Wednesday, June 01, 2011

Two More Questions About The Minimum Wage

Saw Bowman at the Adam Smith Institute blog asks two more questions about the minimum wage:

1. An excess of supply in labour is usually called unemployment; minimum wage supporters deny that minimum wage laws create unemployment. What other goods can have a price floor set above the market price without creating an excess of supply?

2. Why don't you want minimum wage to be £20/hr. ($33/hr.), or £100/hr. ($164.25), or £1,000/hr. ($1,642.50)? If wages can be set by government without any ill effects, why not solve poverty simply by raising the minimum wage?

68 Comments:

At 6/01/2011 8:22 AM, Blogger Walter said...

An excess of labor supply is not called unemployment. Unemployment is a count of the number of people actively looking for work. If the minimum wage made jobs very attractive, it could very well increase "unemployment"; if it destroyed lots of jobs, it could reduce unemployment, and yes, in some cases, reduce the unemployment rate. Oddly, proponents of the minimum wage often say the minimum wage reduces unemployment and proponents say it increases unemployment: the very opposite of what they really want! Once again, "unemployment" does NOT mean losing a job; it means looking for one. This has been known to labor economist for years (look up Jacob Mincer and the push and pull effects of minimum wages).

 
At 6/01/2011 8:37 AM, Blogger BP said...

I did a study of minimum wages in Canada when I was in university and came across an interesting coincidence...the provinces with the highest minimum wage tended to have lower per capita university enrolment. Someone should study this on a larger more formal scale in the US to determine if this is correlated in any way.

 
At 6/01/2011 8:49 AM, Blogger geoih said...

Quote from Walter: "Once again, "unemployment" does NOT mean losing a job; it means looking for one."

If you have a job and you're looking for a job, you're still employed. If you don't have a job and you're looking for a job, you're unemployed.

Minimum wage makes it unprofitable (and illegal) to employ somebody whose productivity is less than that minimum wage. If your productivity is only $5/hour and the minimum wage is $7/hour, then you will be unemployed (eventually, assuming you continue to want a job), unless the market for labor changes and/or your productivity increases (look up supply and demand).

 
At 6/01/2011 9:07 AM, Blogger morganovich said...

"What other goods can have a price floor set above the market price without creating an excess of supply?"

government health care?

 
At 6/01/2011 9:22 AM, Blogger Sean said...

These types of questions are the form of argument I like most: I approve.

 
At 6/01/2011 9:24 AM, Blogger PeakTrader said...

A minimum wage may cause unemployment. However, the gains of higher wages for 99% of workers may exceed the job losses of 1% of the workforce.

Why should construction firms buy hardhats for their workers when some workers would be willing to work without the company expense of hardhats (imagine how many more workers can be hired without the expense of hardhats)?

Why buy a standardized hardhat, for $7.25, when some workers would be willing to work for a cheaper-less effective-substandard hardhat or without a hardhat?

Why doesn't the construction firm buy $164.25 or $1,642.50 hardhats for their workers instead of $7.25 or $2.00 hardhats?

 
At 6/01/2011 9:25 AM, Blogger bix1951 said...

Somehow I remember reading "The Grapes of Wrath" by Steinbeck. Seems like the workers were paid so little that they had to go into debt in order to get enough to eat. That's the line about "THE COMPANY STORE"
Perhaps the minimum wage does depress the economy, but it is the best solution we have found so far regarding wages to what otherwise is an inequitable world.
Idealists on both sides of the argument do compromise for the sake of equity.

 
At 6/01/2011 9:25 AM, Blogger Sean said...

morganovich,

True. A price floor can coexist with a dearth of supply if a monopoly is enforced.

 
At 6/01/2011 9:52 AM, Blogger Angela said...

"Why should construction firms buy hardhats for their workers when some workers would be willing to work without the company expense of hardhats ..?" - Because their insurance company won't cover their losses if an accident happens to a guy not wearing a hardhat.

 
At 6/01/2011 9:55 AM, Blogger Angela said...

"Perhaps the minimum wage does depress the economy, but it is the best solution we have found so far regarding wages to what otherwise is an inequitable world. " Nonsense. I clearly remember the late 90's. Burger King was paying twice minimum wage, and offering an $800 signing bonus to anybody who would stay at least six months. Minimum wage jobs were essentially disappeared by the force of the market. There is no upside to having a minimum wage law.

