http://ideas.repec.org/a/aea/aecrev/v84y1994i4p772-93.html
Thoughts?
EconomistInTraining:There's ongoing debate on this paper. The "refutation" you linked to certainly didn't end the debate. The point of this post is that whilst Micro 101 might suggest that minimum wage will always decrease employment, there are all sorts of empirical complications that need to be taken into consideration.
There are all sorts of "empirical" complications with everything. If there weren't, we wouldn't have "things" like calculation "problems". For example, you might complicate the "issue" by using poor "statistics" that lead you to the wrong "conclusion". That's why empirical "study" of real live human "action" are a poor way to do "economics".
Student:if you have a situation where there is only one major employer in your area (factory towns say), then the employer could potentially nagotiate wages below those that would result from a more comepetitive labor market. this implies that setting a minimum wage above that amount could actually INCREASE employment and in a net welfare improvement.
Employers still face competition from other firms, even distant ones, for labor. This is the same argument that predicts monopoly in a free market.
Student:now, one could argue "oh well, eventually the market will solve those problems. how many factory towns are left?? and look at monster.com!! thats reducing job search!" which I think makes sense. but i doubt those arguments serve much comfort those people that have to suffer the conditions in the mean time.
The fact that industries must die to pave the way for reallocation of labor probably serves as little comfort to those whose skillset becomes obsolete. Are you recommending that, despite the consequences economics reveals to us, we should be in favor of propping up these dying markets because it's uncomfortable for those involved?
Employers still face competition from other firms, even distant ones, for labor.
How much competition? If search costs and barriers to entry are high enough, then I think it is possible for a firm to operate like a monopsony wrt labor. Are you suggesting that workers have always operated in a competitive global market for labor such that employers never have enough "market power" to nagotiate wages below market rates (that if risen by law could actually increase employment)??
Are you recommending that, despite the consequences economics reveals to us, we should be in favor of propping up these dying markets because it's uncomfortable for those involved?
No I am not.
Ambition is a dream with a V8 engine - Elvis Presley
if you have a situation where there is only one major employer in your area (factory towns say), then the employer could potentially nagotiate wages below those that would result from a more comepetitive labor market. this implies that setting a minimum wage above that amount could actually INCREASE employment and in a net welfare improvement.
This perfectly exemplifies the differences between a neoclassical economist and an Austrian economist. The neoclassical economist takes a quick snapshot of the market, reveals some imperfection, and then justifies government intervention (wage rigidity). The Austrian economist, on the other hand, realizes that the market is a process and that government intervention, in the long-run, is self-defeating.
It is true that limited geographical competition may lead to temporary disequilibria in the labor market, but it is also true that such a condition would yield supernormal profits for capital within that region. The supernormal profits that are earned would draw capital investment towards this geographical area, which, in turn, would elevate the productivity of labor (output) and therefore real wages. The government intervention, then, would not only prevent capital investment within this area, but it would cause wage rigidity which could (would) yield involuntary unemployment during recessions.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
^ actually, i believe i did mention how new employers may be eventually attracted to the area at the end of my post (since i was responding directly to the claim that minimum wages always decrease employment, i don't think its unfair i spent more time on the short-run than long-run). in fact, i went a step further in subsequent posts and mentioned factors that may prevent the rosey, long-term outcome you describe (specifically, barriers to entry could keep new employers from entering the local labor market). for some reason, you fail to even acknowledge those.
but, i believe this perfectly represents the difference between neoclassical and some austrian economists. the neoclassical economist takes an assessment of both the long-term and short-term of a situation and identifies those factors that may influence market outcomes in both cases before making any conclusions. on the other hand, some austrian economists first find the conclusion that fits their politics and then work backwards to get their argument (ignoring all possibilities where their argument may fail, if they notice them at all).
if i wanted to continue the comparison, i guess i could note that some austrians also *hate* political ambiguity. for instance, i never said i would support a minimum wage (because i don't), but that didn't stop some from jumping to the conclusion that i do. i don't think a "neoclassical" economist would ever even care about my politics because it isn't relevant for the economics.
of course in reality, some austrian economists never fall into these stereotypes. there are good austrian economists just as there are bad neoclassical economists. thats why i figure "schools of thought" are not nearly that important.
