Minimum Wage Study - No Loss In Jobs

[coloradoatheist]

No, it would have to be a completely inelastic good for a price change to cause no impact. Such things generally do not exist.

Even if demand for a good was fairly inelastic over the price range in question there would still be less demand for it if price went up.

And, if the price of milk goes up 50 cents you can be pretty sure someone somewhere buys less milk. Maybe it's not you, maybe it's the greedy and ruthless Milk Chocolate companies tweaking their recipes to maintain their rapacious profits. Maybe it's the Big Pudding companies using more soy lecithin and guar gum and less milk in their recipes. Maybe it's your elderly grandmother on a fixed income who only uses milk in her coffee switching to non-dairy creamer. Across the millions of purchasing decisions that involve milk every day some percentage of them will be made differently because milk is 50 cents higher. All of those being made differently will involve purchasing less milk. None will involve purchasing more.

The pertinent question here is whether that change is material.

Pricing for most goods aren't stable anyway. The cost of apples and eggs and all other commodities fluctuate all the time, and the price of non-commodities even more so. Retailers have sales, manufacturers put out coupons, and different stores have different shelf prices. If the price change is within the range of fluctuations that already exist for that good... it's highly unlikely that more than an extremely small number of people would notice. And that small number of people isn't enough to cause a macro-level effect provided the water-level pricing effect is relatively small.

For me, the quesiton of minimum wage boils down to a handful of questions:

1) What's the magnitude of change, and how much macro effect is it likely to have?
2) What's the spill-over effect on people earning near-minimum-wage whose relative wage may be considered to have diminished?
3) What's the effect on the supply and demand of unskilled labor?

None of those are easy questions to answer. None of them are independent of each other. All of them depend on a multitude of other factors that are external to the wage increase itself. A simplified microeconomic model is insufficient to answer these questions.

+++++++++++++++++++++

ETA: I spent a whole lot of time arguing the same position that dismal and coloradoatheist are representing. It's taken me a long time to gain sufficient understanding of the complexity to be able to step back and reassess my arguments. I still hold that reductions in employment and increases in inflation are possible, and in some cases quite plausible... but I now have a better understanding of the role that materiality, elasticity, and the resilience of human societies plays in the final outcomes.

A clever person could probably even find old arguments from me on this board expressing those sentiments.

Of course the magnitude of the change matters and you would actually have to do a lot of work to find out how the firms actually handled the min wage increase. Which percentage of the companies raised prices, what percentage changed employment levels, what percentage just took profit losses, etc. But in terms of job los, it's been about a 10% increase in minimum wage leads to a 2% increase in unemployment for the targeted groups. I am curious what they have looked at for price levels.

 

[coloradoatheist]

I work in the health insurance industry. I've been observing the impact of inelasticity on sales for almost two decades now, specifically focused on the individual market (now the ACA exchange market).

People complain when their health premiums go up... but despite those complaints, the total volume of covered lives doesn't change by any material amount. In my state, it was roughly 300,000 for the 10 years I was here prior to ACA... and it's still roughly 300,000. The volume acquired by each different carrier changes, depending on who has the best price to value relationship on the market... but the actual number of total sales really hasn't shifted much in this market. And the price increases in health insurance could reasonably be said to dwarf price changes in almost every other industry in the US.

So if they took away the co-pay from insurance, do you think people would be more or less likely to go see a doctor?

That's an entirely different question, you know. Doctor visits are fairly elastic, and the perceived cost per service on the part of the covered individual can have a material effect on the utilization of that service. But it also has an effect on the overall cost of insurance coverage. There's a lot of shifting that occurs between doctor visits, ER visits, drug usage, and a host of other services, as well as between carriers and plans. But there's very little shift in the overall number of sales.

It's also point out that the use of medical services for people covered by medical insurance doesn't at all represent a free market dynamic. Having a financial intermediary that substantially obscures the cost of the service and pools the risk inherent in the system distorts the whole thing so far out of what was covered in microeconomics that it's a completely different animal.

Correct, different products have different elasticity properties. But we are discussing the elasticity of minimum wage workers combined with the products that they create. But it will also flow through the system as the inputs to one good affect another and those prices go up over time. The health industry payment is really the worst of both worlds.

 

[Emily Lake]

That's an entirely different question, you know. Doctor visits are fairly elastic, and the perceived cost per service on the part of the covered individual can have a material effect on the utilization of that service. But it also has an effect on the overall cost of insurance coverage. There's a lot of shifting that occurs between doctor visits, ER visits, drug usage, and a host of other services, as well as between carriers and plans. But there's very little shift in the overall number of sales.

It's also point out that the use of medical services for people covered by medical insurance doesn't at all represent a free market dynamic. Having a financial intermediary that substantially obscures the cost of the service and pools the risk inherent in the system distorts the whole thing so far out of what was covered in microeconomics that it's a completely different animal.

Correct, different products have different elasticity properties. But we are discussing the elasticity of minimum wage workers combined with the products that they create. But it will also flow through the system as the inputs to one good affect another and those prices go up over time. The health industry payment is really the worst of both worlds.

I'm inclined to say that US health industry payments are the worst of almost all worlds

 

[coloradoatheist]

That's an entirely different question, you know. Doctor visits are fairly elastic, and the perceived cost per service on the part of the covered individual can have a material effect on the utilization of that service. But it also has an effect on the overall cost of insurance coverage. There's a lot of shifting that occurs between doctor visits, ER visits, drug usage, and a host of other services, as well as between carriers and plans. But there's very little shift in the overall number of sales.