 
At 6/01/2011 9:59 AM, Blogger PeakTrader said...

Angela, are you saying government is lowering labor costs by preventing lawsuits?

 
At 6/01/2011 10:05 AM, Blogger PeakTrader said...

Angela, in the late '90s, the country was beyond full employment, actual output exceeded potential output, and real wages actually rose.

I recall working at Janus Funds in 1999-00, we hired bag ladies and guys who slept in parks to process paperwork, because there was so much "economic activity."

 
At 6/01/2011 10:09 AM, Blogger PeakTrader said...

The Greenspan Fed deserves a lot of credit for the economic boom in the late '90s.

Greenspan believed the economy could expand at a faster rate without fueling inflation.

He was correct.

 
At 6/01/2011 10:25 AM, Blogger Methinks said...

"He was correct."

Until the bubble burst.

 
At 6/01/2011 10:25 AM, Blogger efimpp said...

>What other goods can have a price floor set above the market price without creating an excess of supply?

human beings are not produced at higher rate due to minimum wage increase. That's the difference "other goods".

 
At 6/01/2011 10:26 AM, Blogger Methinks said...

Seems like the workers were paid so little that they had to go into debt in order to get enough to eat.


And now those workers won't be hired at all. Hallelujah! How easily difficult problems are solved by the stroke of the government pen.

 
At 6/01/2011 10:31 AM, Blogger Rich B said...

"A minimum wage may cause unemployment. However, the gains of higher wages for 99% of workers may exceed the job losses of 1% of the workforce."

Why would the minimum wage increase wages for 99% of workers? If I were making $50,000 a year, why would a minimum wage increase affect my pay? How about $100,000? Or $1,000,000?


Nonsense.

 
At 6/01/2011 10:57 AM, Blogger PeakTrader said...

Methinks, the "bubble burst" with one of the mildest recessions in U.S. history.

Based on annual per capita real GDP, the 2001 recession wasn't a recession, and the U.S. had by far the longest economic expansion in history, from 1991-07.

 
At 6/01/2011 10:58 AM, Blogger Dimi Paun said...

To play the devil's advocate, if we are to have a "social net" where the state provides some sort of minimal income, then it kinda makes sense to say to the employer: if you want to provide the income, it better be greater than what I provide, otherwise let me handle it.

 
At 6/01/2011 11:02 AM, Blogger PeakTrader said...

Rich, if your wage is already above the minimum wage, a rise in the minimum wage that's still below your wage won't raise your wage.

 
At 6/01/2011 11:10 AM, Blogger PeakTrader said...

I was talking about "the gains of higher wages for 99% of workers," i.e. the workers affected by the minimum wage.

 
At 6/01/2011 11:20 AM, Blogger PeakTrader said...

Dimi, of course, if the state provides economic benefits for not working greater than the economic benefits of a minimum wage job, then why take the minimum wage job?

 
At 6/01/2011 11:24 AM, Blogger morganovich said...

peak-

that's much too limited a way to look at at.

you are considering only nominal wages.

if wages are artificially high, then so are prices as that labor cost gets passed on through them.

eliminate a minimum wage, and nominal wages may drop, but so will nominal prices, meaning that real wages need not be affected.

and your hard hat example is just gibberish.

my house cleaners bring their own equipment and supplies.

as a result, they can charge more.

you assume that only employers have power in a wage or equipment negotiation.

any same construction worker would happily buy his own hard hat for an extra $1/hr. for an extra 5 cents/hr, perhaps not, but there is always an indifference point for both worker and employer.

 
At 6/01/2011 11:24 AM, Blogger PeakTrader said...

And, of course, leisure has a price.

Would you rather work 40 hours a week for $300 a week or not work for $200 a week?

 
At 6/01/2011 11:34 AM, Blogger morganovich said...

"Greenspan believed the economy could expand at a faster rate without fueling inflation.

