For a Forbes symposium on job creation, I’ve proposed that we Scrap the Minimum Wage. In a supplementary post for the Forbes Booked Blog, I discuss my sources and some of the research on the labor market effects of the minimum wage. I discussed the difference between allowing markets to work and trying to fix market prices through government fiat in this space last week.
One question remains unanswered. Why do economists, and why do I specifically, care so much about the minimum wage? The employment effects aren’t really that big, so why do we spend so much time talking about it?
Lay aside for a second the fact that we should oppose minimum wages if we care about poor people. The data are pretty clear that minimum wages reduce employment and increase poverty. The minimum wage is one of the issues where the contrast between conventional wisdom and the economic way of thinking is sharpest. As I mention in my article, the signal policymakers and activists send when they push for a minimum wage is “we don’t understand how competitive markets work.” Support for price-gouging statutes and rent control send the same signal. As long as people support these policies, we will have work to do.
{ 58 comments }
Art,
I think the biggest issue is getting past the myth that removing the minimum wage means that more people will live in “poverty” as one of the responders to your article implied.
How do we counteract the status quo that says tariffs (another responder), minimum wages, and other government interventions are good for the economy because they help support American jobs?
The reality is, as long as the government is allowed to interfere with and impede the free market, there will always be those that want to manipulate the market via the government in order to benefit their well being. All of these interventions cause prices to rise overall, which lowers the standard of living for everyone.
Letting wages fall means that prices will also fall with them. It’s not a net loss for the worker, in as much as wage floors are a net gain. The reality of it all is that employers having flexibility in wages means that they have the tools they need to earn a profit while achieving the maximum amount of employment for the population as a whole.
Over and over we have to strike down the myths that higher wages means higher standards of living, and the same with other government interventions. Higher wages only mean higher standards of living if the productivity of the worker matches the wage. Otherwise, prices rise and employment drops because the business owner cant hire inefficient workers at a rate more than they are worth because it is unprofitable.
The other issue that muddies the waters is “Unemployment Insurance” because you have now socialized the risk and created moral hazards. Why work at 75% of my original wage during an economic downturn when I can do nothing for 2 years and earn 50%?! The real cost of not working has dropped from an individual perspective because the impact overall of this inefficiency is not perceived at the household level.
This is the same story for tariffs. Now you have created a moral hazard and made a whole industry inefficient because you have socialized subsidies for them to mask their productivity inefficiencies. Why improve the way you do business when you can lobby the government to add a tax to your competitors products that make their products cost more than yours? Who pays? We do. However the industry turns it into something of national pride where national jobs are at stake if we can’t force the local population to pay more. Again, lower standard of living because of interference in the market.
Keep hitting them with the fact that things will cost less for the individual and there will be more employment in the long run if we could just stop this mercantilist government intervention.
Why presume wages and prices will uniformly drop across the board? The point with the minimum wage is that only some people are supposed to benefit – those who would apparently be making more money at $3 per hour than whatever they get now. On the other hand, higher wages do mean higher standards of living if you’re paid double then you can double your standard of living.
Isn’t “if” the basis for Cory’s argument? Why presume that employment will remain uniformly steady, despite the mismatch in a worker’s productivity and the amount for which a worker may legally be employed?
Frankly, I suspect those with wages already higher than the median income, as Russ points out below, benefit most from the underemployment resulting from such a mismatch.
Clearly this is the case. Why else would they teach the Laws of Supply and Demand in week 1 of Econ 101, but then tell their students that raising the cost of labor has no effect on demand for it, in week 10? (or whenever)
A bunch of quacks dressing up fallacies in lipstick and then swanking around in public like they’re married to them.
I’m not so sure it’s a matter of not understanding. It may just be a matter of not caring. After all, some people do benefit from minimum wage laws; the people who remain employed with the higher wages. And the politicians benefit from their votes.
“The employment effects aren’t really that big…”
i’m at a loss to know how anyone could ascertain this.
Because they aren’t. If a half-million people are put out of a job because of a minimum wage hike, the unemployment rate will go up some 0.03%. It basically gets rounded out of existence no matter what method of generating the unemployment statistic you use. In addition, the loss of salary for a half-million employed individuals generates a loss of around $5.5 billion off the GDP (assuming we move from $5.25 an hour to a higher rate). This is .0003% of the total GDP of the USA. It also gets rounded into oblivion and no one notices it.
