Saturday, September 06, 2008

Minimum Wage, Maximum Folly

An anonymous left today about this CD post from June:

I own and operate a restaurant in a rural area of California (20,000 population) that is also a seasonal tourist destination and popular retirement spot. In the first three months of 2008, following California's January 1 increase in the minimum wage to $8 per hour, five restaurants went out of business. Restaurants often fail, but these are places that have been in business for long periods (two for 15 years, one for 12 years, and two for 1-3 years). And from my own standpoint, although I did not downsize the number of my employees (20), ALL except two have had to absorb significant cuts in their hours.

I hate to sound like a conspiracy nut, but to anyone with common sense the minimum wage, is dangerous in two ways:

1. Warm fuzzy feelings for the working poor- "Golly, I'm poor and look at what the Democrats are doing for me! They must really be concerned!" Except that the economy resets itself in short order and they end up being in worse shape in the long run.

2. Creating the new poor from the middle class. If minimum wage “Employee A" who is mildly competent receives a compelled, arbitrary, raise, there is less chance that “Employee B" who is a stellar performer will receive any more than the same. Also, “Employee C" who makes a couple of dollars more will also need to get a raise, but because there is only so much money to go around, will get a much smaller raise, percentage wise, and so will fall closer to the minimum. And then, because everybody's hours are cut and fewer overtime hours are allowed, there is less money at the end of the pay period. All because some politicians want to seem "magnanimous" while using other peoples' money.


MP: Even in cases when the increase in the minimum wage doesn't affect the number of unskilled workers employed (like in the case of this restaurant owner), that's not to say that the minimum wage workers are not adversely affected. As this example illustrates, workers' hours are cut, and their overtime opportunities are reduced or eliminated, making them worse off as a result of the mandated increase in the minimum wage.

40 Comments:

At 9/06/2008 10:09 AM, Anonymous Anonymous said...

The Democrats cheat people out of a decent education with those crummy public schools. Then, when these people are not qualified for anything but flipping burgers and sweeping floors, the generous Democrats give them a boost in the minimum wage. Then, when employment and inflation increases, they can blame George Bush for all the problems. Great strategy. Can't say they are cynical...

 
At 9/06/2008 10:09 AM, Blogger spencer said...

Maybe. You actually do not have enough information to make that statement.

For example if workers get a 10% raise but hours worked fall 5% their welfare has actually improved as their net pay is actually up 5%. And this assumes zero value for their leisure time.

The point that some work experience a drop in hours does not necessarily make them worse off.

 
At 9/06/2008 10:24 AM, Blogger Mark J. Perry said...

Spencer: Of course there could be other adjustments to compensation, in the form of reduced fringe benefits, that would make unskilled workers worse off. For example, there could be adverse adjustments to: employer-paid or subsidized uniforms, paid holidays, employee discounts on merchandise, free or reduced cost meals, employee holiday parties, bonuses, profit-sharing, etc. etc. (not that all of those fringe benefits are necessarily provided for all minimum wage employees, but some certainly are).

 
At 9/06/2008 10:28 AM, Blogger spencer said...

I've heard this argument that minimum wage hikes leads to employers treating their employees worse.

In effective what you are arguing that the employer is now going to take actions that will reduce the productivity of his now more expensive workers.

Show me the economic theory that supports this argument.

 
At 9/06/2008 10:30 AM, Anonymous W. Wessels said...

In an article in Economic Inquiry, I showed that minimum wages reduce labor force participation and increase the quit rate of workers, suggesting the cut in the overall compensation (including training and fringes) is reduced by the minimum wage. On the other hand, I have showed that the link between the minimum wage and tipped workers has an inverse "C" shape: the minimum wage first increasing then decreasing tipped employment. This is because tips turn restaurants into monopsonies. In the absence of a minimum wage, as restaurants hire more workers, tips per workers go down, so they have to raise wages: the usual monopsony story follows.

 
At 9/06/2008 10:33 AM, Blogger Mark J. Perry said...

Spencer:

The economic theory is called the Law of Demand: when prices rise, the quantity demanded falls. Period.

 
At 9/06/2008 10:34 AM, Anonymous Kevin said...

Mark - would love to see your updated graphs of unemployment rate over time for different groups - teens, adults, etc.

 
At 9/06/2008 10:57 AM, Blogger spencer said...