He was correct."

no. he was dead wrong. he did fuel inflation. the late 90's were massively inflationary. it just wasn;t reported because they changed the calculation. in the 70's, that price behavior would have been called 8-10%. if you believe that the late 90's had low inflation, then you must say the same about the mid 70's. calling the same temperature 50 degrees instead of 95 degrees doesn't mean it was actually any cooler.

greenspan destroyed all of the good work of volcker. his fed rode a massive internet bubble that it failed to do anything about. then, when it popped, he used preposterously loose money to mitigate the effects by inflating another bubble and another (housing, debt, etc)

now, things are so bad the the only thing keeping us afloat is $1tn in fed monetary injections.

greenspan took an easy bubble to clean up (equity bubble in productive assets) and turned it into the hardest kind to recover from (debt bubble in unproductive assets).

he should be tarred and feathered, not lionized.

then, when it became obvious that the game was up he retired and handed the ticking bomb to bernanke, another bubble baby and inflation denialist.

greenspan's monetary policy was the equivalent of curing a hangover with cocaine then a cocaine hangover with meth.

that's why the economy is such a wreck right now.

it's also why, using a realistic measure of inflation, were were in recession for half of the period between 2000-2011.

his whole "productivity miracle" was just numerical manipulation.

if you underreport inflation, productivity looks high and GDP growth is overstated.

greenspan may have been the worst fed president in US history, though bernanke seems determined to give him a run for his money.

 
At 6/01/2011 11:38 AM, Blogger PeakTrader said...

Morganovich, it's a very limited view that a $1 rise in the minimum wage results in a $1 higher price creating no benefit for the minimum wage worker.

The minimum wage rise could be absorbed by lower profits, higher productivity, or higher prices for higher income workers.

Also, according to you, the house cleaners who don't have the proper equipment can charge less and compete better with the house cleaners who bought proper equipment, because they're charging you a lower price.

 
At 6/01/2011 11:46 AM, Blogger PeakTrader said...

Morganovich, obviously, you still believe inflation is moving at lightening speed, which only people like you can see.

 
At 6/01/2011 11:47 AM, Blogger Andrew_M_Garland said...

To Peak Trader,

Are you being paid to comment?

 
At 6/01/2011 11:57 AM, Blogger PeakTrader said...

To Andrew

No, are you?

 
At 6/01/2011 1:04 PM, Blogger Mike said...

Peak,
Do you honestly believe that a $1 increase in the min. wage is no big deal to a small business, or are you just play devil's advocate?
Depending on one's competitive situation (a family owned pizza shop trying to remain competitive with Domino's prices, for example) and realistic margins, I'd say a 13%, govt-mandated increase in payroll would only be good for the large corporate competitor because the family owned biz can only raise prices so much and certainly can't absorb it in lower profits.
If you have 7 employees, it's virtually the same as adding a worker to the payroll without the worker...no big deal?

The only way you're going to get more productivity out of 17-year-old minimum wage workers is by substantial investment in new technology.

I would even take issue with a $1 raise resulting in $1 extra in costs...I'd say it's more than a $1 increase in costs.

 
At 6/01/2011 1:25 PM, Blogger PeakTrader said...

Mike, why should there be any labor standards? Afterall, they cost money and cause unemployment.

If $7.25 an hour is too much, why not hire some Vietnamese, who are willing to work for $2 and hour and share an apartment or live in a car?

There may be millions of more productive people unwilling to work for less than $8 an hour. How do you solve that unemployment problem when there are millions of people willing to work for less than $7.25 an hour?

If a store can't afford $7.25 an hour, maybe a more productive chain store should take over its business.

 
At 6/01/2011 1:45 PM, Blogger Mike said...

I suppose if what you want are 2 or 3 national chains for every business, you're on the right track.
And if by productivity, you mean reduction in quality...again, you're on the right track.

I don't know what the current numbers are (post '08) but the historically insignificant number of people working for the minimum wage are mostly kids in jobs that only require a little more than a warm body.

If you're asking me to solve unemployment for engineers, I can't. But I can tell you that it's completely silly to attempt to place them in a McDonald's drive thru at a wage comparable to their education.

Not all jobs are the same... high-skill/high-wage jobs don't have anything in common with no-skill/low-wage jobs and, no matter what you do or say, you can't change that.

 
At 6/01/2011 1:56 PM, Blogger Ron H. said...

Peak

"A minimum wage may cause unemployment. However, the gains of higher wages for 99% of workers may exceed the job losses of 1% of the workforce."

In nominal terms, perhaps, but how does that work when you use real wages, considering the necessary increases in prices caused by this increased cost to businesses?