^ labor markets are not perfect. if you have a situation where there is only one major employer in your area (factory towns say), then the employer could potentially nagotiate wages below those that would result from a more comepetitive labor market. this implies that setting a minimum wage above that amount could actually INCREASE employment and in a net welfare improvement. similar logic could be applied in situtations where you have multiple employers but high costs for job search. the fact that its costly to search for a job could give an employer enough market power to nagotiate rates below competitve rates, implying that welfare could be improved through a minimum wage. now, one could argue "oh well, eventually the market will solve those problems. how many factory towns are left?? and look at monster.com!! thats reducing job search!" which I think makes sense. but i doubt those arguments serve much comfort those people that have to suffer the conditions in the mean time. in any case, i think the op's point stands. life is more complicated than micro 101. and minimum wages need not always result in unemployment (in either theory or practice).
similar logic could be applied in situtations where you have multiple employers but high costs for job search. the fact that its costly to search for a job could give an employer enough market power to nagotiate rates below competitve rates, implying that welfare could be improved through a minimum wage.
now, one could argue "oh well, eventually the market will solve those problems. how many factory towns are left?? and look at monster.com!! thats reducing job search!" which I think makes sense. but i doubt those arguments serve much comfort those people that have to suffer the conditions in the mean time.
in any case, i think the op's point stands. life is more complicated than micro 101. and minimum wages need not always result in unemployment (in either theory or practice).
But this is a fantasy. How are politicians and burocrats supposed to know this rate of minimum wage that will hold all this assumptions you make? First, they could not do it even in a small town. Second, each part would require a different rate. Third, politicians have no incentive on doing it right, since having a small enough number of unemployed people allows them to gain votes by offering welfare and justify more power to them.
So what you are proposing is basically not in the realm of reality.
but, i believe this perfectly represents the difference between neoclassical and some austrian economists. the neoclassical economist takes an assessment of both the long-term and short-term of a situation and identifies those factors that may influence market outcomes in both cases before making any conclusions.
Is this a extremely good joke? Because the capital structure theory and the whole austrian bussiness cycle theory is based on long-term vs short term.
on the other hand, some austrian economists first find the conclusion that fits their politics and then work backwards to get their argument (ignoring all possibilities where their argument may fail, if they notice them at all).
This is exactly my opinion of non-austrian economist. They always find a way to justify intervention in the market, regardless of evidence. I guess it goes both ways.
In reality both positions are just prejudices, since ideology always influences decisions (and I always laugh when someone says they dont have ideology). For what I have read of your posts here you have a superiority sense derived that you use what is called "mainstream economics".
Student:How much competition? If search costs and barriers to entry are high enough, then I think it is possible for a firm to operate like a monopsony wrt labor. Are you suggesting that workers have always operated in a competitive global market for labor such that employers never have enough "market power" to nagotiate wages below market rates (that if risen by law could actually increase employment)??
How much competition is an issue of data. I am suggesting that use of the labor supply is always rivalrous, even if a snapshot of a certain geographical area only shows one (or a few) employers, and therefore a cartel of employers cannot survive. Further, I am suggesting that your description of events is only valid with a phantom target of perfect competition to compare current wage rates against. Since there is never perfect competition, nor is there a non-entrepreneurial way to discover a higher wage rate that doesn't reduce employment, nor is there an aggregate way to make interpersonal utility comparisons such that you can say that any other prevailing wage rate is superior, the answer would be no; law cannot set wage rates with the expectation of increasing employment.
Student: cporter:Are you recommending that, despite the consequences economics reveals to us, we should be in favor of propping up these dying markets because it's uncomfortable for those involved? No I am not.
cporter:Are you recommending that, despite the consequences economics reveals to us, we should be in favor of propping up these dying markets because it's uncomfortable for those involved?
Then I don't understand why it was brought up. It seems irrelevant....unless you're using economics to inform a policy recommendation. But you wouldn't be caught doing that, would you?
How much competition is an issue of data. I am suggesting that use of the labor supply is always rivalrous, even if a snapshot of a certain geographical area only shows one (or a few) employers, and therefore a cartel of employers cannot survive.
I agree it is an issue of data. And it certainly seems possible to me to imagine a situation where competition from other employers was sufficiently low to enable a very large local employer to nagotