The economy

[alaskaguy]

Most people see the issue as a no-brainer. Wouldn't it be nice to raise the wages of the lowest-earning people? Even if they understand that this will cause them to pay higher prices on goods and services, they see that as a worthwhile price to pay. But economists of various political stripes tend to oppose the minimum wage. I understand that it only helps a subset of the people it is thought to help, and it only helps them a little -- while hurting some of them a lot.

In raising the minimum wage, the government doesn't guarantee jobs. It guarantees only that those who get jobs will be paid at least that minimum. But precisely by requiring this, the government destroys jobs. In other words its all or nothing. Marginal tasks, the least important tasks in the workplace, would no longer be worth
doing, thus costing jobs. In the longer run, employers will find more capital-intensive ways of doing these tasks.

Economists' consensus estimate is that a 10% increase in the minimum wage wage destroys 1% to 2% of youths' jobs. Some older low-skilled workers also suffer.

It is worth recalling the famous line from liberal economist Paul Samuelson's 1970 textbook, "Economics," about a proposal to raise the minimum to $2: "What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?"

But couldn't a job loss of 1% to 2% be worth it, if the remaining 98% to 99% get a wage increase? This isn't the tradeoff, for two reasons. First and most important, the majority of youths are already earning more than the higher minimum that is typically proposed. Granted some but probably not most, would get what are called "spillover benefits" because of the new pressure on the wage structure.

Second, because the minimum wage does not make employees automatically
more productive, employers who must pay higher wages will look for other ways to compensate: by cutting non-wage benefits, by working the labor force harder, or by cutting training. Interestingly, the Economic Policy Institute (EPI), a union-funded organization in Washington that pushes for higher minimum wages, implicitly admits the last two of these three. On its Web site, EPI states, "employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale." How would an employer get higher productivity and decreased absenteeism? By working the employers harder and firing those who miss work. Lower training costs?
By training less?

Nor is the minimum wage a well-targeted policy for reducing poverty. The usual stereotype is of a minimum-wage parent with no other family members working. But that's a very small segment of minimum-wage workers.

[alaskaguy]

It may be appealing to suggest that everyone should earn a decent wage, but it is an oversimplistic vision. If it is an easy proposition, then why do so many countries have workers earning so little? Have these countries just missed the boat on appropriate legislation? If it is possible to mandate high wages, then why not also have low prices for food, shelter, clothing, and everything else that is good?

[jbhtexas]

It may be appealing to suggest that everyone should earn a decent wage, but it is an oversimplistic vision. If it is an easy proposition, then why do so many countries have workers earning so little?

Well, in some cases, because those countries are ruled by despots who don't really give a hoot about their constitutents. Those countries are governed in a manner that maximizes the wealth of those in political power. Enough buisnesses are allowed to operate in a manner that builds the wealth of the political leadership and provides enough of a return to the business owner so that he will keep the business running. As such, there is an abundance of labor, which keeps wages low.

[alaskaguy]

Our government essentially lets the markets rip but then uses progressive taxes and redistributive transfers to make the end result "fairer." However, many "liberals" feel that this solution is unsatisfactory. Instead, they have to increase "market" wages, through imposing minimum wages.

Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers, which prices some workers out of the market, in order to give those workers extra income? Why not give them the money directly, say, via
tax credits?

[alaskaguy]

Well, in some cases, because those countries are ruled by despots who don't really give a hoot about their constitutents. Those countries are governed in a manner that maximizes the wealth of those in political power. Enough buisnesses are allowed to operate in a manner that builds the wealth of the political leadership and provides enough of a return to the business owner so that he will keep the business running. As such, there is an abundance of labor, which keeps wages low.

It is an economic law that cheap labor in underdeveloped countries results in a capital flow toward those economies. These are the locations in which labor may be purchased most cheaply, and replaced most easily. The flow of capital is toward these economies, results in the gradual rising of these economies. And unless the
global supply of capital increases enough to offset those losses (which, recently, it has not), the result is a decline in available capital in wealthier economies and consequently increased capital for the poorer economies.

[jbhtexas]

It is an economic law that cheap labor in underdeveloped countries results in a capital flow toward those economies. These are the locations in which labor may be purchased most cheaply, and replaced most easily. The flow of capital is toward these economies, results in the gradual rising of these economies.

I forgot one thing...the despots keep most of their constituents uneducated. Captial doesn't flow towards overwhelming ignorance...

[jbhtexas]

Alaskaguy, the problem I see is that you are arguing from a purely academic standpoint.

A single mother who's trying to earn enough to feed her kid could care less (well, that might be a little harsh) if an increase in her wage causes her teenage suburban counterpart to lose his partime "spending money" job. She's trying to survive. For her, more lower paying jobs is not a better thing. She needs to earn the most amount of money in the shortest amount of time so that she can be around to raise her kid. Of course there are many other scenarios, but many are similar to this one.

A wage is a tangible thing that people can easily relate to. A dollar an hour raise means I get a bigger paycheck and I immediately see the benefit of the government trying to help me. Tax credits aren't quite as easy to get your arms around and hands on, and the gratification may be delayed until tax time.

The government has to consider more than just economics. They also have to consider social issues. Social unrest among the lowest wage earners is not desireable, especially when there are alot of those wage-earners, as there now are in our service-based economy.

I'd be willing to bet that if you polled minimum wage workers and asked them if they'd prefer more lower paying jobs or fewer higher paying jobs, most would choose the latter. What would you rather do for an equivalent salary...work two lower paying jobs for 12 hours a day, or one higher paying job for 8 hours a day? Money is the carrot.

I think one idea behind the minimum wage is that under "normal" economic conditions, there will be less social unrest amongst lower wage earners with a few less higher-paying low-wage jobs than a few more low-paying low-wage jobs. It's big balancing act between promoting economic growth, minimzing social unrest, and yes, maybe even genuine conern for the well being of the low-wage earners. When the government senses unrest over the economic conditions of the low-wage earners, a small adjustment is made to the minimum wage. This give a sense of fair play, and the unrest subsides.

That may sound rather draconian, but that's just the way I see it.

[ericlambi]

It is an economic law that cheap labor in underdeveloped countries results in a capital flow toward those economies. These are the locations in which labor may be purchased most cheaply, and replaced most easily. The flow of capital is toward these economies, results in the gradual rising of these economies. And unless the
global supply of capital increases enough to offset those losses (which, recently, it has not), the result is a decline in available capital in wealthier economies and consequently increased capital for the poorer economies.

Sorry, there are no laws of economics, only theories. Also, capital flows to the places where returns are higher. It is a theory that returns on capital should be higher in underdeveloped economies because they have labor and little capital. However, in practice, this has not been the case, it is called the Lucas Paradox. It is generally explained by productivity differences and economic infrastructure differences (think property rights, financial markets, etc).

[alaskaguy]

Alaskaguy, the problem I see is that you are arguing from a purely academic standpoint.

A single mother who's trying to earn enough to feed her kid could care less if an increase in her wage causes her teenage suburban counterpart to lose his partime "spending money" job. She's trying to survive. For her, more lower paying jobs is not a better thing. She needs to earn the most amount of money in the shortest amount of time so that she can be around to raise her kid. Of course there are many other scenarios, but many are similar to this one.

A wage is a tangible thing that people can easily relate to. A dollar an hour raise means I get a bigger paycheck and I immediately see the benefit of the government trying to help me. Tax credits aren't quite as easy to get your arms around and hands on, and the gratification may be delayed until tax time.

The government has to consider more than just economics. They also have to consider social issues. Social unrest among the lowest wage earners is not desireable, especially when there are alot of those wage-earners, as there now are in our service-based economy.

I'd be willing to bet that if you polled minimum wage workers and asked them if they'd prefer more lower paying jobs or fewer higher paying jobs, most would choose the latter. What would you rather do for an equivalent salary...work two lower paying jobs for 12 hours a day, or one higher paying job for 8 hours a day? Money is the carrot.

I think one idea behind the minimum wage is that under "normal" economic conditions, there will be less social unrest amongst lower wage earners with a few less higher-paying low-wage jobs than a few more low-paying low-wage jobs. It's big balancing act between promoting economic growth, minimzing social unrest, and yes, maybe even genuine conern for the well being of the low-wage earners. When the government senses unrest over the economic conditions of the low-wage earners, a small adjustment is made to the minimum wage. This give a sense of fair play, and the unrest subsides.

That may sound rather draconian, but that's just the way I see it.

And my point has been the way that you see it is the way most people see it. However, I don't see it that way and neither do most economists.

You provided the usual stereotype that minimum wage supporters do of a minimum-wage parent with no other family members working. But that's an extremely small segment of minimum-wage workers.

The minimum wage has well-meaning sponsors that I refer to as the do-gooders (people like you) and it also has the special interests who use the well-meaning sponsors as front men. You almost always have bad programs when you have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you can get. The do-gooders believe that bypassing a law saying that nobody shall get less than $XXX an hour, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate -- the unemployment rate among teenagers in this country -- is considerably higher than the overall unemployment rate. It's no accident that that was not always the case until the 1950's when the minimum wage rate was raised very drastically, very quickly. Teenage unemployment was higher than ordinary unemployment because, of course, teenagers are the ones who are just coming into the labor market -- they're searching and finding jobs, and it's understandable that on the average they would be unemployed more.