The economic theory is called the Law of Demand: when prices rise, the quantity demanded falls. Period.

Since the depression average wages and/or compensation has risen every year.

If I apply your rule from above to the Us economy I would logically conclude that the unemployment rate should be over 100%.

 
At 9/06/2008 11:47 AM, Blogger juandos said...

"If I apply your rule from above to the Us economy I would logically conclude that the unemployment rate should be over 100%"...

Hmmm, now there's some seriously twisted but liberal logic for you...

Minimum wage implies workers don't have the skills to make more money where their actual skills are in demand...

Maybe there some or even many minimum wage employees with skills out there but if the skills aren't needed should these people get paid more than minimun anyway?

Spencer obviously needs to reread Dr. Walter Williams' Minimum Wage, Maximum Folly...

 
At 9/06/2008 12:01 PM, Blogger spencer said...

no juandos, i do not have to read anything.

You have to tell me if Mark's application of the law of demand is right why the unemployment rate would not be 100%.

 
At 9/06/2008 12:04 PM, Blogger like such as said...

Spencer:

I can't tell if you're being serious or just playing devil's advocate.

Just to be safe I'll pretend you're as ignorant as you sound.

Of course wages have risen steadily since the depression - productivity has as well, bringing up the wage rate right with it.

However, when there is legislated an arbitrary increase in the price of labor that is not offset by corresponding increases in the productivity of labor, there will inevitably be a drop in the quantity demanded of that labor, as stated by the law of demand.

If all workers in california we're productive enough to be able to earn $8/hr on their own, the minimum wage would be superfluous. However, as Democrats recognize, some people aren't worth that much money. Yet what they don't recognize is that they can't legislate "value" into a human being. All that is accomplished in creating a "minimum standard" is to say that anyone who is only able to produce at a rate below that standard is out of a job. Compassionate...

 
At 9/06/2008 12:07 PM, Anonymous Anonymous said...

And from my own standpoint, although I did not downsize the number of my employees (20), ALL except two have had to absorb significant cuts in their hours.

The business owner doesn't complain about making less money but expresses "concern" that most of his employees have had their hours cut.

I'm calling BS.

The job of a business owner is to make money not to be concerned with his employees. Obviously the business owner had too many employees before the cutbacks.

 
At 9/06/2008 12:15 PM, Blogger like such as said...

Anon 12:07

Whether he had "too many" employees before the cutbacks or not is his choice. If he was running a successful business with 20 employees who worked a certain number of hours, then 20 obviously wasn't "too many." It took a mandatory raise in the minimum wage for 20 to be too many, so he had to cut their hours.

Running a successful business and caring about your employees are not mutually exclusive

 
At 9/06/2008 12:24 PM, Blogger juandos said...

"You have to tell me if Mark's application of the law of demand is right why the unemployment rate would not be 100%."...

Well spencer here's what you missed by not reading that mean, old Dr. Williams: "According to the U.S. Bureau of Labor Statistics: Sixty-three percent of minimum wage workers receive raises within one year of employment, and only 15 percent still earn the minimum wage after three years. Furthermore, only 5.3 percent of minimum wage earners are from households below the official poverty line; forty percent of minimum wage earners live in households with incomes $60,000 and higher; and, over 82 percent of minimum wage earners do not have dependents."...

Well spencer since you made the silly statement in lieu of getting a grip on reality you should be the one to explain it...

Its YOUR logic after all even though there lots of people that are employed at rates that are in many cases many multiples of the minimum wage...

These skilled people are worth the money spencer whereas minimum wage employess get minimum wage just for showing up...

"However, when there is legislated an arbitrary increase in the price of labor that is not offset by corresponding increases in the productivity of labor, there will inevitably be a drop in the quantity demanded of that labor, as stated by the law of demand"...

Thank you like such as, very well explained...

 
At 9/06/2008 12:40 PM, Blogger Walt G. said...

anonymous 12:07:

Obviously you are underestimating the worth of an employee who is well-treated to the bottom-line of the business. You’re not alone because that is a quality that is difficult to quantify; however, most successful business owners know that it is vital to take care of their employees if they want their businesses to thrive. Since businesses run on profits, and profits depend on loyal employees, the restaurant owner has a legitimate complaint with the minimum wage law.

