UC San Diego - New Study Finds Minimum Wage Reduces Employment

[Canard DuJour]

Nah, if you up your price 5% and sales drop 40%, you'd be getting a little over 60% of your previous profit, not 90%. Still better than 50% ..BUT you're still not maximising profits. You now have 40% idle capacity and a 40% hole in the market of consumers willing to buy widgets at some price between $10.00 and $10.49. Even at the reduced margins that's still additional profit. If you don't do it, a competitor will and he'll gain the market share you lose too. Unless costs are driven over or right up to revenue, it doesn't make sense to cut existing production.

If you could sell some widgets at $10.50 and some at $10.25 you would be right. You normally can't, though.

Then what you said would make even less sense. Unless you're a monopoly supplier, raising your price to $10.50 would lose you 100% sales, not 40%.

Your latest assertion, however, is just wrong. The same item with a 5% price differential is commonplace.

The point of maximum profit is when dropping the price would cost you more in lost profit from reducing the price than the increased profit from selling more units.

What does this even mean? What's the difference between reducing and dropping the price? It sounds like you're contradicting yourself.

 

[Canard DuJour]

No it isn't. You estimate by establishing a viable upper limit and a viable lower limit and then narrow the field based on known factors. "Superzillion dollars" is an upper limit; it's easy to see that's too much, so the upper limit is too high. A million is also too high. A thousand is too high. A hundred is too high. Etc etc.

It's a standard technique for trying to figure out how the output reacts to a certain input. It's not meaningful in trying to figure out the value, only the direction.

Not in complex chaotic systems (weather, organisms, economy etc) where non-linear relations are the norm. Too little salt makes you sick or dead, too much makes you sick or dead.

 

[SimpleDon]

... <<This my post that dismal is replying to.

You declare that what I said is not right and then ignore what I said, not giving me the courtesy of pointing out why. I will provide you with an example of what I mean. ... <snip>

OK, I will painstakingly explain to you where you are wrong.

1) You say that owners had maximized profits ex ante.

1) I say they are attempting to maximize profit ex-ante. They will also do so ex-post. They will do this by hiring workers that provide a positive marginal contribution to profit. If I estimate hiring Person X will increase profit by $6 I will hire them if the wage I must pay them is $5.50. I will not hire them if the wage I must pay then is $6.50. I do not say any of that other dreck you attribute to me. If you want to have a productive discussion please direct your comments to things I actually do say. Don't make up things I don't.

Touchy aren't we? Okay, so you meant to say that the producers are only trying to make maximum profits ex ante, not that they were.

Since when you said that,

Let's assume that ex-ante economy-wide all firms have hired just enough people to maximize profits.

What I should have assumed that you actually meant, because by not assuming what you meant to say rather than depending on what you really said, above, I was making up things up, dreck I think that you called it, not having a very productive discussion. So what you meant was not what you said but something like,

Let's assume that ex-ante economy-wide all firms have hired just enough people to to try to or to attempt to maximize profits.

Bolding is what I should have assumed that you meant. Feel free to correct any such failings on my part to properly decode what you meant from what you actually said.

Why are they able to maximize their profits before the minimum wage increase and unable to do it afterward?

As previously mentioned they do attempt to maximize profits after the minimum wage is increased. Specifically they do this by firing all the people who now have a marginal contribution that is negative thanks to the new higher minimum wage and/or who are now more expensive than the latest robot, etc.

Your painstaking explanation didn't touch on my point. You didn't point out where you think that I am wrong, you presented yet another fallacious argument slightly different from the previous arguments that you have made, none of which address my simple point, that nothing is changed in the way to maximize profits after a minimum wage increase.

You introduce yet another new argument that states that after a minimum wage increase the producers who are maximizing profits, excuse me, who are trying to or attempting to maximize profits, won't be able to hire people, because their marginal productivity is less than their wages. Previously you said that they would have to fire people and they would raise their prices. And they would no longer be able to maximize profits.

This is correct, but the reason that they can no longer maximize profits is because they laid off people, reducing their production capacity and they raised their prices reducing the demand for their products. This is the explanation that I was responding to.

Before the minimum wage increase producers were trying to or attempting to maximize profits.

They do this by setting their prices as high as they can that still produces a demand and a sales volume that utilizes all of their production capacity.

This is how you maximize profits.

My painstaking details, ones that should be obvious.

If they lower their prices to the point that the demand for their products exceeds their product capacity then they are not maximizing profits, they are leaving money on the table. If they raise the prices to the point that their sales volume is below their production capacity they have idle capacity and risk not being able to make enough to cover their fixed costs. Simply put, they make more profit on each unit sold, but they don't sell enough units. Once again, they aren't maximizing profits.

