The Minimum Wage

Thanks to LF 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. I apologise if this post seems slightly rushed.MonopsonyCon’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 Con 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. Elasticity of Demand Con’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 Con’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, Con 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 ProductivityCon states “1) There exists a marginal productivity (Amount of revenue that worker brings their employer per hour of work) for workers”, making the mistake of presuming that an employee’s output isn’t changeable which isn’t correct. A worker’s productivity is not set – psychology, health, sleep etc. can alter a worker’s productivity – it is not a constant, unchanging, set in stone value. 2 workers on the same wage may have complete different levels of productive output for instance. 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, such as behavioural management theory. 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 Optimal?As mentioned before, Con 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, Con 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 the below diagram. What’s this all about? Con 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 Con 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. To reinforce this I need merely partially quote LF “A meta-study reviewing previous minimum wage studies found that while some recent studies have found no effect or positive effects because of minimum wages...” . There’s quite the conflicting body of evidence and it’s nearly impossible to control all variables. More in my 3rd round.I’ll leave it there for now – more in later rounds. Addressing LF’s theoryPut simply, this is done already. 1 is negated under my section ‘Marginal Productivity’ due to there not being a set marginal productivity – it varies based on certain circumstances. 2 is negated by monopsonistic competition. 3 is addressed by psychological points stated under ‘Marginal Productivity’ . As to 4, yes, but productivity will likely raise due to additional wages. I’ll grant 5. Nevertheless, 6, the conclusion, is flawed as it is derived from flawed premises.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.........