It's also point out that the use of medical services for people covered by medical insurance doesn't at all represent a free market dynamic. Having a financial intermediary that substantially obscures the cost of the service and pools the risk inherent in the system distorts the whole thing so far out of what was covered in microeconomics that it's a completely different animal.

Correct, different products have different elasticity properties. But we are discussing the elasticity of minimum wage workers combined with the products that they create. But it will also flow through the system as the inputs to one good affect another and those prices go up over time. The health industry payment is really the worst of both worlds.

I'm inclined to say that US health industry payments are the worst of almost all worlds

We can agree on that. But the idea that by default that we are going to save more on the health care spending if we went with the government solution is wrong too.

 

[Emily Lake]

I'm inclined to say that US health industry payments are the worst of almost all worlds

We can agree on that. But the idea that by default that we are going to save more on the health care spending if we went with the government solution is wrong too.

Agreed. It's possible to design a socialized solution that saves money in aggregate... but that doesn't come without tradeoffs. Also, I have zero faith in the ability of the US government to come up with something workable.

 

[Loren Pechtel]

Higher pay = higher prices = fewer customers/customers buying less = fewer workers.

Yes, theoretically this is true... but it depends strongly on how much higher the prices end up being.

Consider a company where all of the employees are minimum wage earners, and their wage doubles. Let's also assume that it's a service-based company, so that the cost of supplies is almost all wages (for example, home health care or day labor). In that case, then the higher pay is going to almost all translate into higher prices... and double the wage is going to be close to double the prices if we assume a water-level effect. In that case, the second consideration is how elastic the demand for that service is. If the service is highly elastic, then the doubled price is going to result in lower sales, and you end up with fewer workers (or the company going out of business). On the other hand, if the service is very inelastic, then the consumer will end up eating the price increase because it's a necessary service that they're effectively willing to pay any price for. It's not a service, but gasoline is pretty inelastic. It takes a really, really, really substantial increase in gas prices for consumers to reduce the amount of gas they buy.

So far so good...

On the other hand, consider a company where only a small portion of the employees are minimum wage earners... and the company is a manufacturer of a material product (not a service). In that case, the majority of the cost of supplies for that company are in terms of materials and non-minimum-wage employees. Since those elements don't change, then the increase in minimum wage will have only a marginal effect on the cost of production of the good, which means that it will also have only a marginal effect on the price of the good. And even for elastic services, most consumers won't even notice a $0.10 change in price (for example).

But now you're losing it because you're only taking your analysis one step.

1) Part of the price is materials? Whoever produced those materials also had their minimum wage workers double in cost. In the end, everything is either service or taxes.

2) People that are getting more than minimum wage? They're getting more because they're in a position to demand more. They're still in that position, in time expect their wages to double also.

When the dust settles you have approximately doubled the price of everything.

 

[Emily Lake]

So far so good...

On the other hand, consider a company where only a small portion of the employees are minimum wage earners... and the company is a manufacturer of a material product (not a service). In that case, the majority of the cost of supplies for that company are in terms of materials and non-minimum-wage employees. Since those elements don't change, then the increase in minimum wage will have only a marginal effect on the cost of production of the good, which means that it will also have only a marginal effect on the price of the good. And even for elastic services, most consumers won't even notice a $0.10 change in price (for example).

But now you're losing it because you're only taking your analysis one step.

1) Part of the price is materials? Whoever produced those materials also had their minimum wage workers double in cost. In the end, everything is either service or taxes.

Ummm.... no. Most material goods are either imported from other countries who aren't subject to US minimum wage laws, or they're produced by people who aren't minimum wage. Why are you assuming that all of the goods used in creation of a good are ultimately derived from minimum wage workers?

2) People that are getting more than minimum wage? They're getting more because they're in a position to demand more. They're still in that position, in time expect their wages to double also.

Sheesh. Let me spell this out via illustration for you. In January, minimum wage is $6 per hour. In January, Bob makes $9 per hour - 50% above MW. Jane makes $12 per hour, more than twice MW. In February, MW doubles to $12. Bob's wage increases to $12. Bob used to make 150% of MW, and now he makes MW. Jane used to make more than double MW, and now makes just a sliver above MW.

When the dust settles you have approximately doubled the price of everything.

Only if every single worker in every single industry across the entire planet makes minimum wage.

 

[Horatio Parker]

I'm inclined to say that US health industry payments are the worst of almost all worlds

We can agree on that. But the idea that by default that we are going to save more on the health care spending if we went with the government solution is wrong too.

Agreed. It's possible to design a socialized solution that saves money in aggregate... but that doesn't come without tradeoffs. Also, I have zero faith in the ability of the US government to come up with something workable.

So Medicare for all wouldn't save any money?

 

[Worldtraveller]

Agreed. It's possible to design a socialized solution that saves money in aggregate... but that doesn't come without tradeoffs. Also, I have zero faith in the ability of the US government to come up with something workable.

So Medicare for all wouldn't save any money?

Not unless you look at the data for every single civilized country that actually has single payer.

But it would never work in the US because...reasons.

 

[Emily Lake]

Agreed. It's possible to design a socialized solution that saves money in aggregate... but that doesn't come without tradeoffs. Also, I have zero faith in the ability of the US government to come up with something workable.

So Medicare for all wouldn't save any money?

Not unless you look at the data for every single civilized country that actually has single payer.

But it would never work in the US because...reasons.

In its current form, no, it likely wouldn't. There are some costs that would be reduced - commissions, marketing, etc. But even in its current form, Medicare Advantage (subsidized benefits run by private companies) has lower effective costs-per-service than Standard Medicare does, as well as better outcomes. Additionally, Standard Medicare has higher levels of fraud, waste, and abuse.

Of all of the proposals that seem reasonable for the US, I actually prefer Medicare for All. I think that with a planned roll-out over the course of a decade, it has the best chance to materially improve access to and quality of health care in the US. But it's important that it be done over the course of several years, simply because a sudden shift would cause massive unemployment that would overwhelm any benefits seen from the expanded coverage. It could also preserve the desire for a private marketplace by continuing to allow Medicare Advantage and Medicare Supplement products to be sold by private carriers. All in all, I think it would be the solution that would be most acceptable to the largest number of people... if our government would just stop being assholes about it.

 

[Horatio Parker]

Not unless you look at the data for every single civilized country that actually has single payer.

But it would never work in the US because...reasons.

In its current form, no, it likely wouldn't. There are some costs that would be reduced - commissions, marketing, etc. But even in its current form, Medicare Advantage (subsidized benefits run by private companies) has lower effective costs-per-service than Standard Medicare does, as well as better outcomes. Additionally, Standard Medicare has higher levels of fraud, waste, and abuse.

Of all of the proposals that seem reasonable for the US, I actually prefer Medicare for All. I think that with a planned roll-out over the course of a decade, it has the best chance to materially improve access to and quality of health care in the US. But it's important that it be done over the course of several years, simply because a sudden shift would cause massive unemployment that would overwhelm any benefits seen from the expanded coverage. It could also preserve the desire for a private marketplace by continuing to allow Medicare Advantage and Medicare Supplement products to be sold by private carriers. All in all, I think it would be the solution that would be most acceptable to the largest number of people... if our government would just stop being assholes about it.

So it wouldn't save money, yet cause massive unemployment...am I missing something?

 

[Emily Lake]

Not unless you look at the data for every single civilized country that actually has single payer.

But it would never work in the US because...reasons.

In its current form, no, it likely wouldn't. There are some costs that would be reduced - commissions, marketing, etc. But even in its current form, Medicare Advantage (subsidized benefits run by private companies) has lower effective costs-per-service than Standard Medicare does, as well as better outcomes. Additionally, Standard Medicare has higher levels of fraud, waste, and abuse.

Of all of the proposals that seem reasonable for the US, I actually prefer Medicare for All. I think that with a planned roll-out over the course of a decade, it has the best chance to materially improve access to and quality of health care in the US. But it's important that it be done over the course of several years, simply because a sudden shift would cause massive unemployment that would overwhelm any benefits seen from the expanded coverage. It could also preserve the desire for a private marketplace by continuing to allow Medicare Advantage and Medicare Supplement products to be sold by private carriers. All in all, I think it would be the solution that would be most acceptable to the largest number of people... if our government would just stop being assholes about it.

So it wouldn't save money, yet cause massive unemployment...am I missing something?

There's a lot more to it.

The current situation in the US isn't inherently a problem with insurers. They're a contributor, due the the impact of a financial intermediary on demand for the services covered by the indemnification and risk mitigation service. But a lot of the problems in the US are significantly affected by the private nature of the providers of the service, as well as the private nature of the suppliers of medical goods, supplies, equipment, and pharmaceuticals. The medical industry is one where competition doesn't necessarily produce lower costs... especially since over the past couple of decades we've seen more and more consolidation of provider groups, hospitals, and related companies. The underlying cost dynamics of the system are broken.

Medicare, in its current form, leverages government power to dictate payment levels for providers at a significantly lower level than are available to insurers. The payment rates that Medicare uses at present are below operating cost for providers. If we roll Medicare out in its current form over a short time span, at the current pricing level... Most of the providers would go out of business. We'd end up with way more demand than can be satisfied. On the other hand, if Medicare were to increase their payment rates to reflect the current level, then the net savings would be minimal, and it doesn't really dig us out of the hole we're currently in.

To solve the problem, we really need a purposeful and thoughtful plan that addresses the cost-side issues while expanding coverage... and also takes the displacement of several hundred thousand people into consideration. It can (and should) be done... it just isn't a quick fix. And the current political climate is one where our representatives really only support things that they can make happen during their term. Our government is pretty much shit for long term planning... and this needs a long term plan.

*** I'm trying to keep this pretty high level. There are a lot of factors involved, and I don't really want to write out a wall of text, nor do I think people really want to read it But I don't mind filling in more if you're interested.

 

[Loren Pechtel]

Ummm.... no. Most material goods are either imported from other countries who aren't subject to US minimum wage laws, or they're produced by people who aren't minimum wage. Why are you assuming that all of the goods used in creation of a good are ultimately derived from minimum wage workers?

I said everything was ultimately service or taxes, not that they were all minimum wage workers.

And, yes, some materials are imported from places without a minimum wage. You're trying to export the pain to those who are hurting worse. Is that a moral act??

2) People that are getting more than minimum wage? They're getting more because they're in a position to demand more. They're still in that position, in time expect their wages to double also.

Sheesh. Let me spell this out via illustration for you. In January, minimum wage is $6 per hour. In January, Bob makes $9 per hour - 50% above MW. Jane makes $12 per hour, more than twice MW. In February, MW doubles to $12. Bob's wage increases to $12. Bob used to make 150% of MW, and now he makes MW. Jane used to make more than double MW, and now makes just a sliver above MW.

And in time Bob will end up with $18/hr and Jane with $24/hr. Nothing about raising minimum wage made them less able to demand a higher wage.

- - - Updated - - -

Agreed. It's possible to design a socialized solution that saves money in aggregate... but that doesn't come without tradeoffs. Also, I have zero faith in the ability of the US government to come up with something workable.

So Medicare for all wouldn't save any money?

Not unless you look at the data for every single civilized country that actually has single payer.

But it would never work in the US because...reasons.

Denying care is always cheaper than providing care.