I realize that seems like a strange remark from a die-hard unionist, but I don’t think we need the government telling businesses or workers what they can do. If the restaurant employees want to collectively bargain with the owner, they should be allowed that freedom, too. Who knows the needs and abilities of the particular situation better than those two groups? If someone is willing to sweep a floor for $2 an hour, and that is all it is worth to a business owner, why should the government tell them they can’t have a mutually acceptable employment arrangement? I don’t think we need an entity that is over $10 trillion in debt telling someone how to run their business.

 
At 9/06/2008 1:06 PM, Anonymous Fred said...

When Boomers were young, plentiful, and cheap ($1.10/hr minimum wage) full service gas stations were the norm. I realize some (most!) of you have never known a time when gas stations hired people to pump your gas, wash your windshield, and check your oil but, that really happened.

Those jobs went away when it got too expensive to hire someone to do that job. Now the gas station attendant job is yours and you pump your own gas at the true minimum wage of zero.

 
At 9/06/2008 2:06 PM, Blogger bobble said...

i am also against the minimum wage because "theoretically" it reduces demand for labor.

however, as i point out every time this issue is posted here, very few workers are actually at minimum wage. spencer has documented that teenage unemployment pretty much follows the business cycle and is not correlated to changes in minimum wage. any effect is minor.

so, just as it is blatant politics to increase the minimum wage when it really does nothing, it also seems like blatant economic posturing to imply this is affecting a lot of workers or impacting the economy in some significant way.

 
At 9/06/2008 2:14 PM, Blogger spencer said...

I'm being both serious and a devils argument.

I know the facts about the minimum wage as well as anyone.

I am not the one that said raising wages -- prices-- causes demand to fall. Mark said that. I know that it is a conditional statement that depends on everything else being unchanged and so does everyone here. He presented it as an absolute statement not a conditional statement. I was just demonstrating how incorrect Marks statement about demand and supply is. If it is an absolute statement then my conclusion that the unemployment rate has to be 100% is true.

What is it about the minimum wage that causes good economists to forget all their training and make statement they would never make about anything else.


I'm not arguing for or against the minimum wage. I'm just pointing out that Marks statements that he presents as overwhelming evidence are not correct. He states as a fact that employees will reduce fringe benefits with absolutely no evidence to back up that statement.
I do not know of a single published survey conducted on that subject. Mark, what is your source on that argument? What elasticity estimated did the study find? I would be interested in seeing the answers but we both know that no such study exist.

He is taking as facts things he does not know. They may sound good, but he has no evidence to support them.

If you expect to be taken seriously you have to give serious argument and he doesn't.

If he were my student I would flunk him. Not because I agree or disagree with him but because his research and line of reasoning is too simplistic.

 
At 9/06/2008 2:26 PM, Blogger juandos said...

"He states as a fact that employees will reduce fringe benefits with absolutely no evidence to back up that statement"...

Well spencer maybe the presentation Professor Mark was less than it could be but you want access to studies that prove his point...

Well may I suggest that you might could consider looking at the unionized airlines and their history over the last twenty or so years...

I as an airline employee in a union (IAM & TWU) with 30+ years can atest to what Professor Mark is saying correct...

Obviously there's the fuel factor in the airline business to consider but even when it wasn't the huge problem it is today, everytime the minimum wage was raised (since '76 for me personally), the unions representing airline employees asked for an increase in pay rates...

Can you guess what happened next spencer?

 
At 9/06/2008 2:58 PM, Blogger spencer said...

juandos -- your airline story is pure bullshit I do not believe a word of it.

document for me in what year and for what airline it happened.

 
At 9/06/2008 3:14 PM, Blogger Walt G. said...

juandos,

I don't see minimum wage laws and bargained wages by big business and big labor as the same thing.

The former is government interference plain and simple. The latter is a collection of capitalists who decide to form a corporation against a collection of workers who decide to form a union to level the field. The corporation and union make choices that they believe are in their best interests. If the corporation leaders decide to pay the workers more than it can afford, they go out of business and the union loses, too.

Regardless of any perceived problems, in a free country, the capitalists should be able to pool their money and the workers should be able to pool their labor. And barring any adverse government regulations that affect the business in an otherwise free market, they should have to live with their actions.

I believe a minimum wage law that caps a floor of wages is as ridiculous as a hypothetical maximum wage law that caps a ceiling on how much worker could make. Government has legitimate purposes, such as making sure that the workplace is safe and that corporations and unions follow the laws, but determining wages of intelligent American workers and business owners shouldn’t be their job.

 
At 9/06/2008 3:44 PM, Blogger juandos said...

"juandos -- your airline story is pure bullshit I do not believe a word of it"...

Well spence as a lying libtard you should be used to lying as you do so often on your web site...

"document for me in what year and for what airline it happened"

Yet you can do your own homework you lazy parasitic clown...

"I don't see minimum wage laws and bargained wages by big business and big labor as the same thing"...

Who said it was walt g?

I'm just telling you that everytime there was an increase in the minimum wage the IAM insisted on a wage increase (regardless of the economic conditions at the time for the airlines) in the very next contract...

"but determining wages of intelligent American workers and business owners shouldn’t be their job"...

Yep!

 
At 9/06/2008 4:23 PM, Blogger Walt G. said...

juandos,

I never bargained a nation contract; however, I have sat in on some proposals our local union have sent to the national bargaining committee over the last 35 years, but I don't think I've ever heard the national minimum wage even mentioned at those meetings. In our case, any connection between an increase in the minimum wage and our request for a wage increase would just be by chance.

The official stance of our union is in support of the minimum wage, but I am not sure how much of that is just emphatic posturing. It is a rather popular notion for some people, and that would help garner some votes for candidates taking that position. Politics aside, it does not affect that high of a percentage of workers, and I don’t see how it helps anyone in the real world in the long run.

Government has enough problems already, so they should just butt out here. We can put ourselves out of business just fine without their help : )

 
At 9/06/2008 4:44 PM, Blogger spencer said...

Just as I though jaundos made it up.

 
At 9/06/2008 5:20 PM, Blogger like such as said...

spencer-

why are you willing to listen to Walt G.'s anecdotal evidence, but wave off the anecdotal evidence of people who disagree with you as unreliable since it hasn't been published?

 
At 9/06/2008 6:51 PM, Blogger spencer said...

I did not know anything about Walt G.-- my posting were made before I read his comments.

Since Jimmy Carter deregulated the airline industry in 1979 wages in that industry have been devastated.

Show me a single airline industry occupation where their real wages are higher now than they were 30 years ago. in general their nominal wages are lower than they were 30 years ago.

But janudos tell us that increases in the minimum wage are driving airline industry wages higher.

Anybody who has any knowledge of what is happening in the economy knows this has no basis in reality.

It is obvious that like our good host, when it comes to the minimum wage janudos is making up claim out of thin air that have no basis in reality.


PS. I'm still waiting for Mark to provide me with any evidence that employers actually cut fringe benefits after a rise in the minimum wage.

 
At 9/07/2008 12:58 AM, Blogger Klockarman said...

This post reminds of the frustration I have with my father-in-law. I love the man, but he just doesn't understand some things. He's a retired union man, and union official - so he's all for upping the minimum wage as are all union men (so that their artificially high union wages don't look too high in comparison), but then he complains that we need a Democratic President in the White House because the current unemployment rate is too high and a Democrat cares more about the working class folks and will do more to help them find jobs. For fear of starting WWIII, I refrain from tying the higher minimum wage to the high unemployment rate he so despises.
I just had to tell someone. Thanks for being there, Mark. Keep up the good work.

 
At 9/07/2008 4:53 AM, Anonymous Allan Manchester said...

What a crock! Anonymous? Yeah, right! Like a business owner would pass on some free publicity. This thing is written by an economist who does not know the first thing about business.
Business owners would love to pay their employees better, if only such action would not hurt their competitive position! This is why the UAW has been able to garner such insane contracts... by ensuring that the competition would be held to the same standards.
Minimum wage does not hurt business at all, but only allows the poorest of workers a small measure of disposable income, and it is on this small discretionary spending that all healthy economies depend on.

 
At 9/07/2008 10:15 AM, Anonymous QT said...

It seems that this discussion seems to hing on one's attitude toward business.

Most businesses hire employees with higher skill sets and therefore, higher wages than the min. wage. Providers of low skilled jobs are usually in retail, fast food, & non-profit community organizations (you want to see starvation wages just visit your local community museum).