How is your argument affected by the additional taxing and redistribution from the gainers to the losers?

This is an argument for inequality, not your usual call for redistribution of gains.


"Why should construction firms buy hardhats for their workers when some workers would be willing to work without the company expense of hardhats (imagine how many more workers can be hired without the expense of hardhats)?"

There are two reasons, as I see it, one is that workers being injured on the job is disruptive, and causes delays. The time saved is worth more than the expense of providing hard hats.

The second reason is similar, in that it is a trade-off between buying hard hats, and defending lawsuits.

"Why buy a standardized hardhat, for $7.25, when some workers would be willing to work for a cheaper-less effective-substandard hardhat or without a hardhat?"

The answer is the same; cost. If the employer will lose money by allowing workers to go without hardhats, he is better off not hiring them or laying them off.

The same is true if a worker doesn't generate for the employer at least the amount he is paid.

 
At 6/01/2011 2:09 PM, Blogger PeakTrader said...

Mike, after decades of minimum wages, I'm sure there are more than two or three restaurant chains, for example.

Productivity typically raises quality.

I didn't know an $8 an hour job is a high skilled job.

I wonder how many Americans who aren't high skilled refuse to work for less than $8 an hour or even $10 an hour.

 
At 6/01/2011 2:17 PM, Blogger PeakTrader said...

Ron says: "workers being injured on the job is disruptive, and causes delays. The time saved is worth more than the expense of providing hard hats."

It wouldn't take long to call 911 and hire another Mexican to work for $2 an hour.

 
At 6/01/2011 2:26 PM, Blogger Ron H. said...

"The minimum wage rise could be absorbed by lower profits..."

Why should stockholders suffer?

"...higher productivity..."

This reduces the number of workers needed, right?

"or higher prices for higher income workers."

What does this even mean? Means testing at the checkout counter?


"Also, according to you, the house cleaners who don't have the proper equipment can charge less and compete better with the house cleaners who bought proper equipment, because they're charging you a lower price."

I'll take a chance that what he means is, a housekeeper with their own equipment and supplies can charge more that one who uses HIS equipment and supplies.

 
At 6/01/2011 2:31 PM, Blogger Ron H. said...

"It wouldn't take long to call 911 and hire another Mexican to work for $2 an hour."

Well, maybe, but what about cleaning up that wheelbarrow full of wet cement that just got dumped on the finished brickwork?

Besides, by calling 911 you are asking ME to foot part of the bill.

 
At 6/01/2011 2:33 PM, Blogger Mike said...

Peak,

Think reality, not theory.

After decades of minimum wages, how many more chains are there now than in years past...? I'm not anti-chain, I'm anti govt interference making my choices for me. The lower-cost giant chains set the price for local biz...and, yes, many locals have now left their entire sector to these chains.
Regulation favors big biz. Period.

Do you really think these chains squeeze out more productivity from their zit-faced, texting employees? It isn't productivity, it's reduced costs, and those costs are often reduced by reducing the quality of their supplies (and of course squeezing their suppliers, something small shops can't do).

I just re-read my last post and don't see where I said $8 was a high skill job.

Lastly, I don't give 2 sh*ts about some delusional, entitled idiot with no skill who believes he or she can name their own wage. If they aren't willing to put in the effort to become viable, why should I care how much they want?
I hope I'm misunderstanding you because that's just crazy.

 
At 6/01/2011 2:35 PM, Blogger PeakTrader said...

Ron, I agree, labor standards are too low. We can start with better hardhats.

 
At 6/01/2011 3:17 PM, Blogger Ron H. said...

Peak

"There may be millions of more productive people unwilling to work for less than $8 an hour. How do you solve that unemployment problem when there are millions of people willing to work for less than $7.25 an hour?

You have answered that question yourself.

"If $7.25 an hour is too much, why not hire some Vietnamese, who are willing to work for $2 and hour and share an apartment or live in a car?"

People unwilling to work shouldn't be considered unemployed.

 
At 6/01/2011 3:28 PM, Blogger morganovich said...

