Economics/Minimum wage


QUESTION: I was wondering what the harm is in raising minimum wage? I was told by someone perhaps 80 years old or older that when he was young a minimum wage job working full-time afforded him a brand new car and house as well as an eventual retirement. These days it really doesn't afford anyone that much at all. Maybe not even keep them at the poverty level. I see so many businesses that pay people no more than minimum wage, and many of them complain that they don't get the best and brightest. lol. It seems to me that if they did raise minimum a lot they could knock all fast food restaurants down a peg to the point where they just about have to raise the prices of all their items and therefore might as well raise the quality. Same with Walmart. Even with mostly Chinese products if they have to pay their workers so much more at the start they would need to raise their prices to cover it as I think they should. Why isn't minimum wage kept a fair amount higher than it is, and adjusted alongside inflation?

ANSWER: That's actually the goal of minimum wage - to provide a living wage proportional to COLI (cost of living index) for the region, and increase it with inflation.  As a result of politics (not economics), we fail to do this.  Right now the federal minimum wage is $7.25 per hour.  The inflation-adjusted minimum wage for 1970 would be about $9 per hour today, if it kept up.

That minimum wages laws cause a shortage of jobs is the sort of thing that people learn in Introduction to Economics when they first start learn how to recognize shortages and surpluses in economic models, but which isn't true at all.  That happens a lot with beginner's economics, actually, because it's taught using a spot measure.  Economics is dynamic, however, and j-curves are common.  The j-curve is a graphed line that drops suddenly then increases past its starting point, making it look like a "j".  The reverse j-curve does just the opposite.  Minimum wage laws are an example of this.  Yes, there is an instantaneous shortage, but as higher wages allows a wider consumer base to increase their spending, companies can charge higher prices to accommodate the increased costs of the minimum wage.  This is called cost-push inflation.  The reason demand for employment increases is because the increased income earned by a group of people who spend 99% of their income (they have a "very high marginal propensity to consume") is stimulates demand.  In other words, almost every extra dollar earned generates business revenues, which will force companies to expand operations to keep up with demand.  Of course, that's only helpful in a recession.

Another thing to consider is the influence on black-market labor.  Hiring people "under the table", and no that's not just referring to illegal immigrants.  There are a lot of people who do it as a tax-dodge.  Increasing minimum wages increases demand for illegal labor.  That's the thing with the vast majority of government economic regulations: they don't work.  You can only influence an economy, not control it.  Attempts to stop supply or demand through regulation only creates profits for those willing to break the law to meet equilibrium.  Alcohol prohibition in America actually only succeeded in lowering consumption for 1 year, then it went up to normal levels.  So, raising minimum wages in an attempt to raise total average wages will always be at a ratio of less than 1, making it highly inefficient.

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QUESTION: Highly inefficient or not it must compensate for corporate greed? Papa John's pizza's CEO says they will not be able to afford to pay their people if minimum wage goes up. Personally I think he is a crook and their pizza is aweful. lol. They would need to raise their food quality so they can charge more, that's all. We complain about low quality goods in China and they nearly rely on slave labor. lol. I think higher pay must cause quality of final product to go up when the right people are hired?

As for minimum wage going up causing under the table jobs to also go up, why not? If someone is willing to work for less if that means not getting money put into their own social security, why not? As long as most people follow the law. And of course those that pay under the table could always be reported on while those that pay the minimum can not.

ANSWER: Quality doesn't change.  As wages increase but prices remain sticky, corporate profitability is reduced temporarily but revenues will increase as demand increases as a result of higher average wages.  In the long-run, though, this contributes to inflation so that any gains in real wages are lost (here's a chart from The Economist on that topic:

So, while the growing income gap is the result of a market failure that, if left unchecked, will devastate our nation and leave it in a similar state as 1960s Communist China or USSR (unchecked planned economies and unchecked free market economies have the same end results), minimum wage laws are completely ineffective at mitigating this.  A better tool needs to be used.  There have been a variety of suggestions on this.  Caps on executive income has been suggested, but executives typically only make about 50% of their total income from their management role, and many make nearly all their income just in stock options (e.g.: Southwest's CEO makes $1 per year, and the rest in stock options).  I'm, personally, of the opinion that a sustainable fix would be found in replacing our government fund accounting system with a capital investing approach to cost accounting, which would naturally adjust fiscal allocations to optimize national value.

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QUESTION: So than although the benefits of raising minimum wage will be defeated eventually, it can be maintained by continuing to increate it with inflation? Has anyone thought to set multiple minimum wages based on what the job actually entails? To my knowledge the only sub-minimum wage is paid to small children who merely pick berries in fields or other simple and safe farm work. Maybe that way some places would pay far less to some and more to others. A comedian or two have said that the thing that sucks about minimum wage jobs is the knowledge that if the boss could pay you less he would. But perhaps there could be a certain range of upward motion if some people made less to begin with. As for CEOs getting paid so much, how can someone keep that from happening? CEOs and people in government seem to have the ability to name their own price unlike the strong majority of everyone else. Would it be inefficient to force a company to hire a certain number of additional workers if a CEO insists on giving themselves an income of a certain level? I doubt they work nearly as hard as even the guys in the mail room. lol.

You're absolutely correct.  As shown in the previous graph, the only group who actually experiences increases in real wages are the very rich.  The following graph shows how these wage increases outpace even corporate performance, so they continuously get paid more for their performance, while everyone else has experienced a decrease in real wages since 2008, and overall stagnancy over the last several decades.

The problem with increasing minimum wages simply as a function of inflation is that, since increasing minimum wages contributes to inflationary pressure, continuous increases will drive an inflationary cycle that will quickly spiral out of control.

The socioeconomic disparity is actually the result of macroeconomic cash flow misallocations.  In other words, money flows up.  In order to fix that, you need a mechanism that will optimize the socioeconomic disparity.  It's said that increasing taxes on the rich will decrease investments.  So far, taxes have never been high enough to have that influence, but at some point it would be true.  In addition, money buys influence, which generates more money at the cost of bad economics resulting from personal pursuit of return on investment using that purchased political and social influence.  Both of these problems can be resolved by taking the same approach to fiscal policy that corporations have been using for decades: look at fiscal policy as a capital investment rather than a household budget.  Doing so naturally shrinks to socioeconomic disparity to its optimal point, removes the potential for politics to create bad economics, and continuously maximizes added value and production potential.


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Michael Taillard


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Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

American Economics Association

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PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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