 

[Bomb#20]

I asked your opinion about the conclusion of a study - that's it.

I just reviewed our entire exchange; I don't see any place in it where you asked my opinion about the conclusion of a study. If you disagree, feel free to quote yourself. I saw quite a few comments from you that weren't asking for that. You might want to consider fact-checking the claims you make about yourself.

All you really need to say is you don't feel like talking about it. The rest of your post is equal parts childish, pointless, and untrue.

I take it that would be some sort of generically untrue, since you seem unable to point out anything I said that's specifically untrue. As for the childish, pointless accusations, those are subjective and unfalsifiable. Good choice for you.

 

[SimpleDon]

If the businesses can raise prices after a minimum wage increase why didn't they raise prices before a minimum wage increase to increase profits?

This would be a water-level effect. Prior to the increase in the cost of a supply that all competitors use, there would be some degree of cost equilibrium. Not perfect, of course, but fluctuation around a "natural" price that reflects what the market is willing to bear as a reasonable trade-in value. If the price of a supply increases for only one company in that competitive cohort, then most likely that company will eat the cost out of profit - that's how they stay competitive, and within the general price range that their customers are willing to pay. But if the price increases for all companies in that competitive cohort, then they can all increase their pricing to reflect that change in supply cost. There's no competitive advantage to reducing profits in a water-level scenario.

On the other hand, you could simply ask "If they could reduce the cost by reducing profits, then why didn't they just do that in the first place to be more competitive?" It amounts to the same dynamic.

Of course, this assumes that the goods are relatively commoditized and that the companies aren't disambiguating their products on non-cost factors such as quality or brand reputation. Those can screw up the economics in all sorts of ways, as I understand it.

I went through some of this in post #139 to coloradoatheist.

Yes, if a cost of production goes up it can give all producers the excuse to raise prices. But the question is still unanswered. If all of the producers can easily raise their prices due to an increase in the minimum wage why didn't they all raise their prices before the minimum wage increase?

What do you believe constrains price increases?

I can explain, but you have to bear with me. It can't be done in a single statement.

Prices are not set by supply and demand. Most prices are set by the producers. They set their prices based on the costs of production (factor costs in economics jargon) plus a markup to provide a target profit and to make a price that results in sales to accomplish some goal, usually something like fully utilizing their production capacity. Prices like these tend to be relatively inflexible, especially in the downward direction.

In spite of the widespread belief expressed often here the primary job of a business isn't to make profits for its shareholders. I don't know any CEO's who believes this. The primary focus of business is to provide goods and services to their customers. The businesses that do a better job of taking care of their customers will be the most successful in the long term.

In many corporations, more than half of the employees are working to make sure that their products aren't treated as commodities. This is why they advertise. This is why they use branding. Even if they sell commodities they use these things to try to make their products as less commodity-like, gasoline for example.

They do these things, advertising, and branding, in spite of the fact that these things are expensive and add to the cost of production of the product because they want to avoid competing on price. Competing primarily on price creates a race to the bottom that eats up profits and that no one wins.

Corporations compete today based on innovation, not price. Innovation in their products, think of Apple and Tesla, innovation in improving their own productivity, think of automation and off-shoring, and innovation improving the quality of their products, think of Honda and Toyota. Innovation depends on listening to their customers, research, and the most important factor, the knowledge and the experience of their employees.

Which leads us to the next most important job of a modern corporation that is more important than making a profit for the shareholders, taking care of its employees. It is the employees who take care of the customers. It is the employees who develop the innovations in the product and the productivity innovations. It is the employees whose productivity is increased. It is the employees who gain the experience and the knowledge to drive the innovation and the productivity increases. It is the employees who must learn to work together to realize the magic of an organization being greater than the sum of its parts.

This idea that the primary job of the corporation is to make profits for the shareholders is one that has been imposed on the management of corporations, primarily by offering bonuses for increasing the share price of the corporation. This is done to counteract the behavior that has evolved in the modern corporation pushing profits down the list of priorities. No one offers incentives to do something that is already being done, you offer incentives to change established behavior.

This idea of the main job of the corporation is to make profits for the shareholders is the brainchild of the neoliberals and specifically Milton Friedman as part of their effort to justify increasing profits by suppressing wages and pretending that the economy is still constrained by the supply side, by the lack of financial capital. That the economy isn't demand constrained.

Businesses are reluctant to raise their prices in response to increases in costs because of the concern for the impact of the price increase on their customers and because they are afraid of the uncertainty of the price increase on their sales volume. The goal of most companies is to keep their sales volume at a point that utilizes the full production capacity of their employees and of their production facilities. This provides most businesses with the highest profits possible while maintaining good relationships with their customers and employees.

What most businesses try to do is to increase prices once a year by a measured and explainable amount, say by the increase in the cost of living.

Most economists believe that profits are a cost of production that has to be paid if higher wages lead unerringly to inflation, can higher profits also cause inflation?

I would assume so. It's certainly part of the underlying cost trend for pharmaceuticals

Inflation from increasing profits, sometimes called markup creep inflation, is quite common, especially in these days under neoliberalism and its wage suppression to increase profits. It is the only inflation we have really had since 2009. It is what Keynes called a semi-inflation.

Do all wage increase prices and inflation or just minimum wage increases?

I would guess that all cost increases exert inflationary pressure... including wage and salary. I think the reason that minimum wage increases get added attention is that it's an externally forced cost increase, as opposed to something arising naturally from within the market.

Increased wages don't have to result in inflation. They very seldom do cause inflation in fact;

• when the wage increases are balanced by a reduction in profits, no inflation will result. This is the usual case.
• when the wage increases are less than the increase in productivity and profits stay the same, no inflation will result.
• when other competitors raise their prices because of the wage increase resulting in more business for the more efficient businesses that didn't raise their prices, little or no inflation will result.

