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On the minimum wage: is it even an issue?

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Buzz Killington posted on Tue, Mar 19 2013 4:46 PM

For example, let's say all employers are forced to hire workers at 18 dollars an hour when previously they were paying 8 dollars - won't they just raise prices to compensate? Everything will cost 10 dollars more, but workers will have 10 dollars more purchasing power.

Has this been brought up - thoughts?

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Not all industries hire equal numbers of minimum wage workers, though, and some just export the jobs.

For example, the programming industry would be largely unaffected since most involved get paid significantly more than $18 an hour, but the service industry, especially restaurants, would be hit hard by a huge minimum wage increase, so they'd either fire their workers or jack up prices.

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eliotn replied on Tue, Mar 19 2013 5:21 PM

"

For example, let's say all employers are forced to hire workers at 18 dollars an hour when previously they were paying 8 dollars - won't they just raise prices to compensate? Everything will cost 10 dollars more, but workers will have 10 dollars more purchasing power.

Has this been brought up - thoughts?"

This has been brought up and refuted:

1.  If businesses can charge 10 dollars more (due to inelastic demand), then it will be profitable to do so anytime.  No need to wait for a minimum wage increase to do so.  Prices are determined by supply and demand,  not costs (although costs can influence supply).  The above scenario is a reduction in supply, which means increased prices and reduced quantity.

2. Everything will not "cost 10 dollars more".

3. Businesses will try to cut costs, and will try to find cheaper substitutes for hiring the now artificially overpriced $18/hour workers.  Outsourcing the business is one option.  Another option is trying to replace the many unskilled laborers with a few skilled laborers/machines, which are now comparatively cheaper.  While softening the impact of minimum wage for the business, this means the minimum wage workers are now unemployed.  Also, if the job has non-monetary benefits, such as healthcare or paid vacation, these will probably be cut to pay for this minimum wage.

4. Even if neither of the above is not possible businesses will not simply hire the same number of workers. Instead, they will cut their operations/go out of business until it is again profitable to produce their good at a higher price.  Simply raising prices will leave the business with not enough sales.  This will unemploy some of the people under minimum wage.

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Why would I want to pay more for food? That's exactly what it does.

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The only way for the general price level to rise is either the money supply increaes or the demand for money drops.

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No, prices are not determined by labour costs, but are determined rather by supply and demand. 

 

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Where does the extra money come from to pay the high prices?

At first it seems that on a macro-level velocity might come to save the day, inflation will occur not because of an increase in the money supply but rather because people are spending their money faster. This can't work because people would have to work to produce the increase in the product necessary to fund the increase in the number of transactions, which presumably they cannot do.

Therefore if prices all just increased by that much people wouldn't have the money to pay that among, elasticity at that level is likely to be quite elastic and therefore it will either be unprofitable to increase prices solely, and just with most minimum wage increases there will likely be an increase in prices combined with a decrease in employment. In this case both shifts are likely to be large.

Where do you envision the money coming from?

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Aren't labor costs a factor that determine supply?

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For example, let's say all employers are forced to hire workers at 18 dollars an hour when previously they were paying 8 dollars - won't they just raise prices to compensate? Everything will cost 10 dollars more, but workers will have 10 dollars more purchasing power.

Has this been brought up - thoughts?

Which means:

-Price of an M&M's pack  = $ 2 * -> $ 12 **

-Price of a Mercedes Benz Class E = $ 200000 *-> $ 200010  **

* before $10 raise in minimum wage

** after $10 raise in minimum wage

Next step: Call it "A paralel shift model for wage-inflation" and sit and wait for nobel prize. 

 

 

  

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It would be cool if worked the other way around too...

I mean, a minimum wage reduction of a few bucks and all public transportation and snacks from vendor machines would have negative prices.

You would earn money by purchasing a candy bar.

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Wheylous replied on Wed, Mar 20 2013 10:55 AM

The workers would not have $10 more purchasing power, because the price level would have increased, which would reducde their purchasing power.

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Wheylous:

The workers would not have $10 more purchasing power, because the price level would have increased, which would reducde their purchasing power.

There would perhaps be an increase in price level, but that's not entirely foreseeable. Higher costs from higher minimum wage could be met by cuts of other wages, or by reducing profit margins, or by scaling back production and so on.

What you can really expect, almost always, from such an increase in minimum wage, is the unemployment of those unable to be profitably employed under new wages, like the youth. Rampant youth unemployment is almost always a consequence of irresponsible minimum wage laws, an affliction particularly acute in western Europe.

It's hard to say what the impact would be in the "price level", because it's hard to specify what the price level is. "Price level" is an abstract macroeconomic variable that is expected to respond to shocks in the money supply or in volume output, but that's very hard to achieve in practice by tracking a basket of real goods, since there are usually lags and buffer effects that make things very nonlinear. But nominally it could remain stable, since money supply and cash reserves didn't change with the law.

What is more or less predictable in the short term is the decrease in volume of production due to the capital factors (mostly human) that are now unemployed as they are no longer profitable under the new price constraint.

 

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Neodoxy:

Where does the extra money come from to pay the high prices?

At first it seems that on a macro-level velocity might come to save the day, inflation will occur not because of an increase in the money supply but rather because people are spending their money faster. This can't work because people would have to work to produce the increase in the product necessary to fund the increase in the number of transactions, which presumably they cannot do.

Therefore if prices all just increased by that much people wouldn't have the money to pay that among, elasticity at that level is likely to be quite elastic and therefore it will either be unprofitable to increase prices solely, and just with most minimum wage increases there will likely be an increase in prices combined with a decrease in employment. In this case both shifts are likely to be large.

Where do you envision the money coming from?

@Meistro

Aren't labor costs a factor that determine supply?

One of the neat things Mises exposes in his Human Action is that the concept of money "velocity" is flawed.

 

What exists is the predisposition of keeping cash reserves, that is, how much money people want to keep "under the mattress" as a liquidity buffer.

Even though "money velocity" looks quite reasonable, it's not definable as a concept.

To understand that*, suppose you and I and a third fellow kept exchanging a virtual token good, for one dollar, many times over.

I mean, I buy it from you, and the fellow buy it from me, and you buy it back from the fellow, and we repeat this pointless game 100 times over.

Suppose any transaction costs and fees and taxes are zero.

The total transactions would sum up to a large value, but the net exchange would be zero (the token good would end up with you, and the dollar piece would end up with me, which was the initial situation).

However such an economy would have a higher "money velocity" than an economy where no such game took place.

The additional income dollar piece would be spent hundreds of times between the same people chasing the same good.

 

* this stupid example is my own, I don't remember exactly the Mises paragraph about that...

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Buzz Killington:

For example, let's say all employers are forced to hire workers at 18 dollars an hour when previously they were paying 8 dollars - won't they just raise prices to compensate? Everything will cost 10 dollars more, but workers will have 10 dollars more purchasing power.

Has this been brought up - thoughts?

 

There's another really huge flaw in this. Not all buyers are employed. So, if the price of a good that is to be purchased by a person that is not employed rises, then the good could be priced-out because the potentional buyer would be willing but not able to purchase the good, meaning that less of that good would be bought; thus, lowering total revenue and, thus, profit; and, thus, lessening the demand for the workers with regard to good; thus, creating unemployment of some of thos workers...

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
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Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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