From a purely statistical standpoint, the effects really aren’t that big.
Of course, that’s only if you view it from a statistical standpoint. All I see are a half-million people who are now unable to support themselves because the government effectively made it illegal for them to be employed. They aren’t going to be appreciative to know their sacrifice for the fuzzy feelings of politicians didn’t have a perceptible negative impact on the numbers. That’s not a consolation prize I’d be happy with.
We all know that minimum wage is not an economic issue, it is a political issue. The ego-driven interventionists use the minimum wage in their rhetoric for the purpose of renewing or gaining membership in the parasitic class.
Of course economic illiteracy makes it possible for the succesful accomplishment of the ego-driven interventionists’ ambitions.
I have never interviewed for a job that paid exactly the minimum wage. I have interviewed for jobs that paid, $0.25, $1.25, or $2-4 more than what the minimum wage was. So that number does not matter. However the minimum wage would matter a lot if it were increased by $7 or so.
On college campuses, one might be able to find people who would favor a minimum wage law of $12-15 or higher. That would be disastrous, and the people who seriously would vote for those laws are the ones who most need to read more about this. Students at some of the most elite universities favor a minimum wage policy that is correctly challenged in the econ courses of those universities, and in the same content taught at community college economics courses.
The arguments and evidence against minimum wage laws are not specific to pro-free-market activism or libertarianism or conservatism, and I see no reason why a socialist or progressive should favor those laws, when they can instead favor taxes and welfare, if they’re familiar with what economists have learned about this.
You forgot to ask a key question: have you ever interviewed for a job that paid less than minimum wage? Ahhhh, now you’re seeing the unseen.
amen.
No I haven’t. If the free market wage for the types of jobs I have sought were lower than the minimum wage, then I would have expected a cluster of jobs that pay exactly the minimum wage.
It might be that there are unusually easy or usually low stress/qualification jobs that do not now exist, but would exist as options without minimum wage laws.
To put this in concrete terms, let’s say there are jobs which are worth $1, $3, $5, and $7 an hour to the potential employer. You would expect to see most/all of these paying $7 an hour, rather than just not existing?
Somewhat similar, let’s say you’re in the grocery store where apples go for a dollar each, but there is a law making it illegal to sell any fruit for less than four dollars. What happens? Only larger fruit sell; the smaller ones rot. Both buyer and seller would like to make a transaction, but few can justify $4 for an apple, so they go to waste.
I would have expected at least some of the jobs whose free market wage is less than the minimum wage to end up being offered at exactly the minimum wage, but in a smaller quantity of workers hired.
I was thinking about a downward sloping demand curve for employees of some level of skill/experience/et cetera. With a price floor, one ends up with a lower than at equilibrium quantity hired, but at the price of the price floor. Then there would be excess supply. Assuming they seek employment and stay in the work force that would be added unemployment.
Some employers might go out of business or figure out a different way of doing things that depends less on labor. The jobs that are well below the price floor might be phased out of the economy entirely.
You’re improperly thinking of employment as “I have X dollars available for this job, so I will hire X/Y number of employees, where Y is the wage rate”. This isn’t how it works. All employment generates a corresponding value in return. If I am going to hire someone for Y wages, they must be able to provide Y+Z (Z being a subjective premium created by the employer) in value to the organization. If I am spending $10/hour to hire two $5/hour employees to clean bathrooms and the minimum wage is then set at $7.25, I’m not going to hire anyone. This is because neither one of them are capable of providing me with $7.25+$X in value to my organization. Hiring one of them at $7.25 results in dirty bathrooms that existing employees have to maintain themselves. Since a dirty bathroom is a dirty bathroom, I can’t find any value in hiring the one janitor at the new minimum wage rate at all.
Setting a budget and then spending it on that specific function is what governments do. A government agency would just hire fewer people if the wage was increased because productivity is a secondary (if at all) concern of a government agency. Private organizations don’t do this. They don’t spend money just because its available. It needs to perform a function, and at a higher minimum wage, ALL the jobs will eventually go away, not just some of them.