I asked the question because the argument has been made here, not by you, that mandated minimum wage increases cause inflation while voluntary wage increases don't. This is a sentient money argument, that money has a memory and impacts the economy differently depending on who spent the money into the economy.

There is widespread agreement among economists that an increase in the minimum wage doesn't cause unemployment for adults and a growing consensus from more nuanced and larger studies that it doesn't even cause unemployment of teenagers. The vitriol and knee-jerk opposition to minimum wage increases come from the political sphere, for the same reason that unions are demonized, for the same reason that normalizing the illegals are demonized, because these things will increase wages and decrease profits.

The neoliberals realize this and it is why they demonize these things. There is no other reason that raising the minimum wage, something that has been done many times in the past without any of the dire results, predicted on these pages, happening.

Would the economy be better off if no one received a wage increase?

I honestly have no idea.

The economy would suffer. If nominal wages stay the same then real wages would decline and real profits would increase. Aggregate demand would decrease. Excess profits, more than what is required for investment in research and production facilities, go into savings and have little impact on the economy. They don't produce growth and they don't produce inflation, except in the stock market and real estate.

Why would a minimum wage increase not increase the purchasing power of the minimum wage workers?

It would not increase purchasing power if inflation increases in tandem. So let's imagine that minimum wage goes up by 10%... but so does the cost of food, rent, gas, etc. In that case, the amount of goods that a minimum-wage earner can purchase is the same pre- and post-increase. The reality, of course, is more complex than that. At least some degree of any inflationary pressure is going to be absorbed by non-minimum-wage earners who are consumers of the goods affected by the increase. But there's a lot of open question about how much of that is the case, and where there might be some unforeseen exploitation. So, for example, if minimum wage earners spend the vast majority of their income on goods that are affected by the increase in minimum wage, then the majority of their increased income is going to go right back out the door as consumption. It wouldn't necessarily be all of it... but let's imagine that you've got some slumlords who decide they'll increase their apartment rent because they know that most of their renters have had their incomes go up. That could quickly eat up the net gain in purchasing power.

There's also some argument to be made that the biggest effects aren't experienced by the minimum wage earners, but by those who had previously been making a higher wage that has now been brought down to or near minimum wage.

Voluntary wage increases are paid for out of profits. They don't cause inflation. Then we are back to the question, if minimum wage increases do cause price increases and inflation then they behave differently in the economy than other wage increases do. The discussion then turns to how this happens, does money from a minimum wage increase have a memory of who spent it into the economy so it behaves differently? That is, is the money sentient?

When the minimum wage is raised it not only raises the wages for those earning the minimum wage, it also raises the wages of the near minimum wage workers too to maintain their wages above the minimum wage by roughly the same amount as before the increase. This is exactly what we want, to increase the wages of the working poor and to decrease the profits that are causing so much instability in the financial markets, witness the Great Financial Crisis of 2008, caused by poorly designed home mortgage securities, based entirely on the fallacy that home prices would never drop. And of course, by the deregulation delusion that the financial markets are capable of self-regulation.

The CBO estimated that a $3.50 increase in the minimum wage, Obama's proposed MW increase in 2013, would increase the incomes of the minimum wage workers and the near minimum wage workers by 90 billion dollars and would reduce profits by 70 billion dollars a year. The difference of 20 billion dollars reflect the added profits from the workers spending their added income rather than it being removed from the economy by being put into savings as profits routinely are.

You believe that the economists at the CBO and I are wrong that the increase in the minimum wage would reduce profits but rather would increase prices, causing inflation. That the entire 90 billion dollars would result in increased prices.

The current GDP of the US is about 20 trillion dollars. Say that the 90 billion dollars would be 100 billion dollars today, (so that I can do the math in my head!). That means that the inflation would be 0.5% a year if every dime of the increase resulted in increased prices and none of the increased wages would be spent back into the economy by the workers, a highly improbable result.

A near 50% increase in the incomes of the minimum wage workers and the near minimum wage workers would, in your worse case, result in barely noticeable inflation if the money caused price increases instead of lowered profits.

Are higher profits a benefit to the economy as a whole?

Depends on your philosophy, I suppose. To me, yes, higher profits benefit the economy as a whole. Those profits are what drive investments of all sorts, from 401-K portfolios to venture capital to research into new medical technologies to launching rockets carrying cars into outer space. Without profit with which to fund those endeavors, progress suffers. Of course, it comes with the risk of greed - those who stuff their money in their mattresses or who spend egregious amounts of money on luxury goods. That's a real risk, and it has a cost all its own. But I still believe that profit is a necessary component of progress, and that progress cannot occur without wealth-driven investment.

How much profit is required to do those things you listed? Business investment each year is running about 300 to 400 billion dollars. This includes venture capital and IPOs, as well as business investment in new and modified production facilities, for all businesses in the US. Corporate profits alone are six to seven times this, not including the profits made in the US but illegally offshored to tax havens. Google and Apple combined offshore more profits than the entire amount of business investment made in the US.

If this is not excessive profits what is? If corporations made ten times the total amount of business investment in the US, would this be too much? Would twenty times?

Do you believe in the core belief of supply side economics that the more money there is available for investment the more investment there will be?

If not what, in your view, determines the amount of investment in the economy?

If this is your belief how to do you explain the obvious disconnect between the almost constant amount of real business investment every year and the ever-increasing level of corporate profits?

The actual impact on the economy of investments shouldn't vary by the philosophy of the viewer. It is one thing and one thing only. There is no empirical evidence that increasing the amount of funds available for investment results in increased investment by businesses. For this to be the case there would have to be a shortage of funds available for investment and a reluctance on the part of bankers to loan the needed funds. Interest rates would be high.

Currently much the opposite is true. The money available, both in flows and in stocks, for investment, dwarfs the amount of business investment. Interest rates are low.

We are intentionally boosting profits by suppressing wages with the sole goal of increasing the incomes and the wealth of the top 1%.

============== § ==============​

I have to apologize for the verbose posts. I understand that I am going against Econ 101 that everyone has been taught in school and the basis of the current prevailing political economics, the Washington Consensus, neoliberal, austerity, deregulation, movement conservatism, free market, free trade, market self-regulation, political economics. It is counter to the widely accepted neoclassical economics of just a decade ago, before the Great Recession.

Therefore I am compelled to present whole arguments rather than just answer questions. I type so slowly that I can't participate in the give and take of the typical discussion. I often post something two or more pages after the fact. This post has taken me at least a week to produce.

 

[Emily Lake]

This was a really comprehensive post, well written, and full of information. I'm snipping some of it, simply for length. You can generally assume that if I don't respond to a point that you made, then I pretty much agree with it. I'm only going to respond to points where I feel there is some reasonable disagreement, or where I have additional questions.

Yes, if a cost of production goes up it can give all producers the excuse to raise prices. But the question is still unanswered. If all of the producers can easily raise their prices due to an increase in the minimum wage why didn't they all raise their prices before the minimum wage increase?

What do you believe constrains price increases?

Labor is a production cost like any other. And although there is some degree of noncommoditization in most industries (as you reference further on), there is often still some element of commodity effects within any specific industry. For example... Ann Taylor distinguishes itself by name and brand reputation, for producing high-quality, sophisticated women's wear. Ann Taylor has Ann Taylor stores... but also supplies their product to general retailers including Macy's, Nordstrom, and a host of others. In addition, while some customers might really prefer Ann Taylor blouses, other designers also produce blouses that can be reasonable substitutes for those produced by Ann Taylor. So for any given item that Ann Taylor produces, there is competition between Ann Taylor stores and other retailers that carry the same item, as well as between Ann Taylor and other brands that serve the same general need. To that extent, Ann Taylor must keep their pricing in line with the price of their goods from other sellers, both of their own item and of similar quality items.

{Brief anecdote - the mall nearest me at one point had a Lucky store, selling jeans. But there were two other retailers in the same mall that also carrier Lucky Brand jeans in their inventory. On multiple occasions, we would find the exact same model of jeans being sold for less at Nordstrom than at the Lucky Store. The Lucky store only lasted about two years before going out of business - they couldn't effectively compete against their own brand being sold for less by another retailer.}

So even if a brand manages to distinguish itself from others, there's still a need to be competitive with other producers of similar goods. The cost of production is still an important factor in where prices can be set. Consider the impact of a non-wage production item. Let's say the price of cotton doubles. Cotton is a commodity, it's not distinguished by brand or origin. So all of the manufacturers of goods that use cotton will see their cost of production increase. If cotton is a relatively small contributor to the cost of their production, and they have enough profit to absorb the increase, then it's likely that their price won't increase at all... or that it does in such a miniscule way to be unrecognized by customers, and to still maintain a degree of cost parity with other manufacturers of similarly classed goods. On the other hand, if the cost of cotton is the majority of the cost of production, then there would be a material increase in the cost of production. And in many cases, the cost of production exceeds the profit margin... so if the cost of production goes up by 50%, then the manufacturer would either have to increase prices to achieve a sustainable degree of profit, or they would go out of business because they aren't able to sell their product at a price high enough to overcome the cost of production.

Now, if this happens to just one manufacturer within an industry of comparable goods, then most likely that manufacturer is going to go out of business - if they raise their prices, they end up out of competition with comparable producers... but if they don't raise their prices, then they can't overcome the cost of production. On the other hand... if the increase occurs on a common item used by all manufacturers within that industry of competing goods, then they're all facing the same issue: raise prices or fold. The price increase may not be reflective of the entirety of the increase in the underlying good, which would result in any manufacturers continuing in that industry seeing lower profit margins. And depending on how many manufacturers exit the market, the remaining ones could see enough of an increase in actual profit to still put them in a better position. It's certainly not a simple dynamic

So back to the question at hand: Prior to a water-level increase in the price of production, prices don't go up because the pricing is essentially at equilibrium. The prices are those that customers are willing to pay, and that keeps comparable manufacturers within a reasonable acceptable range of each other for relatively similar products, and those manufacturers are able to make a sustainable level of profit. If any single manufacturer were to raise its prices, it would be out of competitive range. For all manufacturers to raise their prices, they'd have to collude... and any single manufacturer that refrained from raising their prices would be able to exploit the market and snatch share from the others. But once the water-level rises... then all of the manufacturers are facing the same new cost of goods*. Let's assume that the water-level increase is materially high enough that it places all manufacturers of that good in a position where the new cost of production exceeds prior profit margin. In this case, any manufacturer that does not increase their price is likely to go out of business. And it's likely that all of the manufacturers of that good know that all of their competitors are facing the same situation. So they can all raise their prices in tandem, without collusion. At that point, the only remaining variable is how much can they raise prices before their consumers are no longer willing to pay for the good. In most c

*This all depends, quite heavily, on how material the increase in water-level is relative to the total cost of production. In some cases, it will be distributed enough that no prices change. In others, if it's a key production good, then it can't be distributed enough to simply absorb within existing profit margins.

I can explain, but you have to bear with me. It can't be done in a single statement.

