Friday, February 15, 2013

The Minimum Wage

Apologies for not posting for so long. Also, this is going to be one of the shortest posts I think I have written. I occasionally browse the Mises institute, although I am not an Austrian economist (they have some good points, but others are more questionable). This time round, I stumbled on an article on the minimum wage. This key passage was of particular interest:

The advocates of the minimum wage and its periodic boosting reply that all this is scare talk and that minimum wage rates do not and never have caused any unemployment. The proper riposte is to raise them one better; all right, if the minimum wage is such a wonderful anti-poverty measure, and can have no unemployment-raising effects, why are you such pikers? Why you are helping the working poor by such piddling amounts? Why stop at $4.55 an hour? Why not $10 an hour? $100? $1,000?
The logic appears to be simple and very clear. The 'piddling' amounts is because higher amounts would cause unemployment, and the advocates know it! I do not favour the minimum wage as I have always considered it a misguided tool (I will not go into all my reasons now). However, this single passage seems so simple and logical, it is difficult to argue with. Rarely in economics is there such a simple, concise and clearly expressed argument. Does anyone have a counter-argument to this simple logic, as I would be fascinated to hear it?  Maybe this is too simple?


  1. The proper response to post is, quite simply, they present a caricature of their opponents, at least the academic economist opponents.

    No, economists who advocate a minimum wage do not argue that the "minimum wage rates do not and never have caused any unemployment." Maybe ignorant posters on blogs might say that.

    The response:

    (1) the reason it could be, say, $8-9 in the US today and not $20, $40 or $100 of higher is that the *minimum* wage is a floor concept, not a ceiling. This is the wage below which people start to really struggle to live: they must face life below the poverty line. Minimum wages are set roughly at the poverty line, but ideally slightly above it. The current US real (inflation-adjusted) minimum wage has fallen below the poverty line, and for a long time now.

    (2) first economic argument: the law of demand is mostly a theological abstraction; it is not universally true in the real world.

    There is no reason why minimum wages must necessarily cause unemployment, although it is reasonable to think it may do so in some cases. However, the real world factors in (4) below will overcome whatever unemployment is created.

    (3) As Keynes pointed out, the labour market is highly unusual: people’s wages are also income, and income is spent on output. Demand drives output. Even if we assume *some* unemployment from wage rises, it is most likely that extra demand will more than swamp that unemployment and eliminate it - especially with countercyclical Keynesian fiscal policy.

    If you do not believe that, then why in the classic era of Keynesianism (1946-1970s) when minimum wages were generous (often slightly above the poverty line in many countries) did we have very high employment?

    (4) second economic argument: the reason it is $9 and not $20 etc. is that excessive wage increases can feed into cost push inflation – wages being a big factor in input costs. But a rise from $7.25 to $8- 9 is quite small. In the real world, whole swathes of the market have corporations and businesses that actively set prices and control them by price administration. They leave prices unchanged for significant periods of time, even when mild to moderate demand changes happen or even when mild price increases affect their factor input costs.

    1. I forgot to mention; minimum wages have knock on effects on wages in general. If the minimum wage increases, it does not just impact the bottom, but all wages. For example, if a worker's wage rises with the minimum wage, so must the supervisor's wage to keep the differential, and then the supervisor's manager etc. How can it be otherwise? It indirectly sets a floor for all wages.

      There are other problems but, as you may have guessed from the lack of posting and brief posting here, time is not currently on my side for working on the blog.

    2. "minimum wages have knock on effects on wages in general. If the minimum wage increases,"...

      Which means that the boost to aggregate demand is also a knock on effect! (more wages = more income = more demand). Everything I say above applies to any and all cases of higher wages elsewhere.

      There is no refutation of anything I've argued here.

    3. For your point about aggregate demand, you are creating a perpetual motion machine, and this returns to the point made in the quote. If raising wages increases aggregate demand, just keep raising the minimum wage ever it will just keep raising aggregate demand, and raise employment at higher wages, which will raise aggregate demand and raise employment and raise wages higher etc. etc. If this works, why not just keep raising the minimum wage ever higher and higher and higher....

      Congratulation - the economic mirror of the perpetual motion machine seems to have been invented. No need to worry about wages; just keep hiking them ever higher, and we get more output, more employment and more output and more employment and higher wages, and so forth. Yes, a miracle.

