Economics/Minimum wage


I know I have asked a similar question many times, but why exactly can't we raise minimum wage at the rate of inflation? It would cause "super-inflation?" What exactly is that and isn't there enough other factors out there that counter the effects of economic regulations like having a minimum wage? If the purpose of minimum wage was always to be a living wage why not always make sure it will do that? In all honesty I suspect I've worked as hard if not harder in any minimum wage job as any job that paid more. I don't see why I shouldn't be allowed to make a living from the crappiest job there is. I already have to deal with the lack of respect from working a crappy job.

Minimum wages aren't a bad thing, but they aren't a cure-all, either.  Basically, raising the minimum wage is helpful during a recession but harmful during a boom.  Let's take a brief look at why.

During a recession aggregate demand is already low, and so is labor demand, which means that demand-based inflationary pressure is very low.  That also means that company revenues are low because no one wants to buy their stuff, but no individual company has incentive to hire more people than they need or to pay higher wages because those people won't spend all their extra money at just the company at which they work - they'll spend it in a variety of ways, ensuring that the added cost of hiring more people or paying higher wages will generate costs with a negative return on expenditure.  In other words, it won't help.  Companies won't need to hire people until surplus inventories are depleted and the companies go back into production to meet demand, again.  So, in order to resolve this problem, demand stimulus is necessary at the macro level, rather than the micro level.  One method of accomplishing this is by raising the minimum wage.  Since prices are sticky (meaning that they don't respond immediately to market forces), an increase in minimum wages will diminish the producer surplus and increase discretionary income, resulting in an increase in aggregate demand.  This will help to deplete inventories and force companies back into production, where they must hire people which then increases demand further as incomes increase.  This usually starts with increases in part-time or temp-work, which turns into normal full-time work over time.  Prices will increase in the long-run in response to the overall increase in demand, domestic and global, but since demand-based inflationary pressures are already low during a recession, the tiny amount of inflationary influence this has will actually be seen as helpful, since small amounts of inflation causes a change to the relative differentials between exchange rate and purchasing power parity that causes the nation's exports to be cheaper in terms of other currencies, causing an increase in demand for one's own goods globally, and a decrease in demand for imports, thereby stimulating the economy through improved trade competitiveness.

During a boom employment is already full and demand already at its peak for a given level of production potential, so increasing the minimum wage will translate directly into inflation.  It's true that the producer surplus will be diminished at first, still, mitigating the influence of cost-push inflation, but increasing demand at this level will also cause high inflationary pressures.  So, when you constantly change minimum wage to keep up with inflation, since increases in minimum wage contribute to inflation, this will turn into a self-perpetuating cycle that constantly increases the rate of inflation until we have hyperinflation.  That's why minimum wage rates must be thought of as a stimulus tool, and not a cure-all policy.

During stagflation, when unemployment is high as during a recession but inflation is also high as the result of cost-push or monetary pressures, then minimum wage increases may not be the best choice.  There are other tools to stimulate demand which don't contribute to further increases in cost, but if minimum wage increases are used, then other policies must also be implemented to mitigate the cost-driven inflationary pressure which already exists and may be exacerbated by an increase in minimum wage.

You're absolutely correct in saying that low-wage labor works just as hard, or harder, than high-wage labor.  There are many people who are simply born into money and haven't seen a hard day's work in their lives.  The socioeconomic disparity in our nation, and around the world, is constantly growing, and if left unmanaged it will devastate global economies over time.  Minimum wages are not an effective way of managing it, though.  It's a stimulus measure for a recession, not a fix for the socioeconomic disparity.  For that, we must understand the mechanics of the socioeconomic disparity.  Here's a thing I wrote for an econ class I teach, which would help clear things up on that front:

