Minimum wage - leads to price increases more regressive than sales tax, only 35% of the benefits go to those under 2x poverty line

[Jimmy Higgins]

So the argument seems to be that raising the minimum wage will destroy the American economy, as was seen with the other minimum wage hikes?

 

[Jimmy Higgins]

I have access to the paper. It's not a study but a thought experiment and lit review to support a preconceived conclusion. There are no hard numbers only a lot of "shoulds" and "we thinks". I could do the same thing and "prove" the Koch Bros are Bolsheviks.

This is the norm for Austrian economics. They believe that thought experiments, a good way to describe what they term "praxeology," is a better way to think about economics than the hypothesis and test against known data cycle of science. Refer to nearly any page in von Mises' Human Action. It is available as a free download here.

But are the points about those receiving the increase from the minimum wage hike not being that many in the last quintile still true? If so, fighting poverty via raising the minimum wage wouldn't be effective then and alternatives should be sought.

 

[dismal]

So the argument seems to be that raising the minimum wage will destroy the American economy, as was seen with the other minimum wage hikes?

Pretty tiresome Jimmy.

The argument is exactly what is written. If you are having trouble following it please feel free to ask for help. Or maybe get a basic economics textbook.

 

[Nice Squirrel]

Ah the old Econ 101 jab.

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This is the norm for Austrian economics. They believe that thought experiments, a good way to describe what they term "praxeology," is a better way to think about economics than the hypothesis and test against known data cycle of science. Refer to nearly any page in von Mises' Human Action. It is available as a free download here.

But are the points about those receiving the increase from the minimum wage hike not being that many in the last quintile still true? If so, fighting poverty via raising the minimum wage wouldn't be effective then and alternatives should be sought.

Jimmy, are you making the Communist assumption that poverty is somehow linked to the amount of money a person earns?

Pure Ideology!

 

[SimpleDon]

I'm an advocate and it's not what I've told you. Here's another for you : "Without a minimum wage, the bad employer undercuts the good, and the worst undercuts the bad." - Winston Churchill.

The fact that you think welfare is a dirty word, so we must do our best to disguise it in a minimum wage policy (instead of through an earned income credit for example), is not often a position I often hear.

It isn't a fact that I think welfare is a dirty word, and disguising welfare in MW policy is precisely what I'm saying we shouldn't do.

What is the relevant difference to people's standard of living whether they are earning $10,000 wage income and $10,000 earned income credit ($20,000) vs. $20,000 wages (only obtainable with a minimum wage law)?

If, given the choice, do you think they would prefer $20,000 in wage income or $10,000 wage income and $15,000 earned income credit? The $15,000 earned income credit is actually more affordable for society compared to a minimum wage that gives people $20,000 in wages, if the earned income credit is focused on those below 2x the poverty line. These are the kind of trade-offs one must consider. When minimum wage advocates don't prioritize like this and consider the fact that we could increase incomes for those in poverty without a minimum wage far more with other alternatives, and they don't consider whether this is actually a better outcome for society, the minimum wage seems to be more about making themselves feel good rather than actually helping people.

So you are saying that the drumbeat from the right is to increase the EITC to do away with poverty. And I have just missed it.

To raise everyone above the poverty level will take on the order of 250 to 300 billion dollars a year in transfer payments from the wealthy to the poor. How does the rightest drumbeat plan on doing this? The only proposed tax changes that I have seen from the right, Cruz-Hill for example, are going the other way, transfers to the wealthy from everyone else.

The CBO estimates that raising the minimum wage to 10.10 an hour will raise the wages of minimum wage earners by 19 billion dollars a year and will lower profits by 17 billion dollars a year. The difference of 2 billion dollars a year is due to profits gained from the increased demand from minimum wage workers.

The CBO says that the claims of job losses or gains of minimum wage workers are inconclusive. But the 2 billion dollar difference between the wage increase and the profit decrease indicates that the net effect across the whole economy is for an increase in employment. If profits went down more than the wages increased that would indicate that there are net job losses in the economy.

The CBO at the time that this study was made was an independent bastion of neoclassical economics and they say that the net effect of a minimum wage increase is to lower profits, not to increase costs.

 

[SimpleDon]

"Without a minimum wage, the bad employer undercuts the good, and the worst undercuts the bad." - Winston Churchill.

Without a minimum wage, market forces determine the wages. The statement is also demonstrably false: a "bad" employer who tries to pay below market wages will perform worse than the "good" employer who pays market wages.

Axulus is now arguing with Churchill.

The labor market is not a fair market.

Are you familiar with game theory? The labor market is not a fair game in the terms of game theory.

In game theory, a fair game is one that is not biased to one of the players. An unfair game is one in which one of the players can always win while playing correctly.

The labor market is not a fair game. People have to work to eat. Businesses have to hire when they think that they can make a incremental profit by doing so. Eating is more important than incremental profit, the businesses come out ahead in the confrontation, resulting over time in wages being forced slowly down continuously all the way to subsistence level wages while the share going to other sectors increases, profits for example.

The only time that wages rise in real terms, accounting for inflation, is when everyone who wants a job has one. This is not only low unemployment, those who are actively looking for work, but it includes those who want to work but have gotten discouraged and aren't actively seeking employment and those who are working part time who want more hours. We know that both of these groups that are not counted as unemployed are quite large now because our labor participation percentage is at historical lows, 56 to 58% over recent years.

We choose to keep the employment levels well below the level at which the advantage swings away from employers to the employed. The transcripts of the Fed's open market committee shows us that the primary concern of the Fed is to keep inflation low, not to increase employment. We need a way to control inflation without causing widespread unemployment. It is easy to do by the same method that we used during World War II, by increasing taxes to soak up the extra money that is created by inflation and "forced" or heavy handed savings, ie bond drives.

 

[SimpleDon]

That second assumption is awful.

So what does happen? You failed to answer last time I asked.

How much gets passed on? What happens to the rest?

The increased costs lower profits, exactly what we want to happen.

 

[SimpleDon]

I am sorry, I completely missed that I was eleven pages behind. I will jump ahead by reading but not commenting.

 

[Loren Pechtel]

So the argument seems to be that raising the minimum wage will destroy the American economy, as was seen with the other minimum wage hikes?

You perfectly well know that's not what we are saying. You're trying to avoid actually addressing the issue.

 

[Jimmy Higgins]

So the argument seems to be that raising the minimum wage will destroy the American economy, as was seen with the other minimum wage hikes?

You perfectly well know that's not what we are saying.

It seems to be the point that you are trying to make. Profits disappear, people become unemployed, Palin becomes President. Pretty much economic armageddon.

You're trying to avoid actually addressing the issue.

Actually, that'd be you. According to the 2000 paper, the cost for the poorest quintile for the year due to cost increases from the wage hike was $84 a year. So costs did go up, but not by much. And no notable link shows employment dropping noticeably due to a hike as well... mainly because fewer employees means less opportunity for more money.

 

[Togo]

I'm not sure that really makes sense. The underlying demand is there, but suppressed by higher prices triggered by lack of competition. In other words, firms are reaping extra profit by raising prices. But a scenario where profits are high, competition is low, demand is captive, and there is a large pool of ready-trained employees, is ripe for new entrants into the market. It doesn't sound like a new equilibrium at all.

What I don't understand is that, in your analysis, you're portraying increased automation and the closure of loss-making companies as bad outcomes. Doesn't that actually improve the economy overall?

The reason automation can be good is that it can lower the cost of producing things allowing us to afford more things, and free up labor to produce those other things. For example, when you lower the cost of producing some good from $20 to $15 people can have more of that thing and/or more other things.

But when you start messing with prices all bets are off. For example if you apply a minimum wage that raises the cost of a good from $20 to $25 people can afford less of that thing and/or less of other things. Then there may be an automation solution that now makes sense because it can lower the cost to $22 but it is still higher than before and people can afford less things.

But still nowhere near as much as the idea that the full cost of the wage increase goes onto prices.

Also, the labor that is displaced by the automation struggles to find alternative uses because you have artificially raised the price of labor above what the market would pay for unskilled labor.

But you also have a market ripe for new entrants, which was my point. What you're describing is not a new equilibrium.