We’re already seeing this today. Fast food joints in my area have basically eliminated cashiers and only have a cook that does everything (and the cooks are more and more in their 40s and likely with extensive work experience, it’s been a while since I’ve seen an actual teen or college student in these positions) working there and the shift manager runs the drive through on top of doing all the other management duties. When I order something, I walk up to a kiosk, punch in what I want, swipe the credit card, then the cook comes out and delivers it when its done.
They didn’t hire fewer cashiers, they just got rid of them entirely. They didn’t just hire fewer teen fry cooks, they hired a more experienced worker and dumped all the fry cooks. This is what businesses do. They just get rid of the entire job description because NONE OF THEM can justify the higher wage.
And once these automated technologies are created, there’s no going back, even if you eliminate minimum wage. So these eliminated jobs will likely stay eliminated permanently. I suppose this indicates that the market would have preferred automated cashiers anyway, though wouldn’t have moved to them as soon. So minimum wage sped up the process. Now what was its purpose again?
If I am spending $10/hour to hire two $5/hour employees to clean bathrooms and the minimum wage is then set at $7.25, I’m not going to hire anyone.
Certain tasks have to be done. If the price of labor is artificially increased, companies will have no choice but to pay more for those tasks. Companies may go without the labor for unnecessary tasks or for tasks they can eliminate, but even this is not a foregone conclusion. You make a lot of assumptions and state your result with authority, but the real world is not as cut-and-dry as you seem to assume.
The truth is that companies balance the benefits and rewards of each hire, and as relative wages change between various skilled and unskilled labor categories, companies have to adjust their hiring. This happens even in the absence of government regulation affecting wages. I think you would agree with this. The line of where a given employee adds value and where he or she does not is not a sharp line. It’s a fuzzy line. There is certainly a price at which a company will make every effort to go without, and a price at which a company will have no choice but to go without. But even these are fuzzy boundaries.
If you’ve ever met someone who loses jobs due to lack of productivity over or at the minimum wage, you’ve met someone who would at least have a consistent job without minimum wages.
I have someone in mind myself saying this, and while I like to just say they should work harder in reality I know this probably isn’t going to happen absent some development of skill and confidence.
The minimum wage law destroys opportunities entirely for these types of individuals.
In all of my discussions about minimum wage with non-economists, the point they reiterate to me over and over is that it’s better for those who have a job to earn more than it is for there to be more jobs at a lower overall wage.
We all know this position is untenable, but there it is. Advocates of minimum and “living” wages are not concerned about the unemployed. As a result, we need to start meeting them where they are if we have any hope of convincing them otherwise.
I’m not sure how to get around this issue, but I thought I’d put it out there. These folks do not respond to reason and economic analysis. They are looking for a reason to increase wages. Anything we have to say to them that runs contrary to this is unwanted noise to them.
Steven Landsburg makes a pretty compelling case near the end of his book The Big Questions. I think I’ll give that one a try the next time I’m drawn into a minimum wage debate. The long and short of it is: If someone offers an inch (by supplying a job to the workforce), don’t ask them to give a mile (by demanding that they pay a certain wage. He then combines this argument with the fact that supplying more jobs will tend to increase the value of labor and push wages up over time.
It’s a lengthy argument that many who support minimum wage will not have the patience to listen to, but it’s worth a try, considering that the classic Econ 101 argument against minimum wage seems to convince no one of anything.
Yes, minimum wage eliminates cheaper competition. This is especially useful if you’ve invested a lot in improving your skills even though the market doesn’t need them; just eliminate the less-skilled competition and you become more employable.
There probably are some people who receive more money with minimum wage laws than without them. People who like minimum wage laws will probably tend to latch onto that, and ignore or downplay everything else. Those people should be friendly to the argument that welfare and taxes are even better than the minimum wage laws. I think libertarians might be reluctant to make that argument because they do not like welfare and taxes any more than they like minimum wage laws.
Please cite the data that supports this statement.
The evidence is great and the theories rock solid, but it will require long, honest and careful study. Start anywhere (you too please, Jeff):
http://blog.mises.org/?s=%22minimum+wage%22
What evidence, what theories?
Here’s a video introduction, Frank, if you don’t care to read any of the dozens of articles on the subject here:
http://www.youtube.com/watch?v=4KT0JZhTIcg
I’m torn as to what is the most horrible thing there is for “poor” Americans:
Unions and their minimum wage scam, government schools, government welfare, the Drug War or the State lotto. I guess they all go together in a mighty edifice of evil/stupidity.