Labour represents a major cost for any business. The minimum wage doesn't destroy a business; the business owner may simply make do with 1 less person or do the job himself.

It is ironic that governments pass minimum wage laws when they routinely pay their workers $1.00 per hour.

 
At 9/07/2008 12:31 PM, Blogger druid said...

There's a bunch of fairly bogus logic being thrown around here, and I say that as a small business owner myself.

Point one, from Min Wage/Max Folly:

"Poor people are not poor because of low wages. For the most part, they're poor because of low productivity, and wages are connected to productivity."

Wages are connected to productivity (since wages are driven by overall GDP and the economy is largely driven by worker productivity). *Individual* wages are driven by market forces more than individual productivity. That's why a janitor in Silicon Valley makes more than a janitor in Idaho - it's not that he's more productive, it's that the market for janitors is tighter in Silicon Valley due to factors like cost of living, etc. While it's nice to blame the working poor's low wages on their supposed lack of productivity, it's really not true - unskilled labor is cheap because the available labor force is so large, not necessarily because it is 10-100x less productive.

As a small business owner, I can say that lower minimum wages can have two effects: they *can* lead to lower employment (if I have a fixed amount of money to spend on labor, it'll go to fewer people). Or, it can cut into my profits. Most businesses are limited by the size of their customer base (they have a fixed amount of work), and they have a fixed-sized workforce (you need X workers to provide the labor needed to service your customer base) - having a minimum wage ensures that those X workers get a decent living wage and has no impact on overall employment (arguments about trickle-down theory aside).

As for the original anecdote about closing restaurants - if you're running a restaurant in a rural county that depends on tourism, and you go out of business during Jan/Feb/Mar (off-season), I think you can blame your financial troubles on lack of tourism due to rising gas prices and the normal cyclical tourist economy rather than some piddling increase in the minimum wage.

 
At 9/07/2008 1:47 PM, Anonymous Allan Manchester said...

Druid
If you really were a small business owner, then you would know that how much you have to spend is dependent on how much you bring in day to day. Your budget is limited, but it is not fixed. Your sales are limited by your costumer's earnings. It is good for every business if only some of their customers get a raise, even if it is the poorest ones. The notion that minimum wage hurts business is in fact THE flawed logic.

 
At 9/08/2008 12:18 PM, Anonymous Fred said...

The broken window fallacy of Bastiat:

"Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented."

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when he is forced to arbitrarily raise the wages of all his employees?

 
At 9/08/2008 12:30 PM, Anonymous Allan Manchester said...

"Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."
And I tell you that economics as taught is short sighted. Labeling an argument a "fallacy" simply declares that you do not agree with the argument. It does not dispute the facts presented, nor reinterpret the facts presented. These arguments are labeled "fallacies" only to short circuit the argument, and inoculate the economics students from logical argument.
The broken window fallacy is a logical argument, but you label it fallacy so as to make it an illegitimate one regardless the legitimate logic to it.

 
At 9/08/2008 7:06 PM, Anonymous Anonymous said...

Although wages of low-wage workers increase with increases in the minimum wage, their hours and employment decline, and the combined effect of these changes is a decline in earned income: http://www.nber.org/papers/w7519

Exposure to minimum wages at young ages may lead to adverse longer-run effects: http://www.nber.org/papers/w10656

The Earned Income Tax Credit (EITC) is more beneficial for poor families than is the minimum wage: http://www.nber.net/papers/w7599

A higher minimum wage may discourage employers from using the very low-wage, low-skill workers that minimum wages are intended to help. Also a higher minimum wage may hurt poor and low-inocme familes rather than help them, if the disemployment effects are concentrated among workers in low-income famies. And a higher minimum wage may reduce training, schooling, and work experience - all of which are important sources of higher wages - and hence make it harder for workers to attain the higher-wage jobs that may be the best means to an acceptable level of family income.
http://showmeinstitute.org/smi_study_2.pdf

At the same time, I would suspect people closing up full-service restaurants today are feeling more the effects of the economic downturn than higher minimum wages - min wages more affect fast-food and low-end retail establishments.

 
At 9/08/2008 10:14 PM, Anonymous Allan Manchester said...

