Minimum wage and demand for labor, credible theory?

[AJH032]

This is probably an argument you get into a lot with conservatives, or at least the theory of price regulation in general (I know I do), and it's really difficult to argue against the basic demand-supply price equilibrium that conservatives promote through the free market. I've kind of developed this idea though, that may demonstrate that price regulation (mainly the minimum wage) may not be as detrimental to employment as Republicans say it is, and it has to do with the elasticity of demand in the labor market. Let's say if there were no minimum wage, market price may be established around $3.00 (just for the sake of argument, I don't know what it would actually be). And now let's say we impose a minimum wage of $6.00 per hour. The conservative argument is that this would decrease employment by increasing supply of labor and decreasing demand, causing a surplus of labor, and thus unemployment. But my thought is let's say the demand for supply is actually quite inelastic, that is, even if the price goes up demand doesn't necessarily go down, at least not by the same proportion (much like in the gasoline market). This would especially be the case for businesses where labor and capital are not substitutable and/or paying salaries is not considered a large expense. If this happens, then the unemployment rate would theoretically hold pretty constant even as the wage rate goes up. Businesses wouldn't necessarily just go off firing people as a result of a new minimum wage. Also, there's the whole concept that minimum wage laws only affect a fraction of markets out there. Of course, it's all just an idea...thoughts?

[EVDebs]

1. Marginal propensity to consume favors the masses in huge numbers

Conservatives cannot deny this purchasing power. It is virtually what saves the economy and keeps the engines running. It is truly a Demand Side economy, despite what they think.

[The Magistrate]

2. You Are On The Right Track, Sir

To put it in a nutshell, people who are paid more spend more, increasing the demand for goods and services, creating investment opportunities requiring people be employed to service that increased demand. The more workers are paid, the more opportunity for profit exists for entrepenuers.

[enlightenment]

3. I'm an historian, not an economist,

but I seem to recall something from Econ101 that argued that as wages went up, people had more disposable income -- so they wanted to buy more stuff. Because they wanted to buy more stuff, companies had to increase production -- which led to needing more labor, who could demand higher wages, which led to more income, which led to wanting more stuff . . .

Or something like that.

Is that what you're saying?

[AJH032]

7. you're looking from a broader economic view

I was just looking specifically at price control in the labor market, but what you say definitely has truth to it.

[sam sarrha]

4. that is why they keep 5% to 8% unemployed at all times..

[Jayhawk Lib]

5. If what you say is true

lets make the minimum wage $20.00 per hour and things would really boom.

[AJH032]

6. I don't think so

Demand inelasticity isn't constant at every price. At a certain point, it will become elastic.

[Jayhawk Lib]

8. I agree...

I really do not think a minimum wage law is needed. What ever the bottom wage scale "minimum wage" is, it will seek it own level. I really do not know anybody making less that $8.00 per hour. The workers with skills are hired first and then anybody with no skills will be hired last at a lower wage.

As soon as they acquire necessary skills and show up everyday they are moved right on up. The company does not want to take a chance on losing that person and having to take a chance on another unskilled worker who might not have such good work habits.

Setting an arbitrary scale is counterproductive.

[Nadienne]

14. One could possibly argue that we don't have a minimum wage

law.

If wages aren't low enough, jobs go to where wages are low enough. This is especially true for unskilled labor, but to an extent it is also true of skilled labor.

[Warpy]

10. That's what right wingers say, and it's a strawman

so go wander off and knock him down.

Historically, the minimum wage, at least through about 1970, was what it would take to support a family of four on a "thrifty" budget, meaning hamburger instead of steak and only basic necessities like used cars and small houses, with the major luxury being a movie a month. The minimum wage has been allowed to fall so far it won't support a single adult in safe housing, forget about decent food, medical care, and that movie every month.

I doubt few people but right wingers would advocate raising the minimum wage to an inflationary level. Raising it to a subsistence level is necessary; raising it above the level that causes illegal immigrants to be recruited in Mexico, brought here and exploited is the sensible thing to do; raising it to a level that would increase tax revenues and boost the economy is the astute thing to do.

I would strongly suggest that you take this summer off from economic propaganda classes and read some economic history. You might be surprised at the line of BS you've been sold.

[Quequeg]

9. The best argument is one based on experience

I've read that everytime we've raised the minimum wage, it has not caused the unemployment rate to go up. If that's true, then how can anyone make the case that raising the minimum wage is always harmful?