After a minimum wage increase or any other wage increase or any other increase in costs absolutely nothing has changed. They will still try to maximize their profits exactly the same way, by setting their prices to have a sales volume that utilizes their full production capacity.

If you believe that a minimum wage increase changes this you have to explain how that it does. There is nothing in the previous discussion of how you maximize profits about minimum wages or even costs. The maximum profit that you can make is always the same, the highest price that generates a sales volume that utilizes all of your production capacity.

After the minimum wage income their capacity to produce hasn't changed if they don't lay off people and the demand for their products is the same if they don't raise their prices. And yet you say that they have to do both. Why?

If you have another way of maximizing profits, that you can explain that is affected by the minimum wage, that allows you to maximize profits before the minimum wage increase but doesn't allow you to do it afterward please explain it. For this to be the case something has to change because of the wage increase. Something that prevents you from maximizing profits as you did before the wage increase.

I am sorry, put "trying to or attempting to" before "maximizing profits," what you meant to say.

But firing people reduces your production capacity. And raising your prices, reducing your demand, will also not maximize profits.

Yes, a minimum wage increase will reduce the total profits. But it won't change the way that you maximize profits.

You have by my count offered four different explanations now. Supply and demand reducing the demand for labor, marginal productivity, sometimes referred to as marginal costs, or as you call it marginal contribution to profit, (you have to cover costs before there are any profits by the way,) the specter of automation and now the new one here, the inability to hire people, presumably a bow to the study referenced by in the OP that as I understand it from the discussion depended on projections of employment increases to prove that an increase in the minimum wage reduces the rate of additional new employment, that it doesn't reduce existing employment.

Were I a lesser man I would complain that you accused me of not having a productive discussion because I failed to realize that you don't say what you really mean, while you are constantly coming up with new arguments instead of defending the ones that you presented previously, (or I suppose the ones that you meant to say?) or addressing my simple point. But broad shoulders and all I won't.

Break here, continued below.

=================

 

[ksen]

SimpleDon, you don't get it. If companies are used to having a 30% net profit anything that drops those companies below 30% net profit is a disaster and means the company owners will just take their capital ball and go home and put it in a 2.5% money market account instead.

 

[SimpleDon]

=================

continued from above

2) Maximizing their profits before the wage increase means that they have some control over price. The theory of marginal productivity, which you go on to offer in your explanation, depends on supply and demand setting price. You can't have it both ways.

No idea what this point is. I agree supply and demand and demand are functions of price. Price fluctuates to equilibrate supply and demand. This applies to unskilled labor and everything else. If you imagine I have argued otherwise it's on you, not me.

I am not surprised that you don't understand the theory that you referred to, marginal productivity. To understand it is to realize how ridiculous it is. But it and not supply and demand is what is behind the often repeated phrase "if wages are too high employers will use less of it." This is ridiculous. Employers don't hire more people because they cost less nor do they hire fewer people when they cost more. Employers hire the number of people required to do the work that they need to be done.

Marginal productivity requires that the price is reduced by supply and demand to the point that the price equals the marginal cost to produce the very last product that can be produced. This is how neoclassical economics says that the mechanism of supply and demand setting prices can guarantee maximum efficiency by utilizing all of the production capacity. And how it guarantees the maximum social good by paying labor its true value, if the producer isn't forced to utilize his full capacity including his workers by a price set out of his control he will under pay his employees. And it is also how neoclassical economics explains that the free market would be able to self-regulate independent of government, it is the cornerstone of that fantasy.

And lastly, and most pertinent to our discussion, it is the reason that the employer is forced by the market to reduce his production capacity by laying off his least productive workers.

But according to the theory all of this can only occur if the owner has no control over the price that he gets for his product. It has to be set by supply and demand.

On the other hand, if the producer is able to change his prices in order to maximize his profits, then obviously it is at least partially in his control and is not being set by supply and demand. So you have to decide which way that you are going to argue. You can't have it both ways. Prices can't be set by supply and demand except when the owner wants to maximize profits or when he wants to reduce his sales volume by increasing his prices, as is the net result of what you have said, possibly not what you meant to say of course.

As I said, repeatedly, the whole theory is ridiculous. It flies in the face of anyone with the remotest business experience.

3) Marginal productivity is a seriously flawed theory. There is nothing in it which would limit the higher unemployment to just an increase in the minimum wage mandated by the government. According to the theory any wage increase would result in an increase in costs and the necessity of laying off workers. In fact any cost increased for raw materials, rent, electricity, etc. would result in less employment. That obviously doesn't happen.

No idea what you mean here either. One would have to be a complete moron to think all workers contribute some fixed amount to profit. Of course they contribute different amounts based on a variety of things, including simply, directly, and relevantly in this case, their wage. What sort of lunacy is required to think a worker doing the same job contributes the same to profit regardless of whether his wage is $5 or $500 per hour? Hint: try opening a store and making a profit paying your retail clerks $50,000 per hour. Then try $10 and let me know which one results in higher profit.

I didn't say that all workers contribute some fixed amount to profit. I didn't say that workers who do the same job contributes the same to profits no matter what they are paid. I am usually good at understanding the sources of your simple minded confusion but it is late at night and I am tried. You will have to work this out for yourself.

Ah, yes, explanation number 5, the old stand by if it is good to raise the minimum wage to $10.10 an hour why don't we raise it to $500 a hour or a million dollars an hour? Because we are not talking about a fantasy here. We are talking about reality. Yes, we need to increase wages and to decrease profits. Wages are the primary component of real economic effective demand. You need a balance of money paid to reward capital, profits, supply, and money paid to reward labor, that goes to demand. But changes have to be moderate and introduced slowly to avoid destabilizing the economy, as we did by deregulating the mortgage financial markets leading up to the financial crisis of 2008. Not only was it done too fast, in only six years or so, it shouldn't have been done at all.

As much as we need to increase wages and to decrease profits we can't increase wages too fast. We only want to shift tenths of a percentage point of GDP from profits to wages.

Once again, you are absolutely correct that you have no understanding of marginal productivity theory. I am only saying that if you did understand the theory that you are trying to use in your arguments you would understand that there is no way that any increase in wages or other costs wouldn't result in the same losses of jobs that you are claiming for the increase in the minimum wage. It is not only that, if marginal productivity were true it would drive prices so low, to the marginal costs of the last item produced, that in the modern industrial economy where there is effectively no diminishing returns there wouldn't be any profit at all. Marginal productivity is not possible if there are economies of scale, which is pretty much the defining reality of the industrial revolution.

4) This is a thread about higher unemployment resulting from a minimum wage increase. I explained why this doesn't happen, because the maximum profit still would be to sell the same number of products at the same price as before. You presented an explanation that assumes that an increase in the minimum wage will result in higher unemployment and higher prices as givens. And then you leave it to us to imagine the problems that would result from the lower employment and the lower demand.

And I explained that you are wrong.

No, you stated that I was wrong, you didn't offer any explanation other than a shotgun approach of different, conflicting, apparently memorized with no understanding of the theory, pointless dialogs, most of which assumed the very things that you were trying to prove, that increases in the minimum wage results in losses in employment or that the price increases from an increase in the minimum wage results in lost employment from the reduced demand without explaining why the prices have to go up, why the employees have to be laid off when the result of those actions will be a lower total profit than if the people had stayed employed and the prices had stayed the same.

Like a petulant middle school bully you have stomped your feet on the ground certain that you are right but being completely unable to articulate why. You are in an arena where only words can help you and you are unable to find them. This is because you have selected your economics to support your politics, not to understand how the economy works. That an increase in the minimum wage creates unemployment comes from your need to support your beliefs, not the logical result of your economics.


As I have said repeatedly in other minimum wage threads on this discussion board, I don't care if raising the minimum wage does increase unemployment. If it does it is by a very small amount concentrated in teenagers, on this point everyone agrees.

I want teenagers in school, not working. In school they have the best chance of developing their full potential.

We need to increase wages and to decrease profits. You seemingly can't address this point about profits at all, you ignore them.

I will also answer your last remaining, mostly fallacious point about automation. It is a complex subject, one that I know quite a lot about. I am an electrical engineer and I specialized in control and automation.

And in economics, I deal with the real world, not the fantasy world of the self-regulating free market, a fantasy economy dreamed up to support political beliefs that result in the singular result of more money going to the already wealthy and less money going to everyone else. The real economy is very complex, with many unintended consequences of nodes to such simple notions as the suppression of wages to increase profits.

There is a thread on automation and I will post my answer to you there.

 

[SimpleDon]

SimpleDon, you don't get it. If companies are used to having a 30% net profit anything that drops those companies below 30% net profit is a disaster and means the company owners will just take their capital ball and go home and put it in a 2.5% money market account instead.