Thanks, I’ll post that video on my site.
No problem, Frank. Cool.
This is a complete bunch of nonsense. The writer offers no support whatsoever for the claim that minimum wages have a negative impact on the poor, he just offers it as an article of faith.What research are you talking about, research from The CATO Institute or the Heritage Foundation?This is just like what I was telling someone the other day. There are three types of free-market libertarians, #1) Those that acknowledge that in a “free market” system ownership of capital will become highly concentrated in the hands of a few, who will then by virtue of their concentration of capital, actuality come to control the market and also of course the government and everything else, i.e. that “free-markets” are only fleeting under natural conditions and that it is in fact capitalism that leads to the destruction of free markets and small businesses, etc. These “free-marketers” know all of this and support this because they believe in a system where the few rule the many and they openly acknowledge this and their disdain for their fellow man. They believe that life in inherently unfair and that its fine if a few super rich people unfairly dominate the rest.Then you have type #2. Type #2 are people who think that “free-market capitalism” without “government interference” will give rise to a society in which every individual is an empowered capital owner and exploitation and poverty will go away for all those who are simply not to lazy to work. These people are basically delusional fools who have no idea what they are talking about.Then you have type #3. These people are #1 people in type #2 disguise. These people make arguments in favor of “free-market capitalism” using euphemistic like “freedom” and “choice” and “liberty” and argue that all of this will bring about improvements for the poor, etc., but all the while they don’t really believe any of this. In reality that actually know that what they are arguing for will lead to greater economic inequality where the few rule the many, but they just pretend otherwise.I’d suggest that you sir are type #3.There is no way that, by eliminating the minimum wage, both the rate of employment and compensation would go up, or that prices would come down in America. The real problem with the minimum wage that the American economy is not a closed system. There are adverse results from raising the minimum wage in America because employers can just move jobs to other countries and then export the stuff back in at significantly less cost. If the American economy were a closed system, or if minimum wages went up around the world, or if we regulated trade more strictly, then that wouldn’t be the case.Then you will bring up automation. Yes, exactly, we need more automation and we need to move AWAY FROM work as the primary means of income, JUST A IS ALREADY THE CASE FOR THE WEALTHY. The wealthy do NOT get the majority of their income from working, they get the majority of their income from owning capital, which then GRANTS THEM OWNERSHIP RIGHTS to the products of OTHER PEOPLE WORK, the people they are paying the minimum wages!!!!
Let’s see, that was:
1. The evil
2. The stupid
and 3. The evil and stupid.
Funny that’s my three possible categories for Marxoids like yourself.
You didn’t find the four exclamation points at the end there convincing, mpolzkill? By signalling the author’s righteous indignation and fierce self-confidence I have to say I was rather persuaded to accept his argument. Although I’d say in my defence that would make me more stupid than evil.
Haha. How are you Jon? Always a pleasure to hear from you. On this pleasant note I’m going to leave for awhile, the noise susceptible human mind and the apparent hopelessness is depressing me as usual, and then I start getting wreckless with my pen. Take care.
I am amazed at how leftists show up and proceed to lecture us thinking that what they are telling us is groundbreaking and new. Is this all this guy has? I mean, really. His arguments are so old it is laughable. I do know this: Morons like this guy and michael showing up here means that the Austrian influence is becoming more prevalent and it scares the masters.
I find this baffling too Rich. And then they say “You Austrians are all boggled up with your “theory” and don’t know how the “real world” works, you’re all supply side fanatics and don’t understand anything about how the economy actually works.” There is also a baffling trace of victimhood in the claim “oh we’re just trying to ensure that everyone has a FAIR GO and that we live in a just society and you evil bastards are just stooges for the Man”. Well here’s some news: policies designed to ensure a fair go have been in place for the last 80 years, the theory dominates the education system and the media, and yet we all agree that our society is more bloody unfair than ever! Yet this gives no pause at all. “More of the same!” is the cry.
I really don’t understand how an economy run on neo-Keynesian demand side policies is supposed to work, I confess I just do not undrestand it. Hence an interest in and support for Austrian economics.
And good day to mpolzkill.
Quite frankly with the concentration of wealth being what it is in this country, the minimum wage is one of the few things keeping us from a new era of feudalism.
