Newsgroups: alt.politics.clinton,talk.politics.misc,sci.econ
From: mfriedma@uucp (Michael Friedman)
Subject: Re: Minimum wage: balancing job losses vs pay increases
Organization: Oracle Corporation
Date: Mon, 27 Jul 1992 04:40:54 GMT
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In article <1506@cogsci.ucsd.EDU> king@cogsci.ucsd.EDU (Jonathan King) writes:
>I *said* I wasn't going any deeper on this thread, but somebody new joined
>in, and raised a few new points that might be worth addressing.  

>mfriedma@uucp (Michael Friedman) writes:
>>king@cogsci.ucsd.EDU (Jonathan King) writes:
>>>n9020351@henson.cc.wwu.edu (James Douglas Del-Vecchio) writes:
>>>>king@cogsci.ucsd.EDU (Jonathan King) writes:
>>>>>crisp@netcom.com (Richard Crisp) writes:
>>>>>>Minimum wages have the effect of reducing employment or increasing
>>>>>>unemployment (state it your preferred way).

>>>>>That's one effect.  The other effect is to raise wage levels for those
>>>>>who are working, which could (say) increase consumption and create new
>>>>>jobs.  One sentence on the topic is not a useful analysis of the
>>>>>situation.

>>Mind explaining why this would increas consumption?  After all, you're
>>just taking money out of one set of pockets - the people whose skills
>>are not worth more than the minimum wage - and putting them in another
>>set of pockets - the people who are worth keeping at a slightly higher
>>salary - and adding a bit of inflation to boot.  

>Um, not quite.  First off, you mention the effect on prices yourself;
>not all the cash to cover the raises is coming from those who would
>get pink-slipped. 

True.  Not all.  But one heck of a lot.

>Secondly, somebody else posted that economists were
>projecting only a "marginal" increase in inflation, which I understood
>as meaning "less than the net increase in wages" (note that there
>certainly *would* be a net increase).

First off, unless you are not counting the wages that drop from
minimum to 0 how can you be so sure that there will be a net increase?
Personally, I would argue the opposite.  After all, if labor costs go
up that means that productivity is more important than before.  In
order to increase productivity you need capital.  That capital must be
paid for.  Where does it come from?  Well, the only other set of
pockets is labor.  Also, always remember to think in constant dollars.
If you don't everything gets totally distorted.

Secondly, my understanding ofthe word "marginal" in this context is
"small enough to be lost in the noise."  Do we have an economist in
the house who can tell us who is right on this definition issue?

>So where does the money come
>from?  In part from the people who are higher on the wage scale, in
>part from possible productivity gains, and in part from an increase
>in the money supply.

First part, true, but I would argue that it is offset by the increase
in the demand for capital.

Productivit gains?  If these productivity gains are really worthwhile
in and of themselves then they will occur even if you don't raise the
minimum wage.  The ones that occur only because you raise the minimum
wage are an attempt to compensate, but if they are good enough to
provide a net benefit then they would be worth doing even if the
minimum wage was not raised.

Increase in the money supply?  That's inflation.  It doesn't provide
benefits.  

>>You aren't adding any
>>buying power to the economy so why should consumption increase?

>First of all, note that it certainly shouldn't decrease, even if it
>were just a reshuffling of consumption.  

True.  But you are neglecting the negative effects of a minimum wage
increase, like inflation and the need to spend more on welfare, that
have a bad effect on the entire economy. 

>Second, any real productivity
>gains would fuel an increase in consumption.

Note however my explanation of why these productivity gains do not
benefit the economy.  To make it really simple, let's say I have 100
workers are $4.00 an hour.  Now the minimum wage jumps to $5.00 an
hour.  Well, in order to be back where I was I need a 25% increase in
productivity, in which case I'm right back where I was before with a
payroll of $400 an hour but now I need to pay for the capital I used
to increase productivity.  Prices go up so demand goes down.
Therefore I need to fire some people, total wages go down, GNP
decreases.  If we increase productivity enough to make GNP go up then
it's a worthwhile investment to make even if the minimum wage doesn't
increase so it will happen anyway.

>Third, the
>redistribution of a small chunk of money from those with higher
>incomes to those with lower incomes probably also fuels consumption,
>given that low wage workers don't save as much.  Now, you may not
>*want* a decrease in the savings rate, but that's another issue.

Note my point, however.  The money really transfers from the very low
paid to the low paid and from the low paid to the rich, not the other
way arround.  The people who get laid off get less.  Labor over all
gets less because those providing capital must get more to pay for
productivity increases.  See the numbers above.

>>>>It has no such effect.  It merely eliminates all jobs paying 
>>>>below the floor, with no change for the workers already getting the 
>>>>minimum or better.

>>>What?  As if you want to promote the creation of sub-minimum wage 
>>>jobs in the economy, when you can't live on minimum anyway?  Sorry, 
>>>but I can't support the "jobs at any wage" position.  I can't name a
>>>developed democracy that doesn't have some sort of wage regulations
>>>at the low end.

>>So you oppose sub-minimum jobs so strongly you want to make them
>>illegal?  This seems kind or unreasonable especially as many 
>>states are moving to eliminate welfare for able-bodied adults 
>>without children.

>No, I don't think it should be a government policy to promote the
>creation of jobs that don't pay a living wage.  What is the point of
>that? 