Prices are not set by supply and demand. Most prices are set by the producers. They set their prices based on the costs of production (factor costs in economics jargon) plus a markup to provide a target profit and to make a price that results in sales to accomplish some goal, usually something like fully utilizing their production capacity. Prices like these tend to be relatively inflexible, especially in the downward direction.

DEmand is an element in the price that is set for the good. But you're right - when we're talking about aggregate pricing (as opposed to fela-marekt style barter and negotiation for each transaction), there are other factors that determine the ultimate price. But demand is still a part of that. It's the marginal increase in sales for a given increase in price, relative to the cost of production, the profit objectives, and other company goals, that ultimately determine the price. But I think it's incorrect to say that prices aren't set by supply and demand. It would be more accurate to say that prices are not set only by supply and demand.

In spite of the widespread belief expressed often here the primary job of a business isn't to make profits for its shareholders. I don't know any CEO's who believes this. The primary focus of business is to provide goods and services to their customers. The businesses that do a better job of taking care of their customers will be the most successful in the long term.

How many CEOs do you know? Shareholders are a bit of a red-herring. While it's true that some publicly traded companies are beholden to their shareholders, there are a huge number of companies out there that aren't publicly traded and don't have shareholders. But any company still needs to make sufficient profit to achieve sustainability, inure against potential downturns, and support future growth investments and technological updates. They need to make enough profit to be able to contribute to capital holdings for the long-term health of the company. It doesn't matter how focused on providing goods and services and taking care of their customers they are... if they can't make sufficient profit to stay in business.

Which leads us to the next most important job of a modern corporation that is more important than making a profit for the shareholders, taking care of its employees.

It really depends on the company, doesn't it? Some companies have few employees, or have employees with no particularly distinguishing skills, who are easily exchangeable for any other able-bodied employee who can do the same job with little to no investment on the part of the employer. Much as many people don't like to admit it... unskilled labor is very nearly a commodity. It's only when a worker can distinguish themselves as having a skill, as being differentiated from other workers, that they can command a higher price for their services. If the job is picking apples... anyone with functioning hands and legs can pick apples. John is not distinguishable from Mary in this regard. And if John and Mary are essentially undifferentiated in that role, then the labor that they are providing is a commodity in the eyes of the employer.

Businesses are reluctant to raise their prices in response to increases in costs because of the concern for the impact of the price increase on their customers and because they are afraid of the uncertainty of the price increase on their sales volume. The goal of most companies is to keep their sales volume at a point that utilizes the full production capacity of their employees and of their production facilities. This provides most businesses with the highest profits possible while maintaining good relationships with their customers and employees.

I disagree. The goal of most companies is to maximize bottom line profit. Not profit margin, but actual dollars of income. Most of the time, that maximum is highly correlated with full production capacity... but not always. It's entirely possible that a maximum bottom line profit occurs with lower production capacity and higher pricing.

Let me share a dirty little secret from my industry. There are several phases of maturity for a health insurance product, because there are many, many, many factors that play in to pricing. There's the underlying cost of care, driven by provider organizations, pharmaceutical companies, and device & supply manufacturers. There are regulations governing price increase, there are requirements for solvency and appropriate reserve holding, and there are competitive pressures from other carriers. And there are demographic factors or the covered lives in the pool, including age, gender, income, and health status (among other things). Some products can be adapted, both in terms of the benefit design offered and the price set, in order to maintain a relatively stable position within a market. But other products go through a cycle. Medicare Supplement and Medicare Advantage both have fairly well defined life cycles. They start with a growth phase, where the age and health of new purchasers tend to be advantageous. That allows the carrier to offer lower prices than their competitors (because their cost of care delivered is lower). But senior citizens are very "sticky" - they don't shop and change carriers as they age, or as they develop more demanding health needs. So the longer a company stays in business, the older the average age of their pooled lives are, and the higher their average cost of care is. There is usually a period where the carrier reaches a flat point in the curve - the younger, healthier people buying the product roughly offset the aging population being retained. But this necessarily comes to an end at some point... and the age and health burden of the pool extends beyond a critical point. At this point, the company does some math. If the size of the population is small enough, they can reduce their prices, take a short-term loss on their product, and attract a higher volume of younger and healthier customers in order to bring the average of the pool back into a competitive position. But that rarely happens - the degree of price decrease needed usually puts the carrier into a position of being insolvent, and requires too much capital infusion over too long a period of time. So most carriers will enter a "harvest" phase. In this phase, sales drop (sometimes to near zero), and prices keep rising (often by substantial amounts). The company still makes sufficient bottom line profit to be solvent, and the rate increases are justifiable by the cost of care delivered to the covered lives. This cycle exploits the tendency of customers to adversely select against their carriers - in each plan year of coverage, the healthiest of the pool will see enough differential in prices to incentivize them to change carriers... and the sickest of the pool stay with the current carrier. And in each plan year, a portion of those sicker individuals will die. Eventually, the volume of covered lives reaches a low enough volume to allow the carrier to reduce prices to a competitive level, at which point they can take a short-term loss on a small volume of customers, but can attract enough newer younger customers to offset that loss. Then they're back to a growth cycle.

Voluntary wage increases are paid for out of profits. They don't cause inflation.

Sure they do. Cost of living adjustments and increases in both wage and pricing are reflective of inflation. If there were no inflation, there would be no need for cost of living adjustments. Most voluntary wage increases come out of the expected price increase due to general inflation, not out of profit. And most material voluntary wage increases come as a result of turn-over and promotion within a company. And those promotions come with an expected increase in productivity as the role of the person involved changes. Sometimes they're a retrospective acknowledgement of higher production than others in that same role. Minimum wage increases are increases above the level of general inflation, and are not reflective of increased productivity on the part of the minimum-wage earner. Minimum wage increases are much more similar to increases in the price of a commodity good than of increases in the price of a luxury or brand-distinguished good.

When the minimum wage is raised it not only raises the wages for those earning the minimum wage, it also raises the wages of the near minimum wage workers too to maintain their wages above the minimum wage by roughly the same amount as before the increase.

I got screwed by minimum wage increase repeatedly when I was younger, working in retail and food service. Three times in a row, when I was up for review, the increase in minimum wage was larger than the raise I would have gotten... so I was simply increased to the new minimum wage level. My additional experience and performance didn't matter, and wasn't reflected in a higher than minimum wage for my specific labor. Despite having been there for a longer period of time, and having performed very well, I was still making the exact same amount that a new hire straight off the street was making. So the assumption that people making near minimum wage would receive an additional increase from their employers in order to maintain their relationship to minimum wage is flawed. It might sound like a good idea... but in my experience that's simply not what happens.

The increase in the cost of a commodity good doesn't increase the cost of a non-commodity good that isn't directly in the production line of that commodity. An increase in minimum wage for unskilled workers doesn't increase the wage of electricians.

A near 50% increase in the incomes of the minimum wage workers and the near minimum wage workers would, in your worse case, result in barely noticeable inflation if the money caused price increases instead of lowered profits.

That would be why I said that it is likely to be an immaterial change overall... even though it could be a very large change within some particularly industries.

Google and Apple combined offshore more profits than the entire amount of business investment made in the US. If this is not excessive profits what is?

Yes, it probably is excessive profits to any objective observer. But it's also important to note that the super-mega-corp companies making massive and arguably exploitative profits are not representative of the economy as a whole. There are a massive number of mid-sized and small businesses that make very slim profits. And although this is an over-generalization, most of the companies making massive profits are NOT companies that have a substantial portion of their production costs coming from minimum wage labor. An increase in minimum wage isn't going to curb Apple's profits, it's going to curb the profits of the privately owned "Root Beer Shoppe" just around the corner from my house, and the privately owned consignment shop down the road, and the small farmer's market a couple miles away.

Do you believe in the core belief of supply side economics that the more money there is available for investment the more investment there will be?

In broad strokes, yes, I think that's true. It's not a universal rule, and there are many other factors that come into play, but generally speaking, the more free capital there is, the more that will be invested (although investment is of necessity a very broad term). The complication here is that not all investments are created equal. Some produce higher overall rates of return than others do. On the flip side of that, however, is that some 'investments' produce meaningful increases in quality of life even if the investment return from a purely financial sense is almost nonexistent. There is no one-size-fits-all answer here.

If this is your belief how to do you explain the obvious disconnect between the almost constant amount of real business investment every year and the ever-increasing level of corporate profits?

What do you consider to be "real business investment"?

The actual impact on the economy of investments shouldn't vary by the philosophy of the viewer. It is one thing and one thing only. There is no empirical evidence that increasing the amount of funds available for investment results in increased investment by businesses. For this to be the case there would have to be a shortage of funds available for investment and a reluctance on the part of bankers to loan the needed funds. Interest rates would be high.

Currently much the opposite is true. The money available, both in flows and in stocks, for investment, dwarfs the amount of business investment. Interest rates are low.

But the volume of start-ups and venture capital investments is currently very high. Do those not count as investments in your book?

Therefore I am compelled to present whole arguments rather than just answer questions. I type so slowly that I can't participate in the give and take of the typical discussion. I often post something two or more pages after the fact. This post has taken me at least a week to produce.

I appreciate your whole argument, even if it takes us both a lot longer to discuss it! I definitely prefer it to one liners and declarative sentences . This approach allows me to present my assumptions, and the relationships that drive my perspective... and lets you do the same. It's how people's minds get changed.

 

[ZiprHead]

Excuse me for interjecting. I'm enjoying your conversation.

I got screwed by minimum wage increase repeatedly when I was younger, working in retail and food service. Three times in a row, when I was up for review, the increase in minimum wage was larger than the raise I would have gotten

You ended up better off than you would have been because of minimum wage. If anyone screwed you, it was your employer.

 

[Emily Lake]

Excuse me for interjecting. I'm enjoying your conversation.

I got screwed by minimum wage increase repeatedly when I was younger, working in retail and food service. Three times in a row, when I was up for review, the increase in minimum wage was larger than the raise I would have gotten

You ended up better off than you would have been because of minimum wage. If anyone screwed you, it was your employer.

Technically, yes... but I still ended up losing any ground that I should have gained for good performance and tenure. It also goes to demonstrate that Don2's assumptions regarding near-minimum-wage earners seeing a concomitant increase in their wages is incorrect

And please, feel free to interject! That's what community discussions are all about.

 

[Loren Pechtel]

I went through some of this in post #139 to coloradoatheist.

Yes, if a cost of production goes up it can give all producers the excuse to raise prices. But the question is still unanswered. If all of the producers can easily raise their prices due to an increase in the minimum wage why didn't they all raise their prices before the minimum wage increase?

What do you believe constrains price increases?

I can explain, but you have to bear with me. It can't be done in a single statement.

What you are missing is that you are comparing two very different scenarios as if they were the same.

Normally a company can't just go raising prices without driving away customers. However, when everyone's costs go up (say, by an increase in the minimum wage) it's a different case--customers won't be driven away because everyone is doing the same thing.

Also, you are assuming that a minimum wage hike affects only minimum wage workers, workers who make more won't demand a corresponding increase. Since they were already making more that means they have negotiating power. It will take time but in the end they'll get the increase.