"Although wages of low-wage workers increase with increases in the minimum wage, their hours and employment decline,"
Only if they choose to work less in the greatly improved economy.
"The Earned Income Tax Credit (EITC) is more beneficial for poor families than is the minimum wage:"
Oh yeah!! Replace simple government guideline with government handout! Now THERE is a progressive idea!
"...may...may...may..."
Yup, definitely!
National labor regulations came in with the NRA in 33, and the economic contraction of the depression turned immediately to strong expansion. The NRA was trashed in the courts in 1935 and the strong growth started to lose steam until it crashed again in 37. The reaction to the FLSA in 38 was again economic contraction changing to strong growth.
It may seem counter intuitive to place regulations on the economy to produce a stronger economy, but every minimum wage increase has been immediately followed by strong and permanent expansion. The countries that have no minimum wage continue to mire in economic depression regardless the massive handouts by countries that do have a good minimum wage.

 
At 9/09/2008 2:48 AM, Anonymous Odofakyodo said...

allan,

I'm not trying to get into an immigration debate here, but the very fact that many many business owners hire illegal workers so that they don't have to pay them minimum wage (among other reasons - e.g. benefits) seems to go against your claim that businesses are better off with a minimum wage. If they were better off paying the minimum wage, why hire workers illegally so you can avoid paying it to them?

Also, can you provide some links to support the following claims:

It may seem counter intuitive to place regulations on the economy to produce a stronger economy, but every minimum wage increase has been immediately followed by strong and permanent expansion.

and

The countries that have no minimum wage continue to mire in economic depression regardless the massive handouts by countries that do have a good minimum wage.

If you're going to make claims that even you admit are counter-intuitive, isn't it in your best interest to provide some evidence, because as far as I know, most European countries like France and Germany have higher minimum wages and higher unemployment rates (you can look these up on wikipedia or anywhere, really).

 
At 9/09/2008 8:05 AM, Anonymous Allan Manchester said...

"...many business owners hire illegal workers so that they don't have to pay them minimum wage..."
Of course business tries to pay as little as they can get away with, regardless what they can afford. When a group is clearly outside of the law, then the MW is circumvented.
"If they were better off paying the minimum wage, why...?"
Because competition forces all prices down. My laborer is my competitor's customer. My competitor will gain from my employee getting a raise, but without government regulation, the gain that I would get from my competitor giving raises will never materialize, so we just won't do it.
"most European countries like France and Germany have higher minimum wages and higher unemployment rates "
Germany created the low wage sector in 2001 basically destroying the wage floor. Since then, Germany's economy is not good. http://www.dw-world.de/dw/article/0,,3276787,00.html?maca=en-rss-en-all-1573-rdf
France's unemployment figures include those not looking for work and not even considering going back to work. As such, their stats are not really comparable to the US.
"Also, can you provide some links to support the following claims:"
If you doubt the validity of what I have said, show me why. I know that if you've taken economics, then there is no reality that will remedy your brainwashing, and I waste my time in giving you the basis for my understanding.

 
At 9/09/2008 11:07 AM, Anonymous Odofakyodo said...

You really didn't answer my question. Let me rephrase. You claim that these "businesses are better off" with a minimum wage. If that is true, then why would a business avoid doing something that makes it better off (by hiring illegal workers or paying low wages)?

Because competition forces all prices down. My laborer is my competitor's customer. My competitor will gain from my employee getting a raise, but without government regulation, the gain that I would get from my competitor giving raises will never materialize, so we just won't do it.

1. Businesses compete to buy employees, which has an upward push on wages.

2. Any given business (you, your competitor, others) is on a budget. If you raise the cost of running the business by raising the minimum wage, then the business makes less of a profit, or even a loss, if it continues to operate how it was operating before. It has to make changes and adjust.

3. Your argument seems to be that consumers in general will have more money, therefore giving everyone more purchasing power, which will bolster the economy. Well, why don't we just double or triple the minimum wage, hmm? Why don't we just make the minimum wage $25 per hour? By your logic, all businesses would benefit because most consumers would have more money to spend.

Germany: I was not correct in asserting that Germany had a higher minimum wage than the US. In any case, the article you referenced basically has a couple of people from an institute speculating that their economy will ultimately be hurt by their deregulation of wages in 2003. However, the signs are pointing the opposite direction in the years since the deregulation: their unemployment rate is way down and their GDP growth is up.

If you doubt the validity of what I have said, show me why.

