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Logical deductions from the Action Axiom

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Consumariat posted on Wed, May 11 2011 5:08 PM

I often hear Austrians say that all sorts of things from the action axiom but I have never seen a step by step deduction layed out. Can someone  provide one of these. To kick it off - please show each step in a logical chain that shows the effect of a minimum wage on unemployment.

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David Gordon will show you: An Introduction to Economic Reasoning . See the first 129 pages. 

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I'll take a stab at it.

0. I assume the Law of Supply and Demand, which is shown from first principles in the books.

1. The Law of Supply and Demand applies to workers and their wages Proof: Common sense.

2. The aforementioned Law implies that for a given Supply curve and Demand curve, there is a price which will result in the maximum amount of sales, and a higher price will reduce the amount of sales. Proof: Step 0.

3. But "sales" when applied to jobs means "hiring of workers", and "price" means "wages". Proof: common sense.

4. Thus, raising wages lowers the amount of people hired. Proof: Steps 2 and 3.

For how this shakes out in the real world, see http://www.youtube.com/watch?v=_LaPGIIAyk4  about Samoa.

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Not enough Austrians really sit down and do stuff like this. I really wish that Human Action had been more of a laid down step by step process rather than Mises stating what he found with only limited explanations (although in his defense just about every time that I thought it out he was totally correct)

Assumptions: Man will act to fulfill his value preferences, money is considered an asset by everyone in this economy (this is not true in the real world of course, this does not invalidate the proof but it takes a while explaining why), and firms know exactly what their costs are and aren't totally stupid

1. People who are looking to buy a good will buy from the source that is cheapest (same utility in good, lower disutility in cost)

2. Firms which offer the same good at lower prices will experience increased sales because of one so long as consumers are able to choose, without an increase in disutility, between their products and more expensive ones

3. Firms which offer the same good at higher prices will not sell any goods so long as consumers are able to choose, without an increase in disutility between their products and less expensive ones

4. Firms which offer the same good at higher prices will experience  sales which fall to nothing

5. Firms which offer the same good at lower prices will experience increases in sales

6. Firms which offer the same good at higher prices experience a massive decrease in revenue because of step 4.

7. Firms which offer the same good at lower prices will experience increases in revenue because of step 5.

8. Firms which offer goods at higher prices become less able to expand their market share (utterly unable if they have no source of income outside of that market)

9. Firms which offer the same good at lower prices become more able to expand their market share and buy more capital and expand production, and will continue to do this so long as prices in doing so do not exceed expected revenues with interest included.

10. Firms that offer the same goods at higher prices will experience large debt and if they A. Have no source of external income B. Do not have a large enough external income to cover costs incurred C. Do not have debts or responsibilities wavered D. wish to stop running debt, then they will be forced to either sell or give away their share of the market or somehow cut costs, or drop out of the market

Lo! I am Neodoxy! Logical prover of competition and the tenancy upon the market for firms which provide lower prices which still cover costs to dominate the market and those which provide higher costs to drop out!

The only things which would interfere with this are the problems posed in step 10 or their inversions in firms with lower costs

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1. The Law of Supply and Demand applies to workers and their wages Proof: Common sense

What is common sense other than something that is widely held to be true? It used to be common sense that the sun orbited the earth. It didn't make it true.

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Proof

Assumption: Man works to fulfill his value preferences, money is percieved as a value, firms know their costs and profits

1. Firms in which the utilization of labor will result in higher profit margins than any other possible method will demand labor in order to be able to produce things which will result in high profit margins

2. Labor will demand wages in order to cover the disutility of work itself as well as to get as much green as possible so long as moneh is seen as something providing utility.

3. Costs for hiring an additional unit of labor must provide higher profit margins than not doing so

Thusly there is a supply for labor, and a demand for labor, only when wages are enough to fulfill the requirments of 2. Will people work, and only when wages are low enough for 1. and 3. are satisfied will firms hire.

I hope you knew what he said was true, the problem with these things is that there are about 50 million factors you ahve to list out to cover all the angles.

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So that's the weak link?

I can restate it like this: The logical arguments presented in the books, which are universally accepted by all schools of economics, can be read by an intelligent person and shown to apply to workers and their wages. In other words, read the books, replacing "good" with "worker" and "price" with wages" and you will see that the arguments proving the law of supply and demand apply.

I was hoping you might present a reason why they don't apply. Maybe the future will please me.

 

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I think the argument has some merit in regards to hiring new workers (even though the introduction of the minimum wage did not increase unemployment in the UK when it was introduced in the 90's).

However, what about if there is already a high employment rate when a minimum wage is introduced? Is it not easier for firms to remain profitable by increasing the price they charge for goods rather than sacking people? Would not a minimum wage just lead to a higher price level of other goods rather than increase unemployment?

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I didnt comment on whether your conclusion was true or not. Just that your reasoning was weak. Common sense is never a 'proof' of anything.

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If they could simply raise the prices and make more profit, why didn't they do it without the minimum wage?  The point is that they will lose more money by raising their prices than from firing workers who are not sufficiently productive.