Prices contain information. When you mess with prices the economy rebalances into a less optimal allocation of resources.

Setting a price for any good is messing with prices. Why is labour different?

 

[ksen]

Setting a price for any good is messing with prices. Why is labour different?

Silly Togo, because government is bad. Everyone knows this.

But it's patriotic to run around claiming the US government is our enemy and ruins everything it touches while intimating that we may have screwed up in Iraq makes you a socialist, islamofascist traitor.

 

[dismal]

Setting a price for any good is messing with prices. Why is labour different?

It isn't. Labor obeys the laws of supply and demand just like anything else. Welcome to reality-based economics.

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Setting a price for any good is messing with prices. Why is labour different?

Silly Togo, because government is bad. Everyone knows this.

But it's patriotic to run around claiming the US government is our enemy and ruins everything it touches while intimating that we may have screwed up in Iraq makes you a socialist, islamofascist traitor.

LOL. Nice failure to understand that he said something you are supposed to reflexively disagree with.

 

[ksen]

No, I understand what's going on just fine.

 

[laughing dog]

So the argument seems to be that raising the minimum wage will destroy the American economy, as was seen with the other minimum wage hikes?

You perfectly well know that's not what we are saying. You're trying to avoid actually addressing the issue.

Frankly your posts in this thread are examples of extremely poor economic reasoning and straw men, so it is no surprise that anyone does not know what you are trying to say.

 

[Axulus]

Of course they can't. Unchanged demand means they'd lose sales and, therefore, profit.

That's going to depend on how much the quantity demanded decreases with price. With fewer other alternatives (due to the marginally profitable ones shutting down), demand is going to be less elastic in response to the price. You can sell fewer units but make more money with a higher price. You are acting like that is an impossibility.

Now it might be that the raised production cost makes the lower price unprofitable. Marginal businesses will have to up their prices or fold, and may fold anyway if there aren't consumers willing to pay the higher price. But that

(a) doesn't mean all MW raises are passed directly to consumers, and

Not directly, but part of it is indirectly due to the market dynamics I've explained.

(b) doesn't necessarily make consumers worse off. If the raise is around the point where employees need welfare and charity, others were already paying the difference for stuff they weren't willing to buy at its true cost.

But those paying the welfare and charity are by and large the wealthiest in a progressive taxation system. Those buying products produced by minimum wage labor is everyone, but much more heavily concentrated on the poor and low income (as these goods/services tend to be cheaper, and such goods make up a much larger share of their total income). Hence the regressive nature of the minimum wage.

 

[Axulus]

Your whole analysis is a mess. However, this should be intuitively obvious.

Profitability of each firm falls along a normal curve. You have some losing money or breaking even, most of them making near the "average" profit, and some of them making well beyond the average.

Labor cost increases will push those firms at the left side of the curve, the least profitable firms, into being nonviable. They will shut down. The greater the increase the more that will shut down.

Now, with less competition out there, the profit maximizing price increases for the remaining players. Supply has been reduced (the ones that shut down), so the remaining suppliers can charge more to meet the unchanged demand.

Of course, when price increases, you also get less quantity demanded.

I'm not sure that really makes sense. The underlying demand is there, but suppressed by higher prices triggered by lack of competition. In other words, firms are reaping extra profit by raising prices. But a scenario where profits are high, competition is low, demand is captive, and there is a large pool of ready-trained employees, is ripe for new entrants into the market. It doesn't sound like a new equilibrium at all.

But, remember, the profit isn't extra because they are paying higher labor costs. What we are seeing is a return to a similar average profit, but with fewer firms left in the market.

What I don't understand is that, in your analysis, you're portraying increased automation and the closure of loss-making companies as bad outcomes. Doesn't that actually improve the economy overall?

It's bad for the employees who are out a job or have had their hours reduced to part-time. Also, the overall effect on the economy is negative (since there will be less output as a result of the higher costs) - but just less negative than it would be if there were no substitutes to labor available. It is a mitigating impact, and thus positive in that respect.

 

[Jimmy Higgins]

I'm not sure that really makes sense. The underlying demand is there, but suppressed by higher prices triggered by lack of competition. In other words, firms are reaping extra profit by raising prices. But a scenario where profits are high, competition is low, demand is captive, and there is a large pool of ready-trained employees, is ripe for new entrants into the market. It doesn't sound like a new equilibrium at all.

But, remember, the profit isn't extra because they are paying higher labor costs.

How much higher? The percent increase in production/service costs are not equal to the percent in wage increase.

What we are seeing is a return to a similar average profit, but with fewer firms left in the market.

Only in your post. How many corporations went under with each minimum wage hike? I'm certain the number must be huge if you are correct.

What I don't understand is that, in your analysis, you're portraying increased automation and the closure of loss-making companies as bad outcomes. Doesn't that actually improve the economy overall?

It's bad for the employees who are out a job or have had their hours reduced to part-time.

Here is a little fact regarding mathematics for you. The cost of an employee goes beyond wages. It also can include health care, paid vacation, paid sick-time, etc...

The benefit of making a worker part-time is that you can get rid of the health care, paid vacation, and paid sick time. The below ignores the other costs to provide a service/production.

Worker A: No minimum wage hike, but has benefits
Wage $7.50 (40 hrs a week -> $1200 a month)
Health Care $600
Paid Vacation/Sick Time (2 weeks a year -> $50 per month ($600 lost labor over 12 months))
$1850 a month cost to employer

Worker B: $7.50 an hour, goes to part time
Wage $7.50 (25 hrs a week -> $750 a month)
Health Care $0
Paid Vacation/Sick Time ($0 months)
$750 a month cost to employer


Worker C: $10.00 an hour, full time
Wage $10.00 (40 hrs a week -> $1600 a month)
Health Care $600
Paid Vacation/Sick Time (2 weeks a year -> $50 per month ($600 lost labor over 12 months))
$2250 a month cost to employer

Notice what actually is costing the most here? Where the savings are via going to part-time? It benefits companies to hire more part-time workers than full-time workers because it saves them a mint in health care and benefit costs.

 

[laughing dog]

It's bad for the employees who are out a job or have had their hours reduced to part-time.

That is only true if the reduction in hours ends up causing a reduction in compensation.

 

[SimpleDon]

Each company handles it differently. Some will be able to pass on all the added cost. Some will absorb a portion of the cost through lower profits. Some will change how they employ people.

Assuming all the added cost will be passed on is just overly simplistic and has no basis in reality. But I guess it's right at home in an economics model.

Actually economics says just what you just said. And then it adds thing like less profits means more marginal businesses close and fewer MW employing businesses open. And that higher prices for those products you raised the price of means less demand for them, and this means less profits still and fewer businesses that employ MW workers still. And all those things you euphemistically refer to as "how they employ people" cut in the direction of employing fewer MW people and perhaps thus reducing the quality of the service and experience for customers causing demand for these employers to fall further still.

So when you enter the economics zone it means MW workers get fewer jobs, fewer hours, and places that employ them will be more likely to shut down.

These are realities people in the ksen zone usually seem to deny.

Based on your assumptions, only then do these things happen. In the real world increased wages decrease profits.

If you believe that supply and demand set prices then nothing in increasing the wages affects either the supply or the demand. If there are businesses that are forced out of business because of the rise in wages, the demand still exists for the supply that the forced out of business producers provided at the pre-wage increase price. And there are still producers in business selling at that price and making a profit. There will only be a decrease in supply if the more efficient producers can't increase their production to make up the supply that was lost when the less efficient suppliers went under.

This points up two caveats about raising the wages.

It should be in low, easy to adapt to steps. Unfortunately the minimum wage has been allowed to drop in real terms to its lowest point. This means that the impulse will be to raise it too high, too quickly.

And obviously we shouldn't raise the wage if the economy is overheated and we are at full employment. This is not usually a problem because these conditions are when real wages increase. Unfortunately the few times that we have approached this recently it is because of asset bubbles, not because of sustainable, real growth.

These are hallmarks of true and effective fiscal policies, they are conditioned on the current state of the economy. Unlike "never raise the minimum wage" and "it's always a good time to cut the taxes of the already wealthy."