I was pondering the idea of a $100 minimum wage and had a question. If the minimum wage was $100 wouldn't prices just rise, even though a price floor on a supply and demand curve would claim that workers who currently make over $100 would be the only ones to keep their jobs? Now, I am infering that there would be no underground economy in this scenario where people could work under the table. To me it would seem that people would just raise their prices and keep their employees. If the minimum wage were $100 would there really be no cooks, cashiers, barbers, construction workers, and even most lawyers? So, if these occupations still existed in an economy with a $100 minimum wage and prices just went up, then why wouldn't that happen from a $1 increase?
Besides, there's just plain not enough money in the economy to do that. Where would the money come from to supply the funds for that number of exchanges?
helicopter ben?
Well it'd just have to now wouldn't it?
I'm being repetitive because what your arguing is not intutive and seems unrealistic. If I owned a grocery store and the minimum wage went to $100 I'd fire 90% of my staff and raise prices to cover the labor costs. In the end, I'll be basically be paying one cashier and someone else to restock the shelves. I wouldn't go underground and have my grocery store become the "food spot". "Well, other people would and you will lose your customers." Well let us say hypothetically that this took place in a small isolated town of a population of 5,000 and the punishment for paying below the minimum wage or patronizing such a firm was the death penalty (a town making this minimum wage would make this law) and people were rewarded for ratting out underground economic activity? Why would anyone risk their life buying goods that they could buy from me? Wouldn't they just accept the fact that they need to pay more money for goods and just raise their prices to make up for it? Where am I wrong here?
It's not exactly clear what your claims even are. No one is saying that all retail outlets would be shuttered forthwith. But the problem - in terms of analyzing the dynamics involved - is that you have chosen a case that is too close to the existing MW. Hoppe uses the illustration of setting MW to $1M/hr. and enforcing it to the hilt (i.e. death penalty, secret police, etc. etc.) Now, what grocery store will have cashiers at $1M/hr? What hairdressing shop will pay its hairdressers $1M/hr?
So, somewhere between $1M/hr. and the current MW is an hourly wage where perhaps 1 cashier would be employed somewhere. At some lower MW, 2 cashiers would be employed. Yet lower, 10, then 100, then 1,000 etc. You get the picture. The relation here is a priori and absolute: higher minimum wage means less employment. This is undeniable.
So what exactly are you trying to prove, here? That higher MW does not necessarily mean less employment? If so, then let's set MW to $1M/hr. so everyone can become rich forthwith. If $1M/hr. is problematical, please explain why only $1M/hr. is problematical but $100/hr. (or the current MW) is just fine. What, precisely, is the difference between these arbitrary numbers?
Clayton -
I answered my own question by admitting that I would cut my staff 90%. What I was aiming at was that what if an increase in the minimum wage would simply increase prices to cover labor costs like many people on the left claim. But, in a market so price competitive any firm could not survive by any incremental price increase while another firm keeps their prices the same. However, if the MW increased by an amount so outrageous wouldn't it force firms to raise their prices to cover the labor cost because nobody in most firms are producing >$100 in revenue.
I answered my own question by admitting that I would cut my staff 90%.
But how do you know this? These numbers are all arbitrary! Perhaps 90% isn't enough... perhaps you will still go bankrupt in a matter of months. How do you know how much to cut based on $100/hr.???
What I was aiming at was that what if an increase in the minimum wage would simply increase prices to cover labor costs like many people on the left claim. But, in a market so price competitive any firm could not survive by any incremental price increase while another firm keeps their prices the same.
You're chasing your tail - the MW affects all employers the same.
However, if the MW increased by an amount so outrageous wouldn't it force firms to raise their prices to cover the labor cost because nobody in most firms are producing >$100 in revenue.
Please answer my questions in my last post re. $1M/hr. MW. Then we can move forward onto more advanced questions.
