Newbie's?: Minimum wages increasing employment via aggregate demand?

JackW posted on Fri, Apr 8 2011 6:00 AM

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Hi everyone, my first post here and before I explain my probably easy question I just want to offer preemptive thanks for any help. I'm your average young adult libertarian with a recently developed interest in economics and I've been trying to learn as much as I can lately (Probably too much even! This science is soo expansive I can hardly even integrate and remember it all!).

Now, I'm currently in an email debate about the minimum wage with a particularly intelligent liberal friend of mine, and while acknowledging that minimum wages will usually increase unemployment in the lesser skilled, he maintains it isn't proper to assert such in any blanket statement kind of way. Namely, he mentions a situation in which a minimum wage will actually increase demand for labor to such an extent it offsets any decrease in hiring. He says there are certain factors which can lead to the "natural" wage (his quotations, I'm guessing this is the wage at the natural rate of unemployment?) being unable to reach equilibrium. This in turn leads to aggregate demand being unable to reach equilibrium, which in turn messes with the whole employment-demand-inflation balance. He says a raise in minimum wage can increase aggregate demand because the marginal propensity to spend is higher for lower income workers.

Now, I understand what all this means (except how inflation really ties in) and his argument seems to make sense on the surface... but it also seems (thinking with my gut unfortunately because I couldn't find anything with the site search, which is why I'm here) like he's missing parts of the bigger picture which, like I said above, I haven't really been able to fully integrate yet. Could a minimum wage really increase overall employment in a situation like this? Would it increase employment in some areas while decreasing it in others so that as an aggregate there is hardly any affect? Or, would it increase employment in some select few areas while still overall decreasing employment? If there is an employment increase, how long term could it be?

He says he got this from an empirical study that analyzed minimum wage increases in certain cities, but doesn't remember where he read it. Sorry, I know that makes it more difficult to address the study's methodology. Any help in understanding the theoretical aspects would be greatly appreciated.

Also, I'm aware this is some kind of Keynesianism despite being an argument I've never heard before. Is there a particular kind of Keynesiansim this would be attributed to (new, neo, post)?

EDIT: Sorry if I put this in the wrong forum.