Since 1940, the minimum wage has been raised 18 times. So, there's plenty of historical data to look through.

By the way, our country will break a historical record as of this year (with respect to the minimum wage). As of January 2007, we will have gone the longest time without raising the minimum wage in our country's history. (The minimum wage was last raised on September 1, 1997.)

The last record was a period of 9 years and 3 months, from January 1, 1981 to April 1, 1990.

(By the way, I got all this info from "ticktockman". Kudos!!!)
http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=18752

The following graph shows the minimum wage since 1940, in current dollars and inflation-adjusted dollars. (The blue line is the inflation-adjusted minimum wage.) It reached a high of $8.69 in 2004 dollars in 1968 and has now sunk over 40 percent, to $5.15. This brings up another argument: if we could pay people a minimum of $8.69/hr in 1968, then why can't we do so today? Are we less productive?



www.VOIDnow.org       www.StopGlobalism.com

[oscar111]

11. JOBS FOR ALL site: Galbraith was an advisor

as is, still, Clinton's Sec of Labor Reich, two nobel laureates, etc.

Take action, as described in the site informantion, not just arguing with failed minds from the RW. Action such as new laws for a new WPA, for new co-ops, for the reliable share-the-work idea.

See my sig below....

============================
NOTE on min. wage, and also on cheap illegal labor and the price of lettuce...

the increase of dollars into both wage buckets... can come from the well hidden, never discussed profits of

1. the small businessman

2. the lettuce plantation owner

==================

PS the only solution to the illegals problem that hurts no one, seems to me to be..

a new WPA in both the US and Mexico.

[oscar111]

12. graph is confusing.. go to this site for explanation of this graph

some lines are labeled so briefly as to mislead one into confustion. Not intentional, but misleading nonetheless.

i urge all to go to this link to orig source, for the full labels and some clarity.

http://home.att.net/~rdavis2/minwage.html

The most useful lines are the lower red one.. the raw value of minumum wage in dollars...

and the blue one.. that raw value adjusted for inflation.

Go to the link for another graph with a highly interesting graph of unemp since the late forties.

Right, unemployment is planned, and has great usefulness in pulling down the "wage ladder"///..... you see, all middle class wages are linked.

Beat down the folks at the bottom with cuts to Food Stamps, and guess what? Ye vaunted office clerks get your wages cut.

Memorize this meme:

TAXCUTS , WAGECUTS.

that will make the freeper's heads spin.

[ticktockman]

16. graph is confusing.. thanks for adding the link

some lines are labeled so briefly as to mislead one into confustion. Not intentional, but misleading nonetheless.

i urge all to go to this link to orig source, for the full labels and some clarity.

http://home.att.net/~rdavis2/minwage.html

The most useful lines are the lower red one.. the raw value of minumum wage in dollars...

and the blue one.. that raw value adjusted for inflation.

Go to the link for another graph with a highly interesting graph of unemp since the late forties.

Thanks for adding the link. I agree that the red line (current dollars) and blue line (dollars adjusted for inflation) are the most useful and easy to understand. The green line was obtained by adjusting current dollars for the wage index in the same way that the blue line adjusts current dollars for the consumer price index. However, I knew that it would be confusing when I added it. Most people are familiar with inflation-adjusted numbers but not wage-index-adjusted numbers.

In any case, the fact that the green line is "above" the blue line which is, itself, above the red line indicates that wages have generally risen faster than prices. That fits in with my basic belief that the minimum wage should be indexed to inflation. This should be affordable to businesses because inflation tends to rise slower than the average wage. The Congress could always delay one of the automatic increases if it deemed that special circumstances warranted such action. Likewise, it could add an additional increase if it felt that the minimum wage had fallen too far behind the average wage. However, the current system has turned the minimum wage into a political football. If we stopped the automatic indexing of Social Security benefits, the senior lobby would likely scream. Unfortunately, the minimum-wage worker is too busy trying to scrape together a living to do much complaining.

[oscar111]

13. delete

sssssssssssssssssssssssss

[Odin2005]

22. My God, look at the drop in the Minumum Wage adjusted for inflation...

...under Reagan, not one increase in his entire term.

[dcfirefighter]

15. Elasticity of Labor is time-dependent

Over a long enough span of time, demand for labor is fairly elastic, at all wages.