"Morganovich, it's a very limited view that a $1 rise in the minimum wage results in a $1 higher price creating no benefit for the minimum wage worker."

peak-

once more your economic ignorance is showing.

if it costs me $1/hr more to hire you, i'll pass that cost on (likely and then some as i alos have to pay your fica etc)

thus, for every extra $1 paid to a worker, $1+n is added to the price of goods.

this means that in real terms, you get a deadweight loss of n.

such a loss will always occur.

you are just thinking about it from the standpoint of the worker. sure, if you get the job, it may benefit you in much the same way that a tariff on imports benefits a local producer, but, like a tariff, it also always results in a larger loss to consumers.

in fact, minimum wage acts just like a tariff. it creates an artificial price level that benefits a few, but reduces overall well being.

regarding inflation, you do not have a leg to stand on there.

there is not question that the CPI calculation was changed nor that doing so reduced reported inflation. this happened in 1992.

no matter which you believe to be the correct measure, it means that data from before and after the change are not comparable. the old data was never adjusted to the new methodology. the two series were just spliced together.

there are only 2 consistent interpretations of the data. either inflation was high in the 70's and is high now (use the old methodology) or inflation is low now and was low in the 70's (use the new and apply it to past years).

there is no consistent way to believe that inflation in the 70's was high and that it is low now.

so which is it? did the 70's inflation not happen? to make the augment you make for current low inflation, you must also believe that to be true. i doubt you do.

 
At 6/01/2011 3:33 PM, Blogger morganovich said...

"There may be millions of more productive people unwilling to work for less than $8 an hour."

and this is just foolish.

i may be unwilling to work for less than $1000/hr. so what? what does what i am willing to do have to do with anything? if i am not willing to do anything reasonable, that's my tough luck.

people get paid according to their productivity, not according to what they want.

if a harvard law grad won't work for under $200/hr, well, that may be reasonable and he may well get it. if he produces more that $200/hr worth of value, then it may be a great deal. but if a high school drop out demands the same wages despite lacking the productivity, he will not work.

whether or not people want $8/hr is irrelevant if they cannot produce that much value.

also: consider all the jobs it eliminates. if working at a beach snackbar produces $6/hr in value but the minimum wage is $8, then how can you rationally hire? you'll either raise prices, shut down, or automate.

 
At 6/01/2011 4:36 PM, Blogger PeakTrader said...

Morganovich, I find it interesting you disagree with my statement, because it basically restates your theory.

You stated:

"eliminate a minimum wage, and nominal wages may drop, but so will nominal prices, meaning that real wages need not be affected."

And my statement that you disagree with:

"It's a very limited view that a $1 rise in the minimum wage results in a $1 higher price creating no benefit for the minimum wage worker."

I explained how the real wage increases for the minimum wage worker.

You continue to make false assumptions, e.g. "if it costs me $1/hr more to hire you, i'll pass that cost on...to the price of goods."

That's not necessarily true. The cost could be shifted from profits to wages. Also, a higher wage can attract more productive workers. Moreover, the minimum wage worker may not pay the higher price if the good they produce aren't consumed by them.

We've seen the Keynesian theory of "sticky" prices work over this recession, because prices have not fallen enough to stimulate demand enough (keeping profits too high).

If the economy was static, we could use your inflation assumptions. However, Ford no longer produces the Model T.

Everyone has a reservation wage.

 
At 6/01/2011 5:11 PM, Blogger morganovich said...

"That's not necessarily true. The cost could be shifted from profits to wages"

wrong. you are thinking only in the very short term.

if it is shifted from profits to wages and the return on invested capital declines, then what happens to the company and the industry?

you stop inventing in it in preference to other opportunities.

less investment = less growth etc.

thus, your whole idea is self defeating/correcting.

companies/industries that do as you suggest tend to grow less and fail more.

they also have lower stock appreciation and pay lower dividends.

so no, i do not agree with your theory, you are misinterpreting what i am saying. there is ALWAYS, ALWAYS a deadweight loss from tariffs.

imagine we impose a sugar tariff in the US of $20/lb. this would make sugar hugely expensive. w few sugar producers in the US would benefit, but the society as a whole will always lose a greater amount.

a minimum wage is just a tariff on people with lower reservation wages. it works exactly the same way and will always result in a deadweight loss.

and sure, we all have a reservation wage, but that does not make them rational, reasonable, or meaningful. if your reservation wage exceeds your productivity, you are free to keep it, but you will not get hired.

that also cuts both ways. if my reservation wage is $6, who are you to tell me that i cannot take a job unless it pays $8.

who are you to tell me that i cannot take an unpaid internship to learn valuable skills? we used to use all manner of interns. smart kids would fight to work for us for free. many would have paid us. in fact, they now have to. we charge them $1 and call it a class because it is illegal for them to work for us for free.

