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

[laughing dog]

Can you point out the best example from one of his points in this thread?

"Minimum wage has always been more about getting votes and demonizing opponents than sound economics." and "that higher prices for those products you raised the price of means less demand for them" and "Argh, the fact that employers voluntarily raise wages to lower turnover because there is competition for good workers etc cuts against the argument that government needs to ban low wages. You should be spouting the typical implausible bullshit about how there is a labor market oligopoly and employers beat down wages to subsistence levels if you want to argue for a Minimum Wage" are some examples from this thread.

Also, if one of your students answered a question to the following question on a test:

"Question - chicken sold for $3/lb before a price floor law of $10/lb was enacted. How will the quantity demanded for chicken change as a result of the law?"

Answer: "Actually without more information we can only speculate at the answer."

Would you give that answer full points, and say "very insightful!"?

I would because it is true. Now, if the question had ended with "with no other influences changing", I would give them a zero.

 

[ksen]

Yeah economists don't argue this theory because the more money in the hands of employees comes from less money in the hands of someone else.

How come the opposite doesn't seem to bother you but this does?

WOT

Maybe I read your post wrong.

Did you mean:

1) economists don't argue this theory BECAUSE the more money in the hands of employees comes from less money in the hands of someone else, or

2) economists don't argue a theory that says more money in the hands of employees means less money in the hands of someone else (presumably owners?).

Most Economists are capable of looking beyond first order effects and doing simple math, which in combination reveal this argument to be total unadulterated crapola.

Most economists don't like to be associated with crapola.

Thanks I guess, but you didn't answer my question.

If you were saying that more money in the hands of employees means less money in the hands of someone else, like owners, and you didn't have a problem with that then I wonder if you similarly have no problem with more money in the hands of owners means less money in the hands of employees.

And by no problem I don't mean that you don't have a problem with the reality that that's what happens but rather that you don't have a problem with owners having more even though workers have less but that you do have a problem with workers having more if that means owners have less.

Arkirk's argument was that more money in the hands of employees would be a magical font of new demand. Good, bad, or other this is not a valid argument if the money is taken away from someone else.

If the person it's taken away from has a lower propensity to consume than the person it is given to then it is a good argument.

It's like arguing you can fill up a pool by dumping buckets of water into one end of the pool while ignoring the fact you are filling up the buckets in the other end of the pool.

Clear enough?

It's clear you reject Econ 102.

 

[arkirk]

Yeah economists don't argue this theory because the more money in the hands of employees comes from less money in the hands of someone else.

How come the opposite doesn't seem to bother you but this does?

WOT

Maybe I read your post wrong.

Did you mean:

1) economists don't argue this theory BECAUSE the more money in the hands of employees comes from less money in the hands of someone else, or

2) economists don't argue a theory that says more money in the hands of employees means less money in the hands of someone else (presumably owners?).

Most Economists are capable of looking beyond first order effects and doing simple math, which in combination reveal this argument to be total unadulterated crapola.

Most economists don't like to be associated with crapola.

Thanks I guess, but you didn't answer my question.

If you were saying that more money in the hands of employees means less money in the hands of someone else, like owners, and you didn't have a problem with that then I wonder if you similarly have no problem with more money in the hands of owners means less money in the hands of employees.

And by no problem I don't mean that you don't have a problem with the reality that that's what happens but rather that you don't have a problem with owners having more even though workers have less but that you do have a problem with workers having more if that means owners have less.

Arkirk's argument was that more money in the hands of employees would be a magical font of new demand. Good, bad, or other this is not a valid argument if the money is taken away from someone else.

If the person it's taken away from has a lower propensity to consume than the person it is given to then it is a good argument.

It's like arguing you can fill up a pool by dumping buckets of water into one end of the pool while ignoring the fact you are filling up the buckets in the other end of the pool.

Clear enough?

It's clear you reject Econ 102.

The notion that money MUST CIRCULATE just flies over his head!

 

[Loren Pechtel]

Places with a booming economy and a high cost of living. I'm not sure there are still any but there have been in the past.

You mean very low unemployment levels, employers competing for the services of suitable employees?

Exactly--low unemployment levels drive wages up--sometimes to the point of having no minimum wage jobs at all.

The point is that removing the minimum wage doesn't remove this effect--there's always a market clearing price, it's just usually it's slightly below the minimum wage.