Over short periods of time, demand for labor is fairly inelastic, in all but marginal industries.

Raising the minimum wage by the tiny bits that we are in the habit of doing does NOT hurt the economy as many economists state, mostly because the raises are still below the market wage.

Better than setting prices, but along the same vein, is reducing the 'Tax Wedge' on labor:

The price of labor (as paid by the employer) is 'artificially' raised by taxation, resulting in reduced employment and suppressed wages:
Payroll tax 15.3%
Federal Income Tax on wages~12%
State & Local Income Tax on wages ~5%.
The total direct cost of Labor is raised by some 30%; removing this wedge would, over a long enough run, increase the consumption of Labor by a significant amount. (Raising the consumption of Labor by 5% would employ all those currently 'unemployed')

Furthermore, there are indirect taxes on labor:
State & Local (labor-made) Property Taxes: ~1-2% year (equivalent to a ~20% sales tax)
State & Local Sales Taxes ~3%
Federal & State Corporate Income Taxes against the productivity of Labor ~?%

In short, in our tax scheme, Labor is set up to fail. Shifting taxes off of wages would reduce unemployment, forcing employers to offer better compensation to attract and retain employees.

Many economists fear that 'full' employment would result in inflation. Generally, as unemployment drops, interest rates are raised to slow the economy.

There are two main reasons for prices to increase:
1) Demand exceeds Supply
2) The value of the dollar decreases

In the first case, for almost every good and service, supply can and will be increased to meet demand. The only exceptions are natural resources that cannot be supplied: Land (as in Real Estate), Crude Oil, Radio Bandwidth, fresh water, etc. This can be rectified (and the revenue lost from decreased taxes on Labor) by heavily taxing the ownership of such non-reproduceable resources, which decreases the demand, and thus the price of such items. Pollution taxes would also be in order, as they would act as a tax on the use of the atmosphere, water, etc.

In the second case, to control the supply of dollars, we have to eliminate the ability of the Fed to create dollars by lending them into existence (the Deposit Multiplier), and create them directly from our Treasury. Ideally, the Treasury would monitor a basket of goods and create dollars to achieve a constant numerical price, however such a system is subject to gaming through political manipulation of the basket monitored. Perhaps a better means would be to establish a fixed amount created each year. Such a number would be on the order of $200-300 Billion each year, which could also be used to offset revenue lost from reducing taxes on Labor.

[theflyingcamel]

17. Not a credible theory

Sorry, but your theory on the demand for labor being inelastic is not plausible. It just doesn't make since in an economic sense. The type of labor that we are talking about is unskilled labor, and if the demand for unskilled labor is truly inelastic, then that means that the laborers have much more power in negotiating their wages, and therefore would not need the help of minimum wage laws. When you are talking about elasticity of demand, the party with the more elastic demand has more power, because they have more options and either substitute, or go without the good that is being sold. That is why the market for gasoline is so inelastic. There's simple not a whole lot of other options besides walking or riding a bike, which is why people still consume almost the same amount at $3 a gallon as they do at $1 a gallon. But as far as unskilled labor goes, there are plenty of options.

Let's take that theoretical person who's market price for labor is $3 an hour. If the government sets up a $6 minimum wage, then that person is going to be fired, and in his stead is going to be hired a person who actually does $6 worth of work in a hour. The people that would theoretically make $3 an hour were it not for minimum wage laws are not in high demand and the demand for their labor is the most elastic. Now if you were talking about highly skilled laborers, such as doctors, lawyers, and the like, then your theory would make perfect sense, because the reason that their income is so high in the first place is because we have such an inelastic demand for their labor.

In addition, even if their labor was inelastic like you say it is, which it obviously isn't, their would still be at least some unemployment as a result, because virtually no goods are totally inelastic. The type of people that would lose their jobs would be the poorest and most unskilled of laborers. Are those the type of people that you want to hurt through minimum wage laws? The purpose of minimum wage laws should be to help the poor, not cause them to lose their jobs, and unfortunately, those are the exact people that are most hurt by them, because their market price for labor isn't high enough to warrant them being hired.