 
At 6/01/2011 5:12 PM, Blogger juandos said...

"Everyone has a reservation wage"...

Normnally I say this is true but since the introduction of the 99 week plan I'm not so sure anymore...

 
At 6/01/2011 5:15 PM, Blogger PeakTrader said...

Anyway, it should be noted that a rise in the minimum wage will likely result in a very small price increase.

In the economy, few workers will be affected by the minimum wage, and in firms, wage costs are a proportion of labor costs and labor costs are a proportion of production costs, some percentage will be absorbed by profits, and some percentage will be offset by productivity.

 
At 6/01/2011 5:22 PM, Blogger morganovich said...

regarding inflation, you point makes no sense.

many (though far from all) products were better in 1976 than in 1956 just as they were in 2008 vs 1988.

they just were not adjusted for then.

you are actually making my point for me.

your argument says nothing at all about their comparability.

it's also a meaningless measure of the price level. so a 1999 ford taurus is 4.2% better than a 1988 version. apart from this being a completely arbitrary number, that's only meaningful to you if you can still buy the old one. you can't.

besides, it is not that sort of hedonic adjustment that makes most of the difference, it's the geometrically weighted substitution assumptions.

bottom line is that your point is meaningless.

imagine a thermometer. it's a tube with a column of mercury in it. it is marked in Fahrenheit from 1945-1992 and then they change it to celsius.

one day someone looks at the data and says "wow, it's gotten much colder than it used to be. temperatures used to average 50 degrees and now they are only 10."

would you take them seriously?

would you expect ice on the driveway at 30 despite the fact that you were in shorts?

that's literally the argument you are making.

so answer the question: do you believe there was high inflation in the 70's? the inflation mercury is as high now as it was then. we've just pretended it's lower by changing the markings on the tube. no matter what we call it, the state of the world is the same.

you're out de-icing the driveway because the thermometer says 30 even though that means 86F.

 
At 6/01/2011 5:25 PM, Blogger morganovich said...

"Anyway, it should be noted that a rise in the minimum wage will likely result in a very small price increase."

but that's not the point. that's like saying "if i steal $100 from you, it will only reduce your net worth slightly."

raising the minimum wage will always cause a real net loss. prices will go up more than the wage recipients benefit.

it's just spread out so you don;t notice, but that does not make it any less a net loss.

 
At 6/01/2011 5:27 PM, Blogger morganovich said...

"Normnally I say this is true but since the introduction of the 99 week plan I'm not so sure anymore.."

getting free money for sitting on your ass does not eliminate a reservation wage, it just increases it.

surely if you offered many of these people $1million to work, they'd jump at it.

 
At 6/01/2011 5:37 PM, Blogger Philip said...

@Peak: "That's not necessarily true. The cost could be shifted from profits to wages. Also, a higher wage can attract more productive workers. Moreover, the minimum wage worker may not pay the higher price if the good they produce aren't consumed by them."

Increased costs to the company from wages will increase the marginal costs of labor. If the market for this company's good/service has relatively elastic demand, they will not be able to increase price much. This is what you are saying when you say profit may shift to workers' wages.

However, the increased price of producing those goods or services (cost = summation of individual input costs, amirite) will go up. This is a shift in the supply curve to the left, reducing the quantity supplied to consumers. This may manifest in closed stores, reductions in regions served and so on. Basically, I'm claiming this will hurt competition which is good for consumers.

Elsewhere you say that despite the myriad regulations, we still see multiple suppliers. This is true, but is it possible that without these regualtions, we would have even more suppliers? With the attendant benefits of competition to consumers?

I also claim that minimum wages' attracting of more qualified and productive workers is a net loss to the economy. If a job can be served at a $4/hr rate, why make it $8/hr and put someone there whose talents could be better allocated elsewhere in the economy?

 
At 6/01/2011 6:00 PM, Blogger PeakTrader said...

Morganovich says: "raising the minimum wage will always cause a real net loss. prices will go up more than the wage recipients benefit."