Common sense and the laws of supply and demand suggest that we can't set arbitrarily high price floors without creating surpluses and generally hurting the economy. You have already admitted that your argument is counter-intuitive. I think that doesn't make it wrong, but that makes it necessary for you to provide some evidence to your claims.

As far as specifics, you said:

The countries that have no minimum wage continue to mire in economic depression regardless the massive handouts by countries that do have a good minimum wage.

But even the Germany example contradicts this statement. All I'm asking for are a couple of examples where the lack of minimum wage laws really hurt the economy.

Same goes for

every minimum wage increase has been immediately followed by strong and permanent expansion.

And by the way, I only took one macro econ course more than 10 years ago. I haven't been brainwashed. I just want you to persuade me.

 
At 9/09/2008 1:51 PM, Anonymous Allan Manchester said...

"why would a business avoid doing something that makes it better off"
My payroll benefits my competitor's sales. My competitor's payroll benefits my sales. It is to our mutual benefit to increase our salaries, but we cannot do this unilaterally, because if I raise my salaries and my competitor doesn't, then I am bearing the cost of my competitor's fortune and I will be losing capital to my competition.
"Businesses compete to buy employees, which has an upward push on wages."
Rising prices are desirable. A lack of competition allows prices to rise, but competition always pushes down on prices.
"If you raise the cost of running the business by raising the minimum wage, then the business makes less of a profit,"
Not if sales are increased to commensurate. In the macro there is no cost. The money coming to business from the consumer is the money going from the business to the laborer. It is impossible to raise salaries in the macro without increasing sales.
"Well, why don't we just double or triple the minimum wage, hmm"
By my analysis, minimum wage should be doubled and maybe tripled. This should push the median earnings towards equaling the average earnings which would be the optimal economy.
And to answer your next question, you cannot have the minimum wage at 100/hr right now because it is a mathematical impossibility to have the lowest higher than the average. What would happen if we tried?? I do not know and certainly you do not know either.
"However, the signs are pointing the opposite direction in the years since the deregulation: their unemployment rate is way down and their GDP growth is up."
You can only build an economic ghost on deteriorating consumer income (spending). This is exactly the situation found in the US following the outlawing of minimum wage in 1924. The growth was and is ethereal.
All business activity is dependent on the expected consumer spending. With deteriorating incomes, the consumer spending will fall way short of current expectation, and Germany will crash.
"Common sense and the laws of supply and demand suggest that we can't set arbitrarily high price floors without creating surpluses and generally hurting the economy."
But the sensible theory is thwarted by the reality of history. I went through the thirties and showed you. You do not mention that evidence, but only ask for more.
"All I'm asking for are a couple of examples where the lack of minimum wage laws really hurt the economy."
Almost all of Africa. Zimbabwe for example gutted their minimum wage in 90. Under severe labor laws in the 80s, Zimbabwe was the bread basket of Africa. Now it is the worst economy in the world.
BUT the economist Mugabe seems to have learned his lesson, and a new minimum wage is slated for enforcement on Oct 1. http://www.zimbabwesituation.com/oct19_2001.html
The Zimbabwe Situation Watch and learn!
I am sorry that you did not understand the answer to your questions, and I hope this helps to clarify.

 
At 2/28/2009 2:19 PM, Blogger luxomni said...

Six months late to find this discussion, but ... there are some things missing in this discussion and its comments:

First, it is not just the effect on the employer's actions that is an adverse effect to the employee. Employers contrary to popular belief do not eat the increases in cost - they pass them through to their customers. This increase effects minimum wage earners just like everyone else. The net result is ultimately a wash. The only change ultimately is in the numbers that everyone must become readjusted to.
Because; the minimum wage is not an amount at any figure. Set it to $100 and hour and eventually everything will sort itself out to the same places they are now with different and confusing numbers; but not without causing much misery first.
The minimum wage is a label. It is a name for the bottom-most wage that an employer can pay someone. If someone is worth no more that x an hour, that is that. It is not employers who keep people at minimum wage. It is the worker who keeps himself at that point through his actions, work ethic, education attitude, and attendance; or no one would earn more than the minimum wage. The minimum is just that. If one cannot raise a family on that so be it, maybe you aren't entitled to a family until you become worth more.
Taking more than you are worth from an employer or society is nothing more than Government assisted theft.

 

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