I'm not sure that the "what if the MW was £10 billion and hour?" argument works, tbh. Obviously, the aggregate outcome of an economy is a result of the micro-level behaviours of the various actors, and the behavioural responses that would accompany a giant increase in the MW would be different from the behavioural responses that would accompany an incremental rise. As such, when it comes to a gradual increase, it is possible firms would decide that it is best to fund the MW by reducing wages of other employees, by cutting the quality of goods, or raising prices. Being that all firms are facing this new law, no single firm would be able to get a competitive advantage against the businesses that adopt these types of strategy. Given that so many behavioural responses are available, it is not a-priori true that unemployment will occur because of a MW increase, it is just one of the many possible consequences that could arise.
@Consumariat
I've heard you argue this before, and I think that on a very slight margin you are correct that very small increases to the minimum wage may have different effects than large increases would. However, this does not demean the fact that any significant increase (I'll arbitarily call it a 50 cent increase or more) will force have some combination of increased unemployment alongside increased prices.
However, this does not demean the fact that any significant increase (I'll arbitarily call it a 50 cent increase or more) will force have some combination of increased unemployment alongside increased prices.
I'd certainly agree with this; or at least this would be the immediate response to such a change. Whether or not the situation in the medium term would adjust to the change, and people would be re-employed once prices rose to enable this re-employment, I have no idea. It's really all just speculation at this point, and as I understand it, the empirical studies that have been carried out on the impact of the MW offer mixed conclusions. I don't need to tell Austrians about the difficulty in testing propositions against empirical evidence though.
In a lot of respects this highlights a methodological question that has been bugging me for a while regarding the appropriateness of comparative statics and the use of ceteris paribus clauses. I'd much rather see agent-based modelling being employed to investigate such questions, but then that topic is probably best for another thread.
I'm not sure that the "what if the MW was £10 billion and hour?" argument works, tbh.
Works for what?? What exactly is the "it" here?? What are you, EmbraceLiberty et. al. trying to prove? What exactly is your claim?
Obviously, the aggregate outcome of an economy is a result of the micro-level behaviours of the various actors, and the behavioural responses that would accompany a giant increase in the MW would be different from the behavioural responses that would accompany an incremental rise.
So what? What does this have to do with the question that was originally being addressed: does increasing MW reduce employment or not?
As such, when it comes to a gradual increase, it is possible firms would decide that it is best to fund the MW by reducing wages of other employees, by cutting the quality of goods, or raising prices.
Or taking a hit in profits. Look, no one disputes this. I don't understand why you're even bringing this up. The point is that it is false to claim that increasing MW does not reduce employment. What you're arguing is "if we raised it by one penny, nothing would change, so there are increases that are so small that they would not affect employment". Fine, but then we're not talking about the principle of the effect of increased MW on employment, we're talking about boundary cases in the noise margin. No one was ever disputing that those exist. The point was always that it is essentially true that increased MW must result in lower employment.
Also, we must be careful when using words like "wage" and "employment" because labor is not a homogeneous good. It is possible that a decrease in the employment of factory workers can correlate with an increase in the employment of robot engineers who design equipment that replaces factory workers. In fact, the MW can even contribute to this process as the low-valued factory workers become less profitable vis-a-vis capital equipment such as robots that can perform the same labor at a higher initial investment but lower amortized cost over time. So, when we speak of increases or decreases of "employment", we need to specify employment of who.
Being that all firms are facing this new law, no single firm would be able to get a competitive advantage against the businesses that adopt these types of strategy. Given that so many behavioural responses are available, it is not a-priori true that unemployment will occur because of a MW increase, it is just one of the many possible consequences that could arise.
Nonsense. Increasing the MW affects specifically all those jobs that are currently below the new MW. Its effects have been spelled out in detail not only on the basis of a priori theory by the Austrians, but by statistical study by the Chicagoans. At this point, the idea that MW can be increased without altering employment levels is the economic equivalent of geocentrism - dead theory. Even Krugman would not defend the idea that MW doesn't affect employment levels. I think his view is that it is sometimes good to raise MW and provide offsetting unemployment insurance at the same time (labor price floor).
Austrians don't simply use "ceteris paribus clauses" - the analysis of the economy as a whole is performed with the aid of the Evenly Rotating-Economy concept. This is a kind of ceteris paribus, but it is much more elaborate than a simple "ceteris paribus" in that it permits us to circumscribe the generality of the conclusions reached using the ERE device. Such conclusions cannot be completely general because of the artificiality of the model itself and no Austrian pretends they are completely general.
Clayton,
I find this claim to be very interesting:
"Austrians don't simply use "ceteris paribus clauses" - the analysis of the economy as a whole is performed with the aid of the Evenly Rotating-Economy concept. This is a kind of ceteris paribus, but it is much more elaborate than a simple "ceteris paribus" in that it permits us to circumscribe the generality of the conclusions reached using the ERE device. Such conclusions cannot be completely general because of the artificiality of the model itself and no Austrian pretends they are completely general."
I agree that the ERE is simply an elaboration of ceteris paribus conditions, but I've never really seen much of an advantage in using it beyond the rigor involved and a better understanding of what happens when we change conditions. Could you elaborate what you mean here, focusing upon the advantages of using the ERE?
I think that you're definitely on the right track here. It would be very interesting to hear an elaboration of the various possibilities of the results of the minimum wage in the longer term. I know that some have argued in favor of the minimum wage exactly to make higher education and automation more profitable than they would otherwise be.
Edit
"No, I'm arguing something slightly different to this. My claim is that the speed at which a MW is introduced/increased is an important factor in the sort of behavioural responses that result. Different behaviours will result in different aggregate outcomes. A gradual increase may lead to no unemployment whatsoever, but significant lowering of product quality for example. Understanding these dynamics enriches theory and advances our understanding of the economy. What is wrong with that?"
I think that, while this would have a different sort of affect, that in the end you'd probably have similar results. I'm also sure that you could do a lot of interesting things with expectations here too.
I'm not sure that the "what if the MW was £10 billion and hour?" argument works, tbh. Works for what?? What exactly is the "it" here?? What are you, EmbraceLiberty et. al. trying to prove? What exactly is your claim?
Works to prove that unemployment is an inevitable result of the implementation of a MW. The claim is that there are many possible consequences of implementing a MW, and that the MW=unemployment position is overly-simplistic.
It has everything to do with the original claim. The line of argument being advanced in support of this claim ("a squilion doller MW will create unemployment, therefore a 10 cent MW will do so too") is based on some very specific behavioural assumptions - behaviours that will be qualitatively different given different levels of MW increase.
Or taking a hit in profits. Look, no one disputes this. I don't understand why you're even bringing this up. The point is that it is falseto claim that increasing MW does not reduce employment.
But you do not know it is false when there are so many other possible outcomes of a MW other than unemployment. There is nothing a-priori about it when there are plenty of alternate outcomes that are theoretically possible.
What you're arguing is "if we raised it by one penny, nothing would change, so there are increases that are so small that they would not affect employment". Fine, but then we're not talking about theprinciple of the effect of increased MW on employment, we're talking about boundary cases in the noise margin.
No, I'm arguing something slightly different to this. My claim is that the speed at which a MW is introduced/increased is an important factor in the sort of behavioural responses that result. Different behaviours will result in different aggregate outcomes. A gradual increase may lead to no unemployment whatsoever, but significant lowering of product quality for example. Understanding these dynamics enriches theory and advances our understanding of the economy. What is wrong with that?
Agree 100%
Increasing the MW affects specifically all those jobs that are currently below the new MW.
I know. I don't get the point you're making here, sorry.
Its effects have been spelled out in detail not only on the basis of a priori theory by the Austrians, but by statistical study by the Chicagoans. At this point, the idea that MW can be increased without altering employment levels is the economic equivalent of geocentrism - dead theory. Even Krugman would not defend the idea that MW doesn't affect employment levels. I think his view is that it is sometimes good to raise MW and provide offsetting unemployment insurance at the same time (labor price floor).
Simply not true. The studies have been varied, with some showing slightly negative impacts on the labour market, and others showing increases in employment. I for one am interested in the reasons behind this, and a doctrinaire insistence that MW=unemployment doesn't cut it for me. Fine, have that position as a point of departure, but fill in the gaps with subtler a understanding of the actual operation of economies on the ground.
Ok, that's fair enough. I guess I have in mind the Neoclassical approach when thinking about these methodological issues. I will admit I do not know enough about the ERE concept to comment on it.