That's not necessarily true either, if profit and productivity fully absorb the wage increase.

There's also a "net loss" having a disposible low wage workforce.

 
At 6/01/2011 6:21 PM, Blogger PeakTrader said...

Philip, why support idle capital (excess profits) and idle labor (excess unemployment)?

Why not shift some capital to labor to spur demand, particularly for low income workers, who have a high marginal propensity to consume.

 
At 6/01/2011 6:28 PM, Blogger Craig said...

An excess of labor supply is not called unemployment. Unemployment is a count of the number of people actively looking for work.

An "excess of labor supply" is the very same thing as "the count of people actively looking for work." If they're not looking for work, they're not supplying labor, are they?

Let's not try to cut the hairs too finely.

 
At 6/01/2011 6:37 PM, Blogger PeakTrader said...

On the supply side, prices and profits have been too high.

On the demand side, wages and employment have been too low.

If that's the case, then why support the supply side instead of the demand side?

 
At 6/01/2011 6:38 PM, Blogger Ron H. said...

"smart kids would fight to work for us for free. many would have paid us. in fact, they now have to. we charge them $1 and call it a class because it is illegal for them to work for us for free."

It's a sad comment on intrusive government regulation, but encouraging that it's so easy to circumvent. If any are so stretched that they can't even afford that, let me know, and I will set up a scholarship fund. :)

 
At 6/01/2011 6:47 PM, Blogger Philip said...

@Peak: "Philip, why support idle capital (excess profits) and idle labor (excess unemployment)?

Why not shift some capital to labor to spur demand, particularly for low income workers, who have a high marginal propensity to consume."

Idle capital like a factory? If it is unwanted, it should be left idle -- making systemic changes from government to make people use capital sounds like a market signal distortion, like formation of bubbles where things are overvalued. Isn't that bad?

As for profit, trying to reduce profits seems like it would reduce the formation of competition. Doesn't this also divert resources from where they are most efficient? An example would be decreasing the profits within a labor intensive industry. This seems to necessarily increase the relative profit of less labor intensive industries and would divert resources away from the labor intensive industry for no reason other than decree.

My last paragraph seems to paint minimum wage's effects as doing the opposite of what you seek, the "shifting of capital to labor." For the people left with jobs, yes they get more money, but as a group, they'd lose out via greater unemployment.

Increasing the cost of labor to spur demand seems wrong. If wages are driven by productivity, and this leads to the most efficient allocation of resources, why toss government decree into the mix? Profits become investment or income, so the C+I+G+X = Y doesn't seem to change.

The benefits of minimum wage seem to be outweighed by the negatives -- less sustainable, efficient allocation of labor and capital.

I so wish I was an economist.

 
At 6/01/2011 7:01 PM, Blogger PeakTrader said...

Philip, "Corporate America" is hoarding $2 trillion in cash. That may not be "the most efficient allocation of resources."

 
At 6/01/2011 7:02 PM, Blogger PeakTrader said...

I stated over two years ago, a $5,000 tax cut for each worker (or $750 billion for the 150 million workers at the time) would've created a V-shaped recovery.

Households would've paid-down or paid-off their highest interest rate debt to increase their monthly incomes, strengthened their balance sheets, strengthened the banking system, and increased demand.

However, the government can't afford a $750 billion tax cut now, because it squandered two years on a massive spending spree that failed to generate a virtuous cycle of consumption-employment.

 
At 6/02/2011 8:59 AM, Blogger Brendan said...

Some supporters of the minimum wage accept that it does actually increase unemployment in a small way but that the increased wages of the workers on minimum wage are worth this cost. What percentage of the labour force works for minimum wage? 5%? 10% at the most.

So the first question is, how MANY people get higher wages?You can't count every person receiving the minimum wage because some would received that wage anyway. The second question is, how MANY people are prevented from being hired by a minimum wage?

 
At 6/02/2011 11:33 AM, Blogger Philip said...

@Peak:" "Corporate America" is hoarding $2 trillion in cash. That may not be "the most efficient allocation of resources.""

If a company was so wildly successful in mutually voluntary trade to amass $2 trillion in cash profits, would that be bad? I don't see why. The profit mechanism exists solely to encourage efficiency by the efficient allocation of resources -- using the most cost-effective inputs possible to deliver products desired by others.

