shocks all have their

major initial labor market impact upon a restricted set of labor markets,

then the wage in this restricted set will rise relative to others. If these re

peated impacts occur upon what are already high-wage industries and oc-

cupations, then the distribution of income will be adversely affected

A test of whether the pattern of aggregate demand creation has a

fected the distribution of income, by a succession of such impacts upon

the demand for particular classes of workers, is needed. Detailed occupa-

tional income data and a way of transforming each period's leading sector

into demand for labor in particular categories are required for such a test.

Policy Suggestions

From the above, I extract two propositions relevant to policy forma


1. The American economy as presently organized is not capable of

achieving and sustaining tight full employment

2. Within the employment limitations of the economy, there is no sig

nificant tendency toward a narrowing of the spread of relative income

from labor

I add to the above that a narrowing of the spread of income from labor

is necessary

If the post-World War II pattern of shifting leading sectors determin

ing aggregate demand leads to perverse changes in the distribution of in

come, then we ought to consider changing the pattern of leading sectors.


A suggestion of real merit is that the government become an employer of

last resort.

One attribute of such a tap employer is that, when the terms upon

which it will employ are set, the minimum wage for all is determined

There is no longer any question about the "coverage" of minimum wage

legislation. In addition, the minimum wage set in this manner does not

have an adverse effect upon employment, as may be true for the present

minimum wage legislation. The relative size of the wage set by the em

ployer of last resort determines the division of the labor force between the

private and the public sectors.

In a world where nominal wages are expected to increase each year

some improvement factor needs to be included in the terms upon which

the employer of last resort hires. If the improvement factor for the em

loyer of last resort rises at a faster rate than average and above-average

wages, the range of relative wages decreases. In time, if such differential

rates of change are sustained, a target ratio between the minimum and

average can be achieved.

To the extent that the high-wage workers' nominal income rises at some

roductivity rate," the low-wage workers' nominal income will need to

rise at some faster rate: there may be an inflationary bias in an incomes

policy that takes as one of its imperatives the achievement of greater

equality. In addition, it will be necessary to restrain profits and invest-

ment; in particular, the highly destabilizing tendency for investment de

mand to explode will have to be brought under control.

Although we currently view the crisis in income distribution as center

ing around the urban ghettos, much of poverty is rural. An employer of

last resort, willing and able to hire all who offer to work, will have a large

impact on the poorer rural areas. One effect of such a national employ

ment policy will be to slow down the pace of migration to the urban com

plexes. Inasmuch as many of the urban problems are related to the rapid

rate of migration, such a retaining effect following from an employer o

last resort will be an added virtue.

Much experimentation with tap employment policies, and its equiva

lent, the creation of programs which will have their major initial impact

upon present unemployed labor, will be needed. However, the objective

is clear: it is to take the labor force as it is and make sure that fitting jobs

are available. Instead of the demand for the low-wage worker trickling

down from the demand for the high-wage worker, such a policy should

result in increments of demand for present high-wage workers "bubbling

up" from the demand for low-wage workers.


1] ANDErsON, W. H. LockE, "Trickling Down: The Relationship Between Eco

nomic Growth and the Extent of Poverty Among American Families," Quart. J

Econ. 78:511-524, Nov. 1964.

[2 BATCHELDER, ALAn B., "Decline in the Relative Income of Negro Men," Quart

J. Econ. 78:525-548, Nov. 1964

[3] GREENE, CHRISTOPHER, Negative Taxes and the Poverty Problem, Washington,

Brookings Institution, 1967.

(4] KALDOR, NICHOLAS, "Economic Growth and the Problem of Inflation," PartI

Economica, N.S., 26:287-298, Nov. 1959.

[5] LIPSEY, RicHARD G. "The Relation Between Unemployment and the Rate of

Change of Money Wage Rates in the United Kingdom, 1862-1957: A Further

Analysis," Economica, N.S., 27:1-31, Feb. 1960

[6] MINSKY, HyMAN P., The Role of Employment Policy,"in Poverty in America

ed. Margaret S. Gordon, San Francisco, Chandler Publishing Company, 1965,

BriaN, AND DALE HATHAWAY, The Movement of Labor Between

Farm and Non-Farm Jobs, Michigan State University Agr. Exp. Sta. Res. Bul.


Change of Money Wage Rates in the United Kingdom, 1861-1957," Economica

[9] Ross, A. M., AND W. GoLDNER, "Forces Affecting the Interindustry Wage

Structure," Quart. J. Econ. 64:254-281, May 1950.

[10] ScHULTZE, CHARLES, "Recent Inflation in the United States," Study Paper 1,

in Study of Employment Growth and Price Levels, Joint Economic Committee,

U.S. Congress, Sept. 1959.


Stanford University Press, 1964.

[12] SIMONs, HENRY C., Personal Income Taxation: The Definition of Income as a

Problem of Fiscal Policy, Chicago, University of Chicago Press, 1938.

Economic Policy," in Economic Policy for a Free Society, Chicago, University of

Postwar United States," Quart. J. Econ. 79:73-97, Feb. 196