 

[ksen]

slightly

 

[ksen]

Yeah economists don't argue this theory because the more money in the hands of employees comes from less money in the hands of someone else.

How come the opposite doesn't seem to bother you but this does?

WOT

Maybe I read your post wrong.

Did you mean:

1) economists don't argue this theory BECAUSE the more money in the hands of employees comes from less money in the hands of someone else, or

2) economists don't argue a theory that says more money in the hands of employees means less money in the hands of someone else (presumably owners?).

Most Economists are capable of looking beyond first order effects and doing simple math, which in combination reveal this argument to be total unadulterated crapola.

Most economists don't like to be associated with crapola.

Thanks I guess, but you didn't answer my question.

If you were saying that more money in the hands of employees means less money in the hands of someone else, like owners, and you didn't have a problem with that then I wonder if you similarly have no problem with more money in the hands of owners means less money in the hands of employees.

And by no problem I don't mean that you don't have a problem with the reality that that's what happens but rather that you don't have a problem with owners having more even though workers have less but that you do have a problem with workers having more if that means owners have less.

Arkirk's argument was that more money in the hands of employees would be a magical font of new demand. Good, bad, or other this is not a valid argument if the money is taken away from someone else.

If the person it's taken away from has a lower propensity to consume than the person it is given to then it is a good argument.

It's like arguing you can fill up a pool by dumping buckets of water into one end of the pool while ignoring the fact you are filling up the buckets in the other end of the pool.

Clear enough?

It's clear you reject Econ 102.

The notion that money MUST CIRCULATE just flies over his head!

Maybe this will help him:

http://www.khanacademy.org/economic...ics/income-and-expenditure-topic/MPC-tutorial

 

[Nice Squirrel]

As a professional economist, I must interject that readers should take dismal's pronouncements about economics and what most economists think with more than a grain of salt.

Can you point out the best example from one of his points in this thread?

Also, if one of your students answered a question to the following question on a test:

"Question - chicken sold for $3/lb before a price floor law of $10/lb was enacted. How will the quantity demanded for chicken change as a result of the law?"

Answer: "Actually without more information we can only speculate at the answer."

Would you give that answer full points, and say "very insightful!"?

I don't think it would it be insightful. My reply was a request for more information and I explained my rational as to why applied economics was more complex than the "first week of Econ 101" which was why the original question was raised. (And my point that "the first week of Econ 101" does not adequately reflect reality.) The law of supply and demand is a useful good basic descriptor to introduce ideas, if individual products and services were offered in a vacuum and all players were rational, but once we take it out in real world where things become more complex it becomes less useful. Would the demand for chicken at $10 per pound fall during a period of hyper inflation or after a mad cow disease outbreak? Possibly? What if wages had doubled and people had more disposable income? As someone who has regularity priced products and services I've never factored in supply/demand into mix. I'm sure there is an effect, but your are more effective at pricing based upon emotion and other irrational factors - especially consumer goods. There are many examples where a lower price will make a product less desirable and less in demand, not by some objective measure, but by the consumer's emotional attachment to and idea. (Part of my point with the examples of the two different gallons of bleach: one was perceived to be the better one even when proved to be the exact same substance - $9.99 over the - $0.99 based solely on the higher price and flashier label.)

So that in a nutshell is my argument. Just like Aristotelian physics divides matter into useful categories such as solid, gas, liquid and energy but becomes less useful as we delve deeper, the law of supply and demand does the same thing as we move from a single product in a static, rational environment into the realm of irrational markets of applied economics.

Refusing to recognize this does not invalidate it.

 

[Jimmy Higgins]

You mean very low unemployment levels, employers competing for the services of suitable employees?

Exactly--low unemployment levels drive wages up--sometimes to the point of having no minimum wage jobs at all.

The point is that removing the minimum wage doesn't remove this effect--there's always a market clearing price, it's just usually it's slightly below the minimum wage.

Just like the market clearing working age of a minor was "slightly" lower than what it is now due to State and Federal laws governing it?

 

[Canard DuJour]

As a professional economist, I must interject that readers should take dismal's pronouncements about economics and what most economists think with more than a grain of salt.

Don't worry. It's pretty obvious.

 

[SimpleDon]

Implict here is that an increase in the minimum wage will result in increased prices. They don't explain how that would be true.