Furthermore, is this $2 trillion stuffed in a mattress somewhere to depreciate due to inflation? Or is it re-invested elsewhere to gain interest and fund more business and market opportunities? I find it hard to believe anyone would lose substantial wealth by choosing not to invest.

 
At 6/02/2011 11:55 AM, Blogger Rich B said...

Brendan-

Let's say, for argument, that the current minimum wage is $7.25 and a new minimum is about 10% higher ($7.80). Suppose 1,000,000 are currently at the current minimum and 100,000 of those are priced out of the market at the new minimum. If working hours are unchanged, total wages drop by about 3%. In addition to that drop, there are now 100,000 workers who are unemployed - losing experience and discipline coming from working.

You can play with the parameters and get different results, but clearly there is no guarantee that the extra wages for the lucky ones are greater than lost wages for those out of a job.

 
At 6/02/2011 12:50 PM, Blogger Ron H. said...

Brendan,

"The second question is, how MANY people are prevented from being hired by a minimum wage?"

A better question might be WHO those people are. A large percentage will be young people with no work experience and no marketable skills.

They might be hired at a lower wage, and gain some skills and experience that would allow them to move up the ladder, but with the bottom rung raised beyond their reach, they are out of luck.

 
At 6/02/2011 1:10 PM, Blogger Ron H. said...

By the way, those who justify a higher minimum wage as a net benefit, claiming that many gain, while only a few lose, to be consistent, must make the same argument in favor of cheap imports that benefit many while harming only a few.

 
At 6/02/2011 6:55 PM, Blogger gator80 said...

Minimum wage raises two questions: one of the net benefit to employees and one of the impact on individual liberty.

All agree some employees benefit and some suffer from a minimum wage. The net effect to society can be debated but it seems doubtful that the benefits to those who get the higher wages offset the downsides to those who lose their jobs (or who work fewer hours or don't get hired in the first place), combined with the opportunity costs to employers and consumers of the excess wages paid. (See: Bastiat, seen versus unseen.)

The impact on individual liberty seems undeniably negative. I can't work for someone for less than minimum wage and I can't hire someone for less than minimum wage, no matter how agreeable both parties are to the arrangement.

 
At 6/02/2011 9:53 PM, Blogger Ron H. said...

"The impact on individual liberty seems undeniably negative. I can't work for someone for less than minimum wage and I can't hire someone for less than minimum wage, no matter how agreeable both parties are to the arrangement."

And that, by itself, is enough reason to abolish the minimum wage. No economic argument is necessary.

 
At 6/03/2011 2:42 AM, Blogger PeakTrader said...

Yes, the liberty to exploit, particularly the young, e.g. teenagers and even younger people, e.g. newspaper boys, the least educated, the poor, and the most desperate for jobs.

Pay them a commission that turns out to be $1 an hour and when they quit, hire another. Afterall, there are plenty of people who need jobs.

 
At 6/03/2011 7:01 AM, Blogger attitood said...

"Pay them a commission that turns out to be $1 an hour and when they quit, hire another. Afterall, there are plenty of people who need jobs."

Or keep them out of jobs, pay them nothing and give them no experience. Wait until their productivity is worth the minimum wage, and then they can get a decent job.

 
At 6/03/2011 11:24 AM, Blogger Ron H. said...

"Yes, the liberty to exploit, particularly the young, e.g. teenagers and even younger people, e.g. newspaper boys, the least educated, the poor, and the most desperate for jobs."

This is a heart tugging, romantic view, but how many of those people, willing to work for minimum wage or less, are head-of-households?

Young people especially, are most likely supported by someone else. Part of what they earn is work experience and skills. It's hard to pity a kid from a middle class family who delivers newspapers. Instead we admire her for her entrepreneurship. What about little kids with lemonade stands? Are they being exploited by their parents?



"Pay them a commission that turns out to be $1 an hour and when they quit, hire another. Afterall, there are plenty of people who need jobs."

Yes, and why do they quit? They have learned a valuable lesson: That is, don't take jobs that only pay $1/hr if that's not enough for them.

Speaking of exploiting, what would you say about job applicants who claim to have job skills they don't actually have?

 

Post a Comment

Links to this post:

Create a Link

<< Home