National Income Misallocation
This comes from MPC differentials. When you're poor, your marginal propensity to consume (the proportion of your income you spend) is something like 99.9% of everything you make, primarily on survival necessities like housing, food, utilities, etc. That money immediately contributes to the return on investment of someone who owns a business, who has a very high probability of making more money than them. Take any owner of a Wal-Mart, for example. That business hires people using that money, that's true, but over the course of the immense number of transactions that take place over the entire nation for years, the cash flows are gradually flowing in an upward direction. Some of it comes back in the form of investments. In fact, that's the primary way people become rich - they own the stuff that other people use in order to generate a return on investment. They'll invest in a company via stock, bonds, through venture capital, possibly as a silent partner. As you generate more income, your marginal propensity to consume goes down, and your marginal propensity to save (MPS; the proportion of income you save) goes up. That money is reinvested in ways that generate more money. Great, but not all of it is reinvested, and not enough of it is generating the multiplier effect necessary to maintain sustainable growth.  As more money is stored in banks, more money must be kept in reserve in order to meet fractional reserve requirements especially during a boom when fractional reserve requirements are increasing in order to control inflation (which contributes to the steady real income, rather than cycling with the nation’s business cycle), and more money gets sent overseas into tax shelters, and so forth. The money that is reinvested tends to very much be traded among other investors, much of it going into tech that increases efficiency utilizing fewer people and fewer jobs but generating higher return on investment. Some of it creating jobs, but it’s insufficient, particularly when much of the time that money is spent to influence politics, causing policy that is contrary to good economic policy. That, and rampant ignorance. Why we hire lawyers to run an economy and not economists... I suppose they're just more charismatic. In any case, lobbyists, hard and soft campaign contributions, cushy jobs after out of office, insider information on investments, etc.  All these things are used to take advantage of the greed and ignorance rampant in politics, and to engineer social opinion in a way that generates, you guessed it, higher returns on investment. The entire Tea Party movement can thank its existence to the Koch brothers, for example. The Mohawk Valley Formula was the first systematic method of turning public opinion against labor unions to break-up strikes.  Things like that.  This also has the impact of reducing power in labor negotiations for two reasons. First, it reduces the power of collective bargaining. Second, having little money and with few jobs available, people will accept anything out of desperation, most of them. Real wages have been stagnant for 98% of the population for decades, until 2008 when they went down. All the while, executive salaries are not only increasing, on average, but they're increasing at a faster rate than the corporations they run. They're getting paid more for performance. Another result of inability to invest among a large percentage of the population, is a lack of understanding regarding how. There is much less diversification of income streams among much of the population compared to those with the money to make it happen. Only about half of income for the top 98% comes from their job wages. The rest comes from investments and self-employment (eg. consulting, writing books, etc.) This makes the majority of people very dependent on their job, giving them little negotiating power when people are in competition for the same jobs. This lack of financial understanding also tends to result in bad financial decisions regarding spending, budgeting, investing, and borrowing.  So, it's a massive cycle that results in an ever-increasing socioeconomic disparity.  This is the difference between pre- and post-Great Depression economics.  The philosophy of pre-Great Depression economics was that “supply created its own demand”, under the belief that people and companies would continue to invest in jobs so long as it generates a return on investment.  As noted, that doesn’t work.  Thanks to The New Deal, we came to understand that “demand creates its own supply”; I promise you, that so long as someone is willing to spend their money, there will always be someone available to profit from them, regardless of all other factors.  Just look at the War on Drugs; the global drug trade is the second largest global industry (second only to weapons), yet despite all the resources being allocated to stopping supply, that supply persists so long as people generate the demand.
To fix this market failure, think of the economy as a huge engine with lots of moving pieces.  Money is a measurement of value that facilitates transactions, allowing the pieces of the economy to move smoothly; it works like oil in an engine.  When the money dries up from any sector in our national economy then, like an engine without oil, everything seizes.  It happened during the Great Depression, and it happened in 2008.  That’s why this particular market failure must be fixed with an oil pump – to keep things moving in way that maximizes growth.  To accomplish this, we make the government pursue the same activities as capital investors – we pursue return on investment.  A government doesn’t have a job it can rely on for income, so if income decreases it must do the entrepreneurial thing, and invest.  The same is true even for people with jobs, really, as we should each be working to maximize the return on investment of our savings (if you’re generating 0% interest on your bank account, go shop around), but many people don’t realize that for the reasons listed earlier.  In any case, a government is successful when its people and companies are successful.  When this occurs, we’ll know it because tax revenues will increase without actually raising tax rates.  So, if we want to stay out of national debt, we pursue that success.  You see, no matter how much or little we spend as a nation, if we’re still generating negative returns on expenditures as we have been, it’s still going to drive us into debt, as it would any investor.  So, in order to resolve this, the government would, in an uncorrupted system, continue to spend so long as it can generate positive returns on investment higher than that achieved by private sector investing.  This will create growth that facilitates success for all sectors, such as through infrastructure for communication, transportation, energy, utilities, defense, and so forth.  These are all things that facilitate growth; they create a lot of jobs with a very high multiplier, given that so much of every dollar spent is then re-spent to create business revenues (remember, high MPC with construction jobs), while also cutting costs because of the increased efficiency that results from utilizing the available public infrastructure.  So, when done right, it can stimulate demand in the short term through employment measures, while increasing our total long-term production potential.  Of course, the natural implication of this would be the creation of a body whose main focus is on increasing government efficiency; implement quality control, lean operations, minimize waste and optimize efficiency.  To do that, it would continue to spend money until the savings it generates in improved efficiency is no longer greater than the cost, ensuring on, as is the trend, return on investment.  This makes the old-and-should-have-been-dead-already argument of more or less obsolete, as we focus on better.  This takes care of many other market failures, like public good and helps to manage volatility, as well.


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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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