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. Customers will purchase less from firms that hire minimum wage labor. Therefore, you see a reduction in employment for minimum wage labor. You will also see the remaining firms attempt to find substitutes for minimum labor - either use less of it and provide slightly worse service (a reduction in product quality with no offsetting reduction in price, the other form a price increase can take), or more automation.

By declaring my explanation a mess you apparently feel relieved of any need to address the various points in it? Perhaps your simplistic understanding of economics renders you incapable of addressing them? We will never know, apparently. I certainly can discuss your explanation of how an increase in wages results in higher prices.

You at least seem to agree with me that the Austrian economics and Econ 101 explanation using marginal productivity isn't the answer. Is this true or are you just 'messing' with me?

On to your explanation. This is simply amazing. In one short post you tell us that the wage increase cuts profits but later in the post you say that increased wages increases prices. And that prices are set by producers to maximize profits but later in the post you say that supply and demand sets prices.

And you tell us that this dichotomy in prices, sometimes set by supply and demand, sometimes in the control of the producer, is intuitively obvious.

Matched only by the equally obvious wage costs increases that sometimes reduce profits until it doesn't and then it starts to increase prices.

Amazingly enough you are half right. How could you not be? You are firmly on the fence between two possible explanations!

Yes, the first and main effect of a wage increase is to reduce profits. This is what I have been saying consistently. This is what the macro data tells us, that any kind of wage increase affects the split of income between wages and profits.

This reduction in profits could force marginal businesses out of business as you say. But this would be a very rare occurrence. Why? Because we know that an operating business can continue to operate indefinitely even without profit as long as its revenues cover its costs.

And the business will continue to operate without profit because the worse thing for a capitalist isn't in not making a profit, it is losing most of their investment if the business goes under.

So yes, it is possible for a cost increase to drive a few businesses into bankruptcy, but only a very few, certainly not enough to make a difference in the whole economy. And certainly not a reason for a wage increase to result in higher prices.

But let's humor you and consider what happens when one of those those few businesses does go out of business. The business was selling product with the pre-wage increase cost structure. There was demand for the product at the price that they offered it at.

But because it was a modest increase affecting a few of their employees there were businesses that were making a profit and who will continue to make a profit even under the new cost structure with the increased wages. Since there was demand at the old price for product that the bankrupt business was meeting the more efficient, profitable business can increase their profits by meeting that demand by utilizing unused capacity in their existing facilities, or by buying the production facilities of the bankrupt company,* or by building new production facilities.

(I use to say that, for example, a business could add a night shift to increase production. But Loren pointed out that his company tried to do this but "it didn't turn out so well." Obviously if Loren's company can't make it work no one can.)

What you have pointed out leads us to some conclusions.

1. Raise the minimum wage in small, gradual steps to minimize disruption and allow the economy to adapt.
2. The best time to raise the minimum wage is when production capacity utilization is low, like now.
3. You don't agree with the base assumption of the study that you referenced in the OP, the one that convinced you that the minimum wage isn't a very good way to eliminate poverty.
4. This leads some of us to question your reasoning because it leads many of us to believe that you are more interested in a study's conclusions than the validity their method of reaching those conclusions.
5. It is starting to dawn on you that in the modern economy most markets and most businesses don't compete on price.
6. That businesses prefer to compete by being more productive, more efficient for one.
7. Next you might even start to realize businesses don't have to mindlessly rely on the price as the single determining piece of information about whether to invest that the Austrians and Econ 101 claim that it is.
8. That businesses now can compete with one another on a whole range of factors other than price; quality, features, sexual attraction bestowed by the use of the product, sophistication, innovation, obsolescence, by branding, by advertising, etc.
9. From there you might even deduce that these things are as they are in the modern economy not because of government fiat but because over time and with the evolution the economy that these are the results of the free choices that have been collectively made by generations of business people when faced with the daily realities of the ever changing economy.
10. Decisions made because the reality is that in the modern, industrial economy competition on price results in only one outcome, the elimination of profit.
11. And you might even start to understand that the demand for the product and the effective demand in the entire economy is now more important than the questions of supply and over time they will become even more important than they are now.
12. That human capital is now more important than financial capital, that supply no longer creates its own demand (if it ever did,) that the economy is now demand lead not supply limited as it was when it was an agricultural economy.