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Glad we agree. And yes, the phrase "common sense" is an easy one to attack.

Just as a curiosity, here is a quote from Marx:

Now, the same general laws which regulate the price of commodities in general, naturally regulate wages, or the price of labour-power. Wages will now rise, now fall, according to the relation of supply and demand, according as competition shapes itself between the buyers of labour-power, the capitalists, and the sellers of labour-power, the workers.

As for increasing the price rather than sacking people, here is an explication. [Full disclosure: Walter Williams is black]:

Many firms, however, may be unable to pass on their increased costs to consumers. It is consumers who ultimately determine the price of any good on the market, and they may decide that a business's product is not worth a higher price. Producers cannot force consumers to buy what they produce, and businesses cannot always arbitrarily increase the prices of their products simply because the government has arbitrarily increased their costs.

This fact has important implications. If a business cannot simply pass along its new labor costs, it must somehow absorb them--by eliminating workers rendered unproductive by the new minimum wage, by replacing labor with more-productive machines, or by cutting back production. Those jobs not eliminated will be more demanding, as employers will use fewer people to produce the same amount of work.

Teenagers suffer most from the adjustments required by an increase in the minimum-wage rate. These workers are generally the least experienced, least skilled, and least productive. According to the Bureau of Labor Statistics, the present unemployment rate for all teenagers actively seeking jobs is 16.5 percent, and the unemployment rate for black teenagers is 36.9 percent, more than double the overall average.[5] The existing minimum wage has contributed significantly to producing these abhorrent levels of unemployment.

The damage done to teenagers is twofold. First, they lose income immediately. Second, because minimum-wage legislation has rendered them unemployable, teenagers cannot gain the ex- perience and skills that would make them employable at higher wages later. If there were no floor price on labor, teenagers could offer to work for a lower price until they had gained the training, experience, and skills they needed to command a higher wage.

The damage done to minority teenagers is far worse. By establishing an arbitrary minimum, government reduces the costs of discrimination. In The State against Blacks, economist Walter Williams described how minimum-wage legislation alters the incentives of employers:

Suppose that an employer has a preference for white employees over black employees. And for expository simplicity, assume the employees from which he chooses are identical in terms of productivity. If there is a law, such as the minimum wage law, that requires that employers pay the same wage no matter who is hired, what are his incentives? His incentives are [those] of preference indulgence. He must pay the black $3.35 an hour and he must pay the white $3.35 an hour. He must find some basis for choice. The minimum wage law says that his choice will not be based on economic criteria. Therefore, it must be based on noneconomic criteria. If he wishes, the employer can discriminate against the black worker at zero cost.[6]

Because no one is allowed to work for less than a set minimum, those who can command only the minimum and are discriminated against have no way to fight the problem. If wages were not fixed at a certain minimum, those who were discriminated against could compensate by offering their labor at a cheaper price. This would effectively increase the costs of discrimination for those employers who wished to practice it.

So if you want to screw minorities, set a minimum wage.

 

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Just as a curiosity, here is a quote from Marx:

Yes, I recall reading somewhere that Marx's intention was to take for true the presuppositions of classical economics before attempting to critique the classicals on their own terms. I still find Marx's writings compelling even though I do not agree with a lot of his conclusions.

Many firms, however, may be unable to pass on their increased costs to consumers. It is consumers who ultimately determine the price of any good on the market, and they may decide that a business's product is not worth a higher price. Producers cannot force consumers to buy what they produce, and businesses cannot always arbitrarily increase the prices of their products simply because the government has arbitrarily increased their costs

This is certainly a possiblity. However, an increase in the minimum wage must also have an impact on the amounts that consumers are willing to pay for a good thereby increasing effective demand. In other words, the minimum wage raises the level of price that the market is able to bear and so has no real impact on either unemployment or standard of living. It is a redundant measure like anouncing that the money supply will be doubled in a month and then doing so.

He must pay the black $3.35 an hour and he must pay the white $3.35 an hour. He must find some basis for choice. The minimum wage law says that his choice will not be based on economic criteria. Therefore, it must be based on noneconomic criteria. If he wishes, the employer can discriminate against the black worker at zero cost.

But these sort of decisions are made whatever the lower wage level is. If the market sets the wage at $1.50 rather than $3.35 then the businessperson still has to make that choice between a black person an a white person, so whilst it could be argued that overall levels of unemployment may be affected, the relative levels of unemployment between whites and blacks does is not nessesarily changed.

 

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About the UK success:

The second wave of studies has concentrated on the introduction of the National Minimum Wage in 1999. Machin et al. (2003) found that the minimum wage imposition did have disemployment effects, with negative elasticities of −0.08 to −0.38 for employment, and −0.15 to −0.39 for hours worked. Stewart and Swaffield (2006) studied the effect of the minimum wage on hours worked and found statistically significant reductions in hours worked when lagged effects are included. The pair found that the weekly hours that a worker was employed declined by between one and two hours, with the reduction occurring one year from the minimum wage implementation.