[AJH032]

21. Somewhat disagree

You're correct in your assessment of elasticity, however, to address your second point (paragraph), if the government were to set up a $6 minimum wage, there would be no such thing as $3 workers. Everyone in the labor force would be at the very least a $6 worker. If there's a job that needs to get done, then even if a firm were to lose money by paying someone $6 an hour to do that job (supposing they only produce, say, $5 worth of work), it could very well hire the less-skilled worker to do that job (because presumably, the $6 or higher workers were already hired first, so they have been cleared from the market) because the loss from the job not being done would be much greater. For example, if you have a factory and whatever is produced there is your main or only line of business, then I doubt the company would shut down simply because its profit margin would be slightly smaller (due to the higher cost of labor). The general microeconomic rule is that you would continue to produce as long as you cover your "variable costs," even if you aren't even making a profit (let along just a smaller one).

And in regard to your third point, of course natural unemployment would still exist no matter what.

[Greyhound]

18. Is the minimum wage even relevant anymore?

It seems the only places that pay minimum wage anymore are the exploit jobs, mostly agricultural. All of what I always considered "entry level" (fast food, customer service reps, etc.) positions pay $2-$4 over the minimum.
In this area there is an abundance of McJobs available, thus they pay more than they have to in the hopes someone will take them. What we lack are decent jobs that pay a living wage.

[stevebreeze]

19. are we democrats here? why are we not acting like it and asking

the right questions? We have a minimum wage because "market conditions" have never and do not now insure that someone working a fair day work receives a fair days wage.An employer with many jobs always have an advantage on a potential employee looking for one. Before the minimum wage many worked at below subsistence levels. There will always be people so desperate for work that they will take crap wages and starve slowly rather then all at once. What job that someone needs done, is not worthy of an honest days pay?

[happyslug]

20. Economic Theory is that your wage is determined by the market.

Thus if you have many "buyers" of your labor and you are competing with many other similar people, wages will settle down to what is "fair". This works so far but has problems in two ares, where you have many "buyers" and few "sellers" of a particular type of Labor (Pro level Basketball players for example) AND where you have a lot of "Sellers" of labor but Few "Buyers" (Jobs for uneducated people with a serious handicap that prevents them from doing manual labor).

In these two extremes the market place is just NOT capable of dealing with the problem. On the high end scale (i.e. Pro-level basketball players) the problem is on a National level minor, so some rich millionaire can not high all the top basketball players he would like, not much of a harm, on the other end low skill people have Little bargaining power so will cut wages to keep their jobs (In between people will opt for another job if their employer cuts they salary to much thus the market works except in the case of many sellers and few buyers.

Minimum wage "solves" this problem by saying you will may at least this much money. Even if you and a worker agrees to pay less, the state will crack down on you for making the less than minimal wage. Conservative Economist point out this means less skilled people will not be able to undercut marginally unskilled labor and get hire less (The example often given is blacks have higher unemployment then poor whites for blacks can not undercut whites for wages do to the minimum wage).

Now Conservative Economist always like to point out their Economic theory says that any item (including ages) is a product of full information to both buyer and seller. Thus some people should be able to undercut other wages for they "Know" they ability is less than others and thus less valuable (and thus willing to work for less than others). In many ways the minimum wage undercut this by giving people an idea of what other workers are charging for their labor (i.e the Minimum Wage). I first earned the minimum wage in the 1970s as a teenage "Contractor" helping someone maintain her yard. We decided on Minimum wage for it was the reference point for both of us. Instead of me saying I do the job for X dollars I did it for what the minimum wage was, my employer paid me for the same reason, it was the only reference point we had for what was the wages for my type of labor. Neither one of us were that familiar with the Market Place to set another dollar amount.

My point is the minimum wage is used as a reference point by a lot of people who hire people to do odd jobs for them. It is this function that permits the Minimum wage to succeed. In classic economic theory Minimum wage should fail, for some person will be unable to undermine it by being willing to work for less forcing all other similar set people to accept that sub-minimum wage. This does not happen for all the people doing odd jobs do so at the minimum wage and thus to get such employees, employers must pay at least the minimum wage.

Thus the minimum wage works do to it being a reference point for people to pay others for labor, as long as it is NOT set to high, it will set a floor people will pay. If the minimum wage is set to high economic pressure will build up and sooner or later people will agree to work for less than the minimum wage and once that starts wages will continue to drop. This does not happen for most people who would undermine the minimum wage will also do odd jobs at the minimum wage, and thus PREVENT themselves from undermining it.

My point is minimum wage WORKS, as long as it is a reasonable floor and not to high (i.e. no more than 10% of the work force is earning minimum wage).