MIG's Tournament: On balance, the minimum wage is harmful to society (take 2)

Thanks to Micro for his post. I'm going to avoid going into rebuttals as per the rules, despite wishing to tear his case apart. Rebuttals will only be in the form of arguments. Also, remember this is ‘on balance' , not just economics. Also, I'm presuming a certain amount of economic literacy on the part of the audience.MonopsonyPro's case is a nice exposition of neoclassical economics when given free market conditions. Unfortunately, this isn't always the case. Take a monopsonist – a single buyer of labour. Monopsonies tend to be common in small towns, where only one large firm provides the majority of employment. [1] Due to this control over employment, monopsonists can control the price they pay compared with buyers in more competitive markets. While pure monopsonists are rare, monopsony power is quite common. Take supermarkets for example. In Australia 2 monopsonists – Woolworths and Wesfarmers, control 80% of grocery sales. This allows them great power in dictating terms to suppliers (in this analogy, suppliers are like minimum wage workers). Now, monopsony means that workers are not being paid an amount they would in a competitive market, which seems to be the standard Pro holds to (more on this later). A rise in the minimum wage eliminates monopsonist power and reduces the degree to which exploitation occurs, up to the point where the marginal cost of labour (MCL) = marginal revenue product (MCP) , so profits still occur for the former monopsonist, merely that they can't exploit workers by paying them below what would be payed in a competitive market.In fact, in the case of a monopsony the minimum wage increases employment. The below diagram (depicting various minimum wage regimes) illustrates how monopsonies operate. What's the basic point? Monopsonist power results in a wage below a competitive wage (absent monopsonistic power) . Placing a minimum wage below a competitve wage yet above a monopsonistic wage reduces unemployment and exploitation.Elasticity of DemandPro's case is very strongly dependent on the idea that the minimum wage will increase prices if additional costs are passed on (instead of the cost being absorbed or redundancies occurring) , resulting in less demand.Unfortunately Pro's case presumes a degree of elasticity. Many industries have inelastic demand. If I had control over the water supply then if I raised prices you would still demand water – you need it to live. Demand is close to perfectly inelastic. The same applies to supermarkets and essential goods and services – the minimum wage will hardly affect demand because demand is inelastic.From here it's clear to see that conspicuous consumption would likely reduce as a percentage of overall spending. Given that conspicuous consumption is precisely what drives a materialistic culture, a reduction is conspicuous consumption could be helpful. I won't push on this topic though as cultural preferences are subjective; readers can decide if a reduction in conspicuous consumption is a good thing. Nevertheless, Pro is still incorrect to state that higher prices necessarily equate to lower demand.Big increases vs. small decreasesWhile not strictly the case, the law of diminishing returns applies to minimum wage workers. One often finds less utility in each additional dollar they make. To use an extreme example, if I had a billion dollars I'd get a lot. I'd value what I got from that billion quite highly. Another billion wouldn't get me quite so much.Basically, a small increase in a worker's wage (as minimum wages do; I'm not advocating for a large wage increase – see second regime minimum wage [2]) is worth a lot more to them than any loss if a price is passed onto consumers. Increased costs in areas like luxury goods may slightly lower people's total utility yet it enables minimum wage employees to vastly increase their utility. Essentially, total happiness is increased, which is a good thing.Marginal ProductivityPro states "When a worker... works at quality rate of only $3/hour" he's making the mistake of presuming that an employee's output isn't changeable, which isn't correct; 2 workers on the same wage may have complete different levels of productive output. This is relevant to the minimum wage because better paid staff who feel their wages are likelier to be healthier, and feel more respected and motivated, leading to more productivity. This is backed up by various economic process theories. Edwin Locke studied this phenomena and found that higher wages increased productivity by an average of 30% [3, 4]The point is thus – there's a point to which it doesn't matter what the actual effects of the minimum wage are. If many people believe the minimum wage is fair, just and beneficial then they'll work harder. A 30% increase in productivity is most definitely worth a few potential job losses in some circumstances (not all, ie. Monopsonistic competition). One's psychological viewpoint is most definitely worth consideration by itself. When it increases productivity it's even better. Need I mention a similarity to the Placebo Effect?Are Market Prices Always Optimal?As mentioned before, Pro has adopted a fairly neoclassical economical approach. As Ross Gittins states in [5] "This conventional economics reduces all economic activity to that which happens within markets. It further narrows the operation of markets to the setting of prices, assuming movements in relative prices are the primary thing influencing the behaviour of producers and consumers". Put quite simply, Pro views price as a critical factor in economics (nevermind that people tend to overemphasise the importance of quantifiable things) , and henceforth supports the price mechanism as ideal. Is this always the case?No. Negative externalities are an example of the price mechanism failing to produce an ideal result, because externalities (in this case negative) are not accounted for because the cost is not incurred by a buyer or seller of the good or service causing the cost. See http://tutor2u.net...... ; near page bottom. Firstly, let me apologise for the colour of the picture. The DDO editor is having a problem with it.What's this all about? Pro can't simply view the price mechanism as always ideal. Things like behavioural economics are important to consider. Furthermore, there are good reasons to doubt that price movements have as much of an impact as Pro speculates.EmpiricsIt's difficult to cover every point to do with the minimum wage in 8000 characters. I'll cover empirical evidence more in later rounds. Empirical evidence is obviously sometimes questionable though because we can't control all the variables. Nevertheless, there is quite a bit of empirical evidence supporting the minimum wage. More in my 3rd round.However, let's discuss Pro's 2 graphs – a prime example of misinterpreted statistics. That 2nd one looks pretty imposing doesn't it? Increases in the minimum wage seemed to coincide with massive unemployment increases. Maybe it was the minimum wage that caused this. Pro even states he thinks this was the case "The reason for this is very simple; Because with minimum wage..." I humbly propose another explanation – the Global Financial Crisis and subprime mortgage housing issues. This also happened at precisely the same time Pro's graph depicts rising unemployment. Massive knock on effects from these crises and such (as well as the effect on psychology and such) led to less money to spend on workers of all levels. Massive redundancies, bailouts, stimuluses etc.Pro believes rising unemployment to be primarily because of the minimum wage rises in his graph. I believe it's explainable by the GFC. I'll let readers decide.I'll leave it there for now – more in later rounds. Sources[1] - http://economicsonline.co.uk......[2] - http://en.wikipedia.org...... [3] - http://www.nbrii.com......[4] - http://www.questia.com......[5] - http://www.smh.com.au......