* I did this frequently for my company, I bought production facilities for 10¢ on the dollar of what a new installation would cost, usually with trained employees already hired and working.

 

[DBT]

You mean very low unemployment levels, employers competing for the services of suitable employees?

Exactly--low unemployment levels drive wages up--sometimes to the point of having no minimum wage jobs at all.

The point is that removing the minimum wage doesn't remove this effect--there's always a market clearing price, it's just usually it's slightly below the minimum wage.

Situations where employers find it hard to attract suitable staff are not all that common. When it happens usually in sectors that require specific skills, and these may be in short supply.

Businesses such as fast food joints etc, have their choice of applicants by offering only minimum wage rates set by legislation, and without that protection for low income earners they would probably offer significantly less...''take it or leave it.''

 

[Canard DuJour]

You mean very low unemployment levels, employers competing for the services of suitable employees?

Exactly--low unemployment levels drive wages up--sometimes to the point of having no minimum wage jobs at all.

The point is that removing the minimum wage doesn't remove this effect--there's always a market clearing price, it's just usually it's slightly below the minimum wage.

Britain introduced a MW in 1999 at £3.60/hr. Before that, £2/hr wasn't uncommon in the service and agricultural sectors. Millions of workers saw their wages increase by a third or more (more than would be hidden in statistical noise) with no discernible unemployment or inflation effect.

The market clearing price was well below what the market would bear.

Employers openly factored welfare in wages. A notorious job ad' at the time accompanied some impossibly low wage with "Would suit man on Family Credit". People took the jobs just so they could say they worked for a living, though the reality was that they and their employers were subsidised by tax payers.

Both the Conservative Party and the CBI opposed MW with dire predictions of unemployment and inflation. Both now support it.

 

[Togo]

"Question - chicken sold for $3/lb before a price floor law of $10/lb was enacted. How will the quantity demanded for chicken change as a result of the law?"

Answer: "Actually without more information we can only speculate at the answer."

If only it were that we could have a discussion like "Well, what information do you need? What sort of information would lead you to what answer?".

Which is the discussion we were having back in post 188. You abandoned that one to focus on a discussion of insults.

To refresh your memory, I challenging your assertion that your conclusions were based on economics at all, by pointing out that the effects of minimum wage, as described by you, were identical to effects of any other event that raises prices, and that the only basis on which you were distinguishing one from the other was because one was caused by government, and thus evil. To put it another way, I'm not convinced that anything you've said about economics is anything more than a smokescreen for your political opinions - in this case a dislike of government.

It's more like:

Answer: Advanced economics teaches us this question is unanswerable.

It's an insistence that the entire discipline is a complete failure at predicting anything about supply, demand and prices. Intellectual nihilism.

Basic economics gives simple answers that aren't necessarily a reflection of the more complicated reality. If you don't understand that, you don't understand the subject. In the case of a minimum wage I've given simple, understandable reasons, couched in economic terms, why I disagree with you, which you have not addressed. Obviously that's your privilege. However, abandoning an economic argument that's not working for you, while simultaneously complaining that you can't get an economic argument out of people, is a stance I would be careful of.

In short I'd be more impressed about the discussions of either you or Axulus about the importance of blindly accepting demand curve models, if either you had been able to demonstrate that such models actually support your position. Is that likely to happen?

Because what we've had so far is an argument from Axulus that the minimum wage is bad because it makes business less profitable, and an argument from you that the minimum wage is bad because the government is behind it. Both of these have been expressed in the language of basic economics, but the economic principles invoked appear to just be window dressing bolted onto a political point of view.

 

[Axulus]

Someone asked for an example where there were no minimum wage jobs - North Dakota (a posting for starting wages for various Walmart positions) - North Dakota minimum wage is $7.25/hr:

 

[Nice Squirrel]

Someone asked for an example where there were no minimum wage jobs - North Dakota (a posting for starting wages for various Walmart positions) - North Dakota minimum wage is $7.25/hr:

And this was in Williston or Grand Forks?

 

[ksen]

Must have been tons of businesses going out of business having to pay so much for unskilled labor.

 

[SimpleDon]

There should be no minimum wage. There should be guaranteed minimum income, implemented as tax refund to all. The infrastructure is already there in the tax system.

Use minimum basic income to level the playing field between employer and employee so they have more equal bargaining power, and so the employee isn't desperate.