    4. No, the minimum wage is a floor, set ideally somewhat above the poverty line. If there are also minor wage "markups" following a slight rise in the minimum wage, there is no reason to think the minor negative effects will not swamped by the positive effects I have outlined above.

      And of course you will not even attempt to answer or address my question: if you do not believe my arguments, then why was it in the classic era of Keynesianism (1946-1970s) when minimum wages were generous (normally somewhat above the poverty line in many countries) did we have very high employment? - indeed historically unprecedented high employment.

      If you suddenly set the minimum wage too far above the poverty line, then, yes, obviously cost push inflation will start to be an issue. But nobody advocates that.

      You're just reduced - like the Austrians at - to setting up a straw man and knocking it down because you will not address the actual arguments offered.

    5. Lord Keynes, you are not following your own arguments. You explained how the increase in aggregate demand from higher wages reduced unemployment. Are you standing by this or not? It is not a straw man. Either your theory applies or does not apply? If increasing wages increases aggregate demand and reduces unemployment, then the logic follows that increasing wages ad infinitum can only do good. Either this works the way you say or it does not.

      As for your golden period, is it really comparable to today's competition. A bit of a weak example....there was not the same situation as today. As for countries that are doing well on unemployment with minimum wages, yes it is possible. However, they still have unemployment and if the economy is very strong such that even with a minimum wage it remains competitive, the impact will be less. The strength of an economy is, of course, dependent on any number of variables. And, even in your golden age, there was still unemployment. Equally, in economies with no minimum wage there has been unemployment. The question at issue is degree of impact.

    6. "If increasing wages increases aggregate demand and reduces unemployment, then the logic follows that increasing wages ad infinitum can only do good"

      It does not follow at all. It is exactly like saying:

      Man 1: "you should drink 2-2.5 litres of water per day. It is good for you."

      Man 2: "If 2-2.5 litres of water per day is good for you, then the logic follows that 20 or 200 and ad infinitum can only do good too!"

      No, it isn't, and of course setting a floor like the minimum wage well above its target (poverty line) will start to cause serious cost push inflation.

      The absurdity of your whole argument is exposed by the fact that minor (even moderate) wage increases - easily comparable to minimum wage increases - happen all the time in many important sectors of the economy. No doubt they have knock on effects.

      Does inflation suddenly soar to disastrous levels when this happens? Do countries suddenly find that no one buys their goods? Does unemployment not continue to fall in a boom even when wage rises are occurring?

    7. Is the water analogy a reaonable analogy - I don't think so. It does not compare with an economy in any sensible way, and appears as rhetoric.

      As for your later points, why are you making this argument as it is not relevant to the point being discussed? It is distracting from the point that either your theory of increasing wages increases demand and thereby increases employment is a theory that might be defended.

      What your argument amounts to exactly the problem identified in the quote in the original post. The point is simple; if the theory you use is taken to logical conclusion, the scale of the impact of the policy becomes ever more clearly evident, whereas if the minimum wage is not set too high, the impact is just less obvious against other background variables impacting upon overall employment. As I said earlier, it is a question of degree. In trying to put caveats on the amounts, you abandon your theoretical justification, which urges greater increases. In other words, you seek to hide the real impact through limiting the degree of the impact against the 'background noise' in the economy.

      You describe the 'absurdity' of my argument, but you are not even willing to endorse your own theory, and instead seek to distract from the logic of the theory you propose. I repeat again; either increasing wages increases aggregate demand which increases employment, or it does not. This is a general theory of the impact of wages on the economy; it either works or does not work. Does your theory work, and have you created a perpetual economic motion machine?

  2. All very well, but it seems that you do indeed accept that minimum wages create unemployment. Your points following this admission are based upon a closed economic system i.e. the country in which the minimum wage is set does not trade with other countries. This is not the real world.

    As for your point (4), you will find that companies try to maximise profit, and will increase prices if the market can bear it. There are complications in pricing, such as volume issues in relation to total profit related to fixed and variable costs, but the objective of pricing in companies is profit. If wages go up, if possible, they will seek to increase prices to compensate.

    1. The argument above is:

      (1) economists like the Austrians say "all minimum age laws do is ALWAYS and EVERYWHERE necessarily cause unemployment because of the law of demand." But, no, that is false; the "law" only applies to a world so abstract, formulated at such a high a level of abstraction (with its ceteris paribus assumption), that it does not apply to the real world. In some cases it will have zero effect on increasing unemployment. It might cause some unemployment in the real world in other cases, but other effects swamp that and in the end it has no discernible effect on unemployment.

      (2) " Your points following this admission are based upon a closed economic system i.e. the country in which the minimum wage is set does not trade with other countries. This is not the real world. "

      No, they are not based on "closed" economic systems. Western economies from 1946-1970s were mostly open economies (and increasing so) but their unemployment was very low. Plenty of open economies today have minimum wage laws and low unemployment (e.g., Norway, Australia, Japan),

      (3) health and safety regulations might cause *some* unemployment too, as might some regulations on pollution, but this is called civilisation, a tradeoff for more civilised life.

      And again when an economy is run properly to maintain full employment there is no discernible increase in unemployment with these things.

  3. Capitalism is funding cultural Marxism. Get a grip. LOL.

    1. Markets =/= Capitalism !

  4. (I should have said this in my comment on the last post, but it's related to this one too).

    What happens to economics if, and when, technology really does give everyone more than enough material goods? Doesn't free market capitalism rely on scarcity and ceaseless 'aspiration'? But what if the people stood back and decided that they had enough stuff, and would rather trade in some of their material income for time with their families, say? What if they even felt they could afford to give some of their income away to the less well off in the form of welfare, or a minimum wage?

    Would free market capitalism be able to survive this?

    1. Thanks for the comment. Firstly, I think we are a long way from the point in time you describe. If you look at the human revolution, one of the things that marked modern humans as modern was the use of objects as symbols, and our consumption replicates this. As long as people can use goods as symbols, there will continue to be an interest in consumption for most people. However, if we ever reached the point you suggest, I would not care a hoot for capitalism, as it would no longer be needed.

      My actual concern would be the lack of direction for some people. Whilst some people are happy doing little, others would not (I guess) be so happy. Also, if goods were freely available to all, how would people signal their status? It is a worrying thought, as all societies form into hierarchies, and it seems establishing your position by buying a BMW is quite benign compared with some other ways humans have pursued the same aim.

      However, this can only be speculative thinking, as we have a long, long way to go before we reach any such point.

    2. Hi Mark

      "I would not care a hoot for capitalism, as it would no longer be needed. "

      An interesting statement, suggesting that you think that capitalism is "needed", rather than a natural state of affairs. Does this mean that you think capitalism must be imposed or steered by 'The Powers That Be'? If so, what are their objectives?

      I'm not so sure that we are far from a state where most people have 'enough' - for now at least. My impression over the last five years is that we have had a combination of a bubble bursting and a partial migration of people into the cyber world, where the laws of economics hardly apply. People's debts have not yet caught up with them because of the zero interest rates, but they have also 'given up' on their dreams because of the uncertain future thus jeopardising the entire basis of free market capitalism. The already-well off still have money to spend, and governments are printing and borrowing money and malinvesting it like there is no tomorrow, but the poor have the cyber world to retreat into which keeps them docile and 'under the radar'.

  5. hey, you're back. i was looking for some info from a british point of view, and some of your old posts, and i find you've returned. used to read your blog regularly, and then you announced that some changes in your life would not allow you to continue to post. welcome back, and i'm excited to catch up.

  6. Isn`t the real problem The Maximum Wage. Wage differentials have increased over the years

  7. Mark, a bit off topic maybe, but any views on the Cyprus thing? Is the end getting nigh now, do you think?

  8. My experience is that with no minimum wage, human nature been what it is, employers will try and get away with paying extremely low wages as is already evidence from government work schemes and the hospitality industry. I know for example that to pay a room attendent 1 or 2 pounds above the current minimum wage will have little impact on profit for rooms sold 40 to 100 pounds per night. The minimum wage thus ensures a reasonable standard outside of London. A good starting point. It then means the lower paid has more to spend thus lifting demand and not really reducing profits like Friedman says. It is the unfetted free market of top managers getting ridiculously high salaries that is the real problem in this context. Minimum wage is a guard for society more than an economic thing but does have in practice a positive effect for the economy.

  9. You need to understand the reason for the minimum wage: it is to prevent a race to the bottom in the labor market. An employer will hire workers at the lowest price he can. As a freelancer I run into this all the time, a client doesn't just contact me, he contacts me and 4 of my peers and starts bidding us against each other. It would be in our collective self interest to then decide on a price floor.


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