Also this is America, not China damn it, our underclasses deserve better lives than 3$ an hour scrubbing toilets.
Also what Jeff said.
My award winner for “Saddest Comment of the Month”.
Sigh. “Water, water everywhere, but not a drop to drink. Oh wait, this is a fresh water lake, maybe there’s something wrong with me?”
I think many of us are simply wondering about the data so we can evaluate the claims ourselves.
Usually people that are against the minimum wage have never worked in a minimum wage position. Years ago before labor unions existed, many corporations took advantage of workers in factories and used child labor to gain cheaper labor costs. Many tragedies occurred with little respect for laborers rights. Currently with bankers and investment bankers having to bailed out by the government, arguments could be made that the entire banking field should be paid at minimum wage levels since it would of failed without government support. To make matters even seem more non Christian or to a certain respect modern Christian, the corrupt were rewarded with bonuses, while the intellectuals desired to confuse the christian public with arguments against the minimum wage. Currently economic arguments could be supported about maximum wages not minimum wages. For example should an unsuccessful trader on Wall Street be given a $ 500,000 bonus when he was not successful in his job, or should his job as a trader be determined with a maximum salary of $ 100,000. Should one go to into cosmetic surgery to earn $3 million a year or should many cosmetic surgeons earn $ 250,000 a year as a maximum salary. The argument for many is not whether a minimum wage is needed is whether salaries should be capped. Should a superintendent of a school system who does not teach classes earn close to $ 300,000 a year in the Northeast while many teachers earn less then $ 40,000. Currently Apple has $ 40 billion in cash and could easily hire 10,000 additional employees at $ 40,000 a year for a total cost of $400 million of a 1% return on their existing cash. IF companies like Exxon Mobil, Microsoft , Google , Goldman Sachs all followed suit, close to five million jobs would be created. That is if the Fortune 500 each hired 10,000 additional workers then over 5 million jobs would be created, unemployment would fall to 4%, and there would be a multiplier effect of 7 to 1 on this expansion. It is time for the Fortune 500 to be Christian companies once again, to lift up their arms for the US population, hire , and to stimulate this great country. Not to get rid of the minimum wage but to honor it with the truth of USA history with why it exists.
If prosperity could be legislated via minimum wage laws we could all be filthy rich earning the minimum $1,000/hr…what the heck make it $10,000/hr, why sell ourselves short. Of course any rational human being will understand that dictating, and enforcing, a $1,000/hr minimum wage would lead to mass unemployement, fantastically high prices for the little bit of product which might be produced and a collapse of the economy. In the real world employees wants to be paid more but the employer isn’t going to pay more than the value the employee can produce unless they have a death wish for their business, such is human nature. Ultimately the only way the employee will raise their incomes is through the tough and time consuming process of investing in themselves through training and education in order to make themselves more highly skilled and productive. Employers will be happy to pay a higher wage to a skilled and highly productive employee since they will benefit from the higher productivity as well.
Good blog, Art. Not only does the minimum wage keep productive workers out of the work force, it is also unconstitutional. No where in the Constitution is the Federal Government authorized to become involved with the price of labor.
I am no economist, so I really don’t know what all the theories are. I also understand the author’s position about minimum wage. But I live in a country where poverty and unemployment is a huge issue. Having a minimum wage policy ensures that workers are not exploited and even with minimum wage we still have the working poor. People who are employed yet earn so little money that they are barely able to survive. I have very little faith in market forces ensuring for better wages especially when talking about workers who are either unskilled or semi-skilled.
Which country?
This is terrible. It is a sin against God not pay a living wage. The writer gives no support for his conclusions. He just makes a blanket statement. God is very severe in His judgments against those who oppress the poor.
Offering to exchange money for production is not my definition of oppression.
Where does God define “a living wage”?
This is a very short blog post, he links to reams of support for his conclusions. Please follow his links.
Thats odd, I thought theft was a sin.
which part of the scriptures support this assertion? and isn’t the minimum wage just such an oppressive measure against those who may want to work for something, however paltry that something may seem to the better-off?
The facts are simple and they speak for themselves.
The minimum wage was implemented in the 1940s. It was at its highest in the 1970s. Poverty rates in America reached their lowest point in the 1970s. As the minimum wage has gone down since that time, income inequality has increased and poverty rates have gone up.