Given these data, it is hard to conclude that the National Minimum Wage was the resounding success that its supporters contend. Though the modesty of the wage when introduced, along with the inclusion of a youth sub-minimum, may have muted the effects of the minimum wage in the UK, it has nevertheless been shown to have negative employment effects and mirrors the US. More troubling than the existence of the wage floor in the UK, however, is the frequency and magnitude of increases to it. Whereas in the USA, the federal minimum wage is adjusted only periodically by Congress, allowing for its long-term real value to stay relatively constant, legislators in the UK update the minimum wage annually, and have consistently increased it by amounts that exceed inflation. While the consequences of the minimum wage, though generally negative, are relatively minor at low levels of the wage, they are likely to be stronger and clearer at higher levels. Few economists, for example, would contend that a doubling of the minimum wage to more than £10 per hour would have no negative effect on employment or hours worked. Yet the general trend in the United Kingdom has nevertheless been in the way of real growth in the minimum wage.

Oh, and not only that, a recession exposes the real problems with minimum wage:

There do exist significant problems that complicate the measurement of the effects of the minimum wage. Minimum wage increases that have been studied in the USA remain quite small as a proportion of the wage in total, rendering it difficult to find clear and discernible effects of the minimum wage, and the proportion of workers earning the minimum wage is very small. As Keil et al. (2001) note: ‘An intrinsic problem with event studies in this context is that the sought effect is acknowledged to be small compared to ambient fluctuations in employment rates.’ Moreover, there may be substantial endogeneity bias present that skews the data in a way that masks the negative effects of the minimum wage. Minimum wage increases do not happen randomly, and are instead controlled by political and economic conditions. As such, wage hikes may only take place in jurisdictions in which economic and employment conditions are good or improving, and may be resisted by governments in jurisdictions where such conditions are poor or worsening. This bias would indicate that studies of minimum wage increases may not fully recognise the full disemployment effect of the increase. Indeed, the effects may not be felt until many years later when the economy moves into recession and individuals find it more difficult to find employment after they have lost their jobs: the minimum wage could then be particularly problematic as workers are then seeking possible ‘second-best’ employment opportunities whilst their skills deteriorate. Thirdly, there is the significant difficulty of finding an adequate comparison group to serve as a control by which to measure the effects of minimum wage increases. These difficulties have undoubtedly contributed to the perception of uncertainty surrounding the effects of minimum wages.

Summing up:

Far from having positive effects for the working poor, the implementation of the minimum wage in the UK is likely to have had a negative effect on employment. This effect of the minimum wage is demonstrated by data from the USA and some studies from the UK. Nevertheless, the minimum wage has been routinely raised at a rate greater than inflation, resulting in a tremendous increase in the real value of the minimum wage. This rise is particularly problematic for workers during times of recession. The present government could alleviate the difficulties of the minimum wage by resisting the urge to raise it further and gradually allow inflation to reduce its real value. A slow death of the wage floor would stimulate employment and permit Britain to regain a competitive edge.

Source: http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0270.2010.02065.x/full

 

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Consumariat:

This is certainly a possiblity. However, an increase in the minimum wage must also have an impact on the amounts that consumers are willing to pay for a good thereby increasing effective demand.

Yes, it certainly looks that way. But let's ask ourselves. "Where did the money come from that allows consumers to pay more?" We are assuming no money printing, and no increase in production that lowers prices. After all, we are studying the effects of a minimum wage when everything else stays the same. 

The only possible answer is that money was merely shuffled around from one pocket to the next. The minimum wage earners have more, which means someone, somewhere, has less. So that the net ability to pay is unchanged, meaning effective demand is the same.

But these sort of decisions are made whatever the lower wage level is. If the market sets the wage at $1.50 rather than $3.35 then the businessperson still has to make that choice between a black person an a white person, so whilst it could be argued that overall levels of unemployment may be affected, the relative levels of unemployment between whites and blacks does is not nessesarily changed.

The difference is this. In the old days, the black could tell the employer "I'll work for a little less." Which got him the job, usually. Nowadays, with minimum wage, what can the black worker do to get himself hired instead of the white guy? Nothing. So he is now unemployed, whereas before he had something.

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Two can play that game though.

 
"There islittle or no evidence of any employment effects. The reasons for this include: an impact on hours rather than workers; employer wage setting and labour market frictions; offsets via the tax credit system; incomplete compliance; improvements inproductivity; an increase in the relative price of minimum wage-produced consumer services; and a reduction in the relative profits of firms employing low paid workers."
 
And on the MW's impact on prices:
 
"Using sectoral-level price data matched to survey data on 
the share of minimum wage workers in each sector, it is hard to find much evidence of 
significant price changes in the months that correspond to the uprating of the NMW. However 
over the longer term, prices in several minimum wage sectors – notably take-away foods, 
canteen meals, hotel services and domestic services – do appear to have risen significantly 
faster than prices of non-minimum wage sectors. These effects were particularly significant in 
the four years immediately after the introduction of the minimum wage. "
 
BTW, since we have resorted to empirical studies to back up the theory, has praxeology gone out the window?
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