I would rather see an employer of last resort, EoLR from here, where the government would hire anyone at the minimum wage and working conditions, health care and retirement for example. Then businesses would have to compete with the EoLR to hire workers. They would have offer more than the EoLR to get anyone to work.

The GMI comes with moral hazards, it provides cash without work. As we have seen it would be demonized from the right, ie "takers," and it would be factored into any wage negotiations as a given, a reason to reduce workers' wages. It will subsidize low wages.

I don't see how it would give the workers more bargaining power than they have now. Only if you give it to everyone, even to the highest paid people in society and then only if it is enough to live on, to provide an alternative to working for low wages .

 

[arkirk]

Someone asked for an example where there were no minimum wage jobs - North Dakota (a posting for starting wages for various Walmart positions) - North Dakota minimum wage is $7.25/hr:

And just how much per hour would you accept in exchange of eight hours cutting up meat or unloading trucks or fitting girdles on fat women?

 

[arkirk]

There should be no minimum wage. There should be guaranteed minimum income, implemented as tax refund to all. The infrastructure is already there in the tax system.

Use minimum basic income to level the playing field between employer and employee so they have more equal bargaining power, and so the employee isn't desperate.

I would rather see an employer of last resort, EoLR from here, where the government would hire anyone at the minimum wage and working conditions, health care and retirement for example. Then businesses would have to compete with the EoLR to hire workers. They would have offer more than the EoLR to get anyone to work.

The GMI comes with moral hazards, it provides cash without work. As we have seen it would be demonized from the right, ie "takers," and it would be factored into any wage negotiations as a given, a reason to reduce workers' wages. It will subsidize low wages.

I don't see how it would give the workers more bargaining power than they have now. Only if you give it to everyone, even to the highest paid people in society and then only if it is enough to live on, to provide an alternative to working for low wages .

In a way, it would give more bargaining power to workers. We seem willing to pull the bottom out from under businesses that do not do well and let them fail. If these Walmarts couldn't compete with the Employer of Last Resort, they would go under...to a fitting end! The GMI would do the same thing. Outfits like Walmart would have to regroup and rethink their expectations for gravy profits.

 

[SimpleDon]

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

This is entirely out of Austrian economics playbook, that prices contain information that businesses rely on to plan investment. That a minimum wage distorts prices and induces businesses to misinvest.

And it is always thrown out as dismal has with no further explanation. As if it is so obviously right that no further explanation is required. But I have never met an Austrian economics enthusiast who can explain exactly how the distorted prices cause businesses to misinvest. Does the higher prices in an economy trick the business into thinking that there is more demand for the product for than what, there would be if the business could pay a lower wage? How does this cause a misinvestment? If the minimum wage is still enforce after the investment the business will still get the price that contains the horror of minimum wage distortion. Where is the misinvestment?

Not even to mention that no business relies solely on price to decide whether to invest or not.

The best argument against the rather simplistic Austrian economics is wholly contained within their theory itself. They say that they are going to provide businesses with the freedom to run business the way that the businesses want to be run, without government interference. And yet most of the things that Austrians say is distorting the free market, like business not competing solely on price, are things that businesses freely chose to do, collectively, over time because they realized that competing on price alone leads to the not so unimportant problem of no profits.

So they started to compete on many different factors, which I have listed in another post in this thread. They weren't forced by the government to start branding or advertising to avoid having to solely compete on price, they chose to do these things and more to avoid competing solely on price. Trust me, more than half of the personnel in an average consumer products corporation are employed to avoid the 'discipline of the market' setting prices based on supply and demand. The people who run the business want the price to be distorted, they are the one who are intentionally trying to distort them.

How are they going to be mislead by prices that they are responsible for distorting?

The price distorting of something like the minimum wage is so minor compared to the voluntary price distortion that the businesses do themselves that it can hardly be demonstrated as study after study has concluded.

Besides, second revelation that Austrian don't realize, businesses don't just consider prices when they are considering investments. The main factor is usually the answer to the question is there any demand for the additional production? Yes, the "d" word. Austrian economics makes the rather ridiculous assumption that demand = desire, that if you make it, that someone will buy it, that supply generates its own demand. Yes, when faced with a real decision that will cost real money every businessman or woman becomes, gasp, a Keynesian. Or more precisely, Keynesians economics does a much better job of explaining what happens in the real economy.