I think that this is part of the problem. Wages, in their view, are bad, they are costs to be minimized. Profits on the other hand are a universal good, something to be maximized. Simply put, the economy is suppose to minimize prices and to maximize profits.

There seems to be no understanding that profits are part of the costs of production. They are the cost of the capital investment.

It is impossible to maximize profits and to minimize costs.

 

[ksen]

I'm sure you've given my good friend dismal a lot to think about. I can't wait to read his few sentence response!

 

[SimpleDon]

For me, the confusion about the impact of the minimum wage, the confusion about profits and what they are and what they are used for and the confusion about the place in the economy for wages and wages as the primary component of demand, that all of this confusion is the result of our inability to agree on what the purpose is of the economy. Why does it exist? What is it suppose to be doing?

Unless we can do this how can we judge how well it is working? And what we have to do to get it working better? We have to know what better is, don't we?

The only way that we could say that today's economy is working well would be to say that the economy is suppose to be unstable and is suppose to be directing to the wealthy ever increasing portions of the nation's income, primarily by allowing the financial markets to take advantage of the instability of those markets that they cause.

This is a pretty pisspoor excuse for a guiding principle, but one that is very pleasing to the wealthy, especially the ones in the largely non-productive financial markets.

 

[ksen]

There is no confusion.

 

[SimpleDon]

I'm sure you've given my good friend dismal a lot to think about. I can't wait to read his few sentence response!

I don't think that he has ever seen this argument, that the increase in the minimum wage doesn't change how the owners maximize profits. There aren't any pat responses to it for them to memorize and to chant. They have to think and to apply their knowledge of economics to the question and come up with a response. This is when the conflicts between their theories and their experiences come up.

All of the responses that I have seen to it miss the point that the total maximized profits after the minimum wage increase are lower. All that they say that have to be done, laying off workers and raising prices was to get the maximized profits back up to the level that they were before the increase. As if there is something sacred about that level of profits. That somehow the owners are due this level of profits.

 

[SimpleDon]

There is no confusion.

Admittedly I am being a little cynical and more than a little sarcastic.

I am really trying to be a better person, but it isn’t easy, especially here.

 

[AthenaAwakened]

There is no confusion.

Admittedly I am being a little cynical and more than a little sarcastic.

I am really trying to be a better person, but it isn’t easy, especially here.

Well, if it matters, I think you are a better person.

 

[ksen]

There is no confusion.

Admittedly I am being a little cynical and more than a little sarcastic.

I am really trying to be a better person, but it isn’t easy, especially here.

Don't change my friend. I always look forward to reading your posts.

 

[Horatio Parker]

Admittedly I am being a little cynical and more than a little sarcastic.

I am really trying to be a better person, but it isn’t easy, especially here.

Don't change my friend. I always look forward to reading your posts.

Ditto, naughty or nice.

 

[maxparrish]

1) I say they are attempting to maximize profit ex-ante. They will also do so ex-post. They will do this by hiring workers that provide a positive marginal contribution to profit. If I estimate hiring Person X will increase profit by $6 I will hire them if the wage I must pay them is $5.50. I will not hire them if the wage I must pay then is $6.50. I do not say any of that other dreck you attribute to me. If you want to have a productive discussion please direct your comments to things I actually do say. Don't make up things I don't.

Let's assume that ex-ante economy-wide all firms have hired just enough people to maximize profits.

As previously mentioned they do attempt to maximize profits after the minimum wage is increased. Specifically they do this by firing all the people who now have a marginal contribution that is negative thanks to the new higher minimum wage and/or who are now more expensive than the latest robot, etc.

... You didn't point out where you think that I am wrong, you presented yet another fallacious argument slightly different from the previous arguments that you have made, none of which address my simple point, that nothing is changed in the way to maximize profits after a minimum wage increase.... the reason that they can no longer maximize profits is because they laid off people, reducing their production capacity and they raised their prices reducing the demand for their products. This is the explanation that I was responding to.

Before the minimum wage increase producers were trying to or attempting to maximize profits.

They do this by setting their prices as high as they can that still produces a demand and a sales volume that utilizes all of their production capacity.

This is how you maximize profits. ...If they lower their prices to the point that the demand for their products exceeds their product capacity then they are not maximizing profits, they are leaving money on the table. If they raise the prices to the point that their sales volume is below their production capacity they have idle capacity and risk not being able to make enough to cover their fixed costs. Simply put, they make more profit on each unit sold, but they don't sell enough units. Once again, they aren't maximizing profits.