Those are the objective facts. There really is no argument against them.
The claim is that the minimum wage hurts the poor and leads to increased poverty, yet the collected data in America from 1900 to today shows that poverty rates were a heir lowest point when the minimum wage was at its highest point, and that as the minimum wage has gone down, poverty has gone up. Those are simply indisputable facts.
http://www.pbs.org/fmc/book/9money8.htm
http://www.pbs.org/fmc/book/2work12.htm
http://www.pbs.org/fmc/book/9money3.htm
http://www.pbs.org/fmc/book/9money7.htm
correlation ain’t causation.
A good thing to keep in mind especially when arguing that unemplyment benefits lead to more unemplyment… Esp when the unemployemnet curve is always slight leading the curve reflecting the rate of benefits being paid out.
But as far as the actual argument goes it could help to show real world correlation between minimum wage and employment, because many of these theories sound good on paper until they run into reality.
I say this as someone who has just recently become intersted in the subject and could still be persuaded either way. But from what I am seeing it seems that the real factor is not a minimum wage, but relative wages that matter more to a person’s wellbeing.
I guess folks have moved on, but just to point out, China is now raising minimum wages across the country, so do the Aynrandians now anticipate these increases in minimum wage leading to a growth of poverty in China?
http://www.spinxer.com/china-increases-minimum-wage/726.html
Do these champions of liberty actually believe that poverty in America would have been reduced faster from 1940-1970 if there had been no minimum wage?
There is no supportable argument for such claims of course.
Jeff,
Has it ever occurred to you that the causality might be exactly opposite of what you assume here? By that, I mean that legislators raise the minimum wage only after overall wages have risen enough (or inflation has eroded them enough) that the harmful effects of the increase will be minimal, that there won’t be a significant number of people on the margin who will lose their jobs.
Knowing that it is in their interests to appear to be doing something to help the poor, and given the general public’s ignorance of economics, why would they not raise the minimum wage at every opportunity? More to the point, what stops them from raising it more quickly and more often? The answer is that to do so would quickly expose the minimum wage for the sham that it is as business suffered and tens of thousands were thrown out of work. Raising it slowly, giving most of the lowest income earners a chance to get above the new proposed minimum, gives them the appearance of saintly altruism while shrewdly limiting the damage.
Here are a few links to counter yours (which I didn’t think related too closely to your point in the first place):
Does the Minimum Wage Reduce Poverty?
The Effects of Minimum Wages on the Distribution of Family Incomes
I don’t have time to go into a whole analysis now, but I’ll say this. Your first link (the second does not work) is completely worthless and clearly very biased.
But even if we discount all of the problems with the paper, the paper still CONTRADICTS the original posts claim!
From the OP: “Lay aside for a second the fact that we should oppose minimum wages if we care about poor people. The data are pretty clear that minimum wages reduce employment and increase poverty.”
From the linked paper: “Accordingly, the most appropriate assessment is simply to conclude that changing minimum wages does not have an impact on poverty.”
So, even if we simply accept this paper at face value, its conclusion is that minimum wages have NO effect on poverty, not that they have a negative effect.But even that is too generous, because the fundamental economic assumptions used in the paper are wrong.The basic economic theory isn’t even right.
From the article: “Economic theory suggests that in competitive markets, workers will be paid their marginal revenue product—the amount of revenue that the worker contributes to the firm.”
Incorrect, that is not at all what economic theory suggests.
As Adam Smith said: “Though the manufacturer (i.e. the worker) has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed”
No employer would ever pay a worker the full value of the worker’s labor, because in doing so the employer would get no benefit from employing the worker, it would be pure charity.The employer has to get a profit from the worker, which means that the worker has to create more value than what they are paid back by the employer.
This is not in and of itself a problem, since the employer is in essence performing a service to the employee by providing capital, etc. for the employee to use. And the employer deserves to get paid for this “service” to the employee.The question, however, is HOW MUCH profit is the employee making off of the employee, and is it justified.
What REAL wage theory suggests is that there is a profit margin that all employers get on their employees. Increases in the minimum wage can be effective without hurting the labor market as long as those increases do not exceed the profit margin.