The minimum wage law is most properly described as a law mandating that employers must discriminate against people who have low skills. That's what the law says. The law says here's a man who that has a skill which would justify a wage rate of $3.50, or $4.00 an hour. You may not employ him. It's illegal. Because if you employ him you have to pay him the minimum wage. Well, what's the result? To employ him at the $7.15 minimum wage is to engage in charity. Now there's nothing wrong with charity. But most employers are not in a position where they can engage in that kind of charity. Thus the consequences of minimum wage rates have been almost wholly bad, to increase unemployment and to increase poverty. Moreover, the effects have been concentrated on the groups that the do-gooders would most like to help. The people who have been hurt most by minimum wage laws are minorities. One of the most anti-minority laws on the books of this land is the minimum wage law.

[ericlambi]

Alaskaguy, the problem I see is that you are arguing from a purely academic standpoint.

A single mother who's trying to earn enough to feed her kid could care less (well, that might be a little harsh) if an increase in her wage causes her teenage suburban counterpart to lose his partime "spending money" job. She's trying to survive. For her, more lower paying jobs is not a better thing. She needs to earn the most amount of money in the shortest amount of time so that she can be around to raise her kid. Of course there are many other scenarios, but many are similar to this one.

You are taking a specific example and extrapolating it in incorrect ways. What if all of the minimum wage earners are single mother's who are trying to feed their kids and the increase in minimum wage causes 10% of them to lose their job?

[ericlambi]

the wages for the office I run will increase over $100K next year due to the increase of the minimum wage. For the same amount of work and output!!! We pay above the minimum now of course, but we want to be at the same level above it that gives us the type of ppl we need.

The increase is a windfall for the state coffers .... they get an extra 9% of the 100K from my shop... grrrrrr..

my services just increased in cost.... think i want to pay it out of my pocket? So, I pass it on to my customers. Sounds similar to the link above right?

- keep.

You pay above the minimum wage, so why should the minimum wage affect the amount you pay? It seems to me that labor market supply/demand dynamics and the amount of marginal revenue per employee should determine your wage rather than some random number set by the government.

Also, why do you think your customers will accept your increased prices without changing the amount of your good/service that they would have purchased under a lower price? It seems likely to me that they will order less or switch to a different provider of your good/service that has a more rational labor cost policy and can therefore deliver the same good at a lower price. Perhaps over the short-run your customer's demand is relatively inelastic to small changes in prices, but I doubt your long-run ability to pass labor costs on to your customers if the reason for this is based on changes in the minimum wage when you already pay above that wage.

[jbhtexas]

You are taking a specific example and extrapolating it in incorrect ways. What if all of the minimum wage earners are single mother's who are trying to feed their kids and the increase in minimum wage causes 10% of them to lose their job?

The 90% who got the raise will be somewhat more content because they can better care for their kids, and the 10% who lost their job will be unhappy. Some might say that this would be a better political scenario (and perhaps even social scenario) than 100% unhappy with the lower wage that was preventing them from making ends meet. The government will help the 10% who lost their job until they find another one...

[madcityCY]

housing boom vs. increased cost of land due to grain prices (biofuels). Other factors as well.

[ericlambi]

The 90% who got the raise will be somewhat more content because they can better care for their kids, and the 10% who lost their job will be unhappy. Some might say that this would be a better political scenario (and perhaps even social scenario) than 100% unhappy with the lower wage that was preventing them from making ends meet. The government will help the 10% who lost their job until they find another one...

The point is, if the minimum wage is binding, then unemployment increases overall if the minimum wage increases. If the government plans to make up the difference, then they have to do it through increased taxes (most likely increased deficit, which means increased taxes in the future). If that's the case, they should probably just increase taxes on middle and upper tax bracket taxpayers and lower taxes on low income people. It would be much more efficient for the government and cause fewer problems for the unlucky people who lose their job because of the increase. Of course, politically it is much easier to leave unemployment benefits unchanged and subtely increase unemployment than to raise taxes.

[Cyclonepride]

Why is the government involved at all? Isn't this what churches and charities are for? To help those less fortunate? It's like we're all in a liberal church, but they don't pass the collection plate, they just have you put your wallet in there and give you back what they feel is fair.

As far as I am concerned, progressive taxes of all kinds are socialistic ideas at heart, and are wrong. And yes, I felt that way before I made a decent living too.