Define a living wage.  There are people sleeping in a bus shelter 2
blocks from where I'm typing this who beg on the streets by day.  I'd
guess they make a few bucks an hour.  Now why shouldn't we encourage
the creation of jobs paying $3.00 an hour that they are able to fill?
Seems like a good idea to me.  The point is so these people can eat
and so that they can hopefully learn enough so that one day they can
get better jobs.

>As far as the public assistance issue goes, you really
>need the wage levels in your economy to be higher than the "wage"
>you would earn from public assistance, 

Well, as stated before, in many states this wage is 0 for able bodied
adults. 

>and I think it's wrong to
>to have a policy where you are in effect forcing people to work for
>wages that they can't live off of. 

What do you mean by "forcing"?  Not taking care of them if they don't
take care of themselves?

>If many states are changing their
>welfare laws, but aren't providing training or transition employment,
>then what good is *that* doing?  For one, this doesn't sound like a
>way to decrease homelessness.

It isn't.  It is a way to take people of the public trough.  The good
it is doing is that it means that I and other people like me who work
for a living don't need to take care of loafers.

>>>Further, wage inflation always used to be one of the big arguments
>>>against the minimum wage, but I see that you're denying this effect.

>>Well, he's wrong.  The key is the marginal benefit from adding extra
>>workers.  McDonalds won't just close.  They'll raise prices.  That
>>reduces demand.  So they fire some burger flippers.  

>Did any of these things actually happen when the minimum wage went up?
>Seriously, I though fast food prices were lower now than they were
>before, while MacDonald's stock price looks pretty healthy right now;
>you don't suppose that they might have increased productivity (and sales
>volume) to come out where they were before?  Or even better?

Productivity again.  Mind showing me some numbers describing a
productivity gain that meets your criteria?  I don't think it's
mathematicaly possible.  Either the gain is beneficial with or without
the minimum wage increase or it is a partial compensation for the
increased minimum that still leaves McDonalds worse off.

>>That solves
>>McDonalds' provblem, but everyone else is paying a bit more for
>>hamburgers so the CPI goes up.  That's called inflation.  

>But this doesn't seem to have happened.  Do you have evidence that it
>did?  The CPI seems remarkably low right now, whatever that really
>means (the CPI is one of the strangest economic statistics of all
>time).

Well, the CPI isn't a good measure for this because oil drags it
arround so much.  Anyway, I would agree that the effect on the CPI
gets lost in the noise from other factors.  But so do the benefits
from increasing the minimum wage.

>>Needless to
>>say, everyone else wants more money to compensate, the CPI goes up
>>more, and the minimm wage is back where it was in real dollars.

>Any evidence for this?  The minimum wage was $3.35 for years, and now
>it's at least $4.25; I haven't seen a 25% gain in the CPI, have you?

Since when?  The minimum wage is lower now in constant dollars than it was
in the seventies.  Seems like I'm right or why do we need to keep
increasing it?

>>>I wouldn't necessarily make this argument, but one could try to argue
>>>that minimum wages are another way to encourage businesses to increase
>>>per worker productivity.

>>So you want to put unproductive people on welfare?  That's loony!!

>No, I want to get unproductive people into training programs to become
>skilled workers.  What's loony is thinking you can run the economy
>on low-wage food service jobs.

But...

1.  These training programs do not exist, and

2.  You can run one heck of a lot of the economy on low wage food
service jobs.  Look at the fraction of our GNP that comes from
services.  It's going up.  

>>>>It would be interesting to see, if say you work for Burger Phlem,
>>>>for example, for $4.85/hr, if a minimum wage increase to $9/hr would
>>>>cause you to get a $4.15/hr raise, or if you would just get canned.

>>>Oh, please.  When has there ever been such a dramatic rise in the
>>>minimum wage?  [Answer: never, and it's obvious why not.] 

>>No.  But thought experiments with large changes make it very clear
>>that the posited benefits of small changes have no rational
>>underpinning.  

>Rubbish.  The experiment is on right now, and if I had time, I'd try
>to look up the data.  Maybe you could.

No time myself.  Anyway I don't know what stats we could look at to
answer this question.  After all, how do we factor out the recession
and the Gulf War, etc?  But please do tell me one thing.  What's the
qualitative change between a large increase in the minimum wage and a
small one that makes such extrapolations invalid?  Where are the
assumptions that break down?  

>>>But this
>>>does bring back the other point about what happens you raise the
>>>minimum wage: the company has a choice.  It can swallow the added
>>>cost, find some way to increase productivity to cover the cost,
>>>increase prices, or lay people off.  In the mean time, the workers
>>>who actually *got* a raise have more money to spend.

>>1.  How long do you think it takes to lay people off?  Not as long as
>>it takes for Congress to raise the minimum wage.

>Sorry about that:  "in the mean time" should have been "in any case".
>Although you do make the point that businesses do usually have time
>before the raise goes into effect to figure out what to do.  

>>2.  Say you're right.  So what?  This money isn't being created out of
>>thin air.  It's coming from someone else.  Why is this redirection 
>>beneficial?

>Where money is ever being created is pretty mysterious to me, then.
>How strict a monetarist can anybody be?

Money is not really created.  Value is by increased production.
That's what backs up the dollar - the goods and services produced in
the US.  If you want to argue that increasing the minimum wage is
beneficial in general rather than via some kind of fuzzy
redistributionist logic then you have to explain why increasing it
increases the GNP.

>As to why it might be beneficial to redirect money from those who live
>more than comfortably to those who much less well--I expect this is 
>more a political question than strictly an economic one.

Agreed.  Also, please note by rather counterintuitive argument above
that the minimum wage actually has the opposite effect.

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