After a minimum wage increase or any other wage increase or any other increase in costs absolutely nothing has changed. They will still try to maximize their profits exactly the same way, by setting their prices to have a sales volume that utilizes their full production capacity.

SimpleDon,

Frankly, while Dismal is clear in his exposition your objections tend rely on imprecision and semantic quibbling, and your arguments too often opaque. Among your economic eccentricities:

1) No, a firm (or producer) does not maximize maximize profits by "setting their prices as high as they can that still produces a demand and a sales volume that utilizes all of their production capacity." A firm's technical production "capacity" ( capital plus labor) has nothing to do with setting prices - in the long run a producer does not produce to lose money just to use potential "excess (capital and labor) capacity". Ceteris paribus, rational firm will produce up to the point that for every unit of labor added to a particular capital base, the marginal revenue exceeds the marginal costs, at the market price for a service or product.

2) "The maximum profit that you can make is always the same, the highest price that generates a sales volume that utilizes all of your production capacity." Apparently you are confusing maximum production and/or maximum revenue with maximum profit. The maximum REVENUE must utilize all production capacity, the MAXIMUM profit does not.

3) "After the minimum wage income their capacity to produce hasn't changed if they don't lay off people and the demand for their products is the same if they don't raise their prices. And yet you say that they have to do both. Why?" Why not? And why would they subsidize an employee whose increased marginal cost due is exceeding his/her return? If the teenage 'water boy' (the guy who stands around and refills water glasses) in a nice restaurant, or the guy who stands at the curb dumbly waving a pizza sign makes 7.50 an hour, and then the minimum wage is set at 15.00 an hour, if he/she cannot cover his/her wages & benefits then they will likely be laid off and/or work reduced.

4) "But firing people reduces your production capacity. And raising your prices, reducing your demand, will also not maximize profits." Correct, but reducing marginal production that is losing money may increase profits - at work is the law of diminishing returns.

Here is a website for those needing some basic conceptual knowledge: http://www.helpwithassignment.com/Profit-Maximization-Assignment-Help

Are you struggling with Profit maximization Assignment? Do you need Profit maximization Assignment Help? Profit maximization Homework Help? ...

Profit maximization is a process by which a firm determines the price and output of a product that yield the greatest profit. The total revenue-total cost method relies on the fact that profit equals revenue minus cost and the marginal revenue-marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost.

Hopefully it is benefit to those who have not taken (or have forgotten) basic economics.

 

[laughing dog]

The above argument holds primarily for firms in a perfectly competitive. It is true that basic microeconomic theory indicates that an increase in costs should reduce output (all other things equal). Unfortunately for much of the empirical work on the effects of the minimum wage, the cutback in production could easily occur by reducing hours instead of firing people. Even though the overall reduction in hours worked by all employees in either scenario should be the same, reducing hours does not reduce the number of measured employed, so there is little change in the measured unemployment rate.

Add in that some of the industries with minimum wage employment are not perfectly competitive (meaning there is some increase in price), and the observed reduction in employment is even less.

Finally, the simple basic economic model of max's assumes instant adjustment of production - something that does not typically occur in the real world. That also would tend to reduce the employment effect in the short-run and make it harder to tease out the longer-run effects when there are other changes in costs and demand.

 

[Loren Pechtel]

SimpleDon, you don't get it. If companies are used to having a 30% net profit anything that drops those companies below 30% net profit is a disaster and means the company owners will just take their capital ball and go home and put it in a 2.5% money market account instead.

Except 30% is basically unheard-of.

10% is doing well.

- - - Updated - - -

Your painstaking explanation didn't touch on my point. You didn't point out where you think that I am wrong, you presented yet another fallacious argument slightly different from the previous arguments that you have made, none of which address my simple point, that nothing is changed in the way to maximize profits after a minimum wage increase.

You introduce yet another new argument that states that after a minimum wage increase the producers who are maximizing profits, excuse me, who are trying to or attempting to maximize profits, won't be able to hire people, because their marginal productivity is less than their wages. Previously you said that they would have to fire people and they would raise their prices. And they would no longer be able to maximize profits.

This is correct, but the reason that they can no longer maximize profits is because they laid off people, reducing their production capacity and they raised their prices reducing the demand for their products. This is the explanation that I was responding to.

Before the minimum wage increase producers were trying to or attempting to maximize profits.

They do this by setting their prices as high as they can that still produces a demand and a sales volume that utilizes all of their production capacity.

This is how you maximize profits.

Then you would see almost no factories running at less than 100%.

That is nothing like reality. Thus your theory must also be nothing like reality.