So, lets say that an employer is paying an employee $2.00 an hour to do roofing, but they are charging $200 for the roofing job because the market will bear $200 for the roofing job from the consumer. Lets say that the job takes the one employee 4 hours to do, for a total compensation of $8.00. After subtracting out other expenses, we find that it costs the employer $50 in other costs and $8.00 in wages to do the roofing job, giving him a $142 profit.If we implement a minimum wage of $7.50, then the cost to the employer to hire the worker to do the job is now $30, plus the $50 in other costs, now giving him a $120 profit.So, in this case economic theory would predict that unless the employer has some other alternative means of getting income that doesn’t require hiring the employee, he’s going to either just accept a lower profit margin and continue on with lower profits, or he’s going to just raise the price and keep the same profit margin.
Minimum wages would only increase unemployment if #1) The employer can move production to a place of cheaper wages, thus creating regional unemployment due to a “wage haven” alternative, or #2) the increase is so much that it completely eliminates profit margins, thus causing employers to go out of business, or #3) the cost of the new minimum wage is higher than the cost of alternative efficiency gains, leading the employer to reduce staff and increase expenditures on capital (which often has the effective of boosting employment at higher market values for more skilled labor).So, in a closed system, without worrying about “wage havens” (i.e. off-shoring) as long as minimum wage aren’t increased to the point that they eliminate profit margins, then all is generally well.
The statistical methods used in the paper are clearly designed do show what the author wanted to show. The assumptions of the author were wrong to begin with.Minimum wages typically effect very few workers.
As such, increases in the minimum wage do not cause equivalent increases in inflation. The typical impact, then of increases in minimum wage is to reduce the profit margin of employers because their prices don’t rise at the same rate as their increases costs of employment, so due to this increases in minimum wage can lead to real gains in buying power of minimum wage employees.The only way that increases in minimum wage can lead to higher unemployment is if employers have better alternatives for producing income without the use of employees. This can only be true ultimately via automation or outsourcing to regions of production that have lower wages. Thus, the issue of minimum wages is largely dominated by the fact that economies aren’t closed systems, because in a closed system minimum wages would have almost no impact on unemployment.
The only impact would be on positions that could be eliminated more cheaply via automation.
From the article: “Economic theory suggests that in competitive markets, workers will be paid their marginal revenue product—the amount of revenue that the worker contributes to the firm.”
Incorrect, that is not at all what economic theory suggests.As Adam Smith said:
“Though the manufacturer (i.e. the worker) has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed”
Technically both are correct, but the market is not competative. If I remeber they say in econ 101 that in a free market at equilibrium profits tend to zero. Therefore the whole game is not to allow an equilibrium to be reached.
What people tend to forget is that Smith himself was more of a utilitarian than a capitalist, and much of his theroeis were based on the free market tending toward equilibrium where you would only have just compensation for goods and services provided without profit taking.
one cannot prove counterfactuals. however, raising the price of a good/service, ceteris paribus, lowers the quantity demanded. this is as true for china as it is for america.
…also, wage demands have no impact on inflation, exclusively a monetary phenomenon.
Minimum wage laws make it necessary for emplyers to utilize capital to improve productivity. The minimum wage and union negotiated wages are the reason for progress in mechanization of most tasks.
Somolia….no minimum wage. Germany, …minimum wage. Choose one to live in.
Sweden… no minimum wage.
I hope this trivial example will show how vacuous your rhetoric is.
As Art points out in the article above, minimum wage has a negative effect, but it is relatively small. The reason why it is important is it is a great starting ground for educating people about economic analysis.
Regarding your specific argument: competitive forces are what entice employers to improve productivity, not minimum wage.
Not really true. The minimum wages in Sweden aren’t set by the government, they are set by unions. The minimum wages in Sweden are actually generally higher than in places where they are set by governments….
Rather than a minimum wage, there should be an attempt to institute a minimum incentive program within companies and private employers. No employee of a low-scale job with limited advancement and career potential should be encouraged to remain at a diminutive position for more than a couple of years, but rather driven by the employer to succeed on their own. Personal growth, entrepreneurial practices seminars and small business development skills should a part of every employer’s employee development programs for those in the low-tier positions. Governmental tax breaks and incentives given to employers would encourage the development of such programs. This way we maintain a continually evolving work force driven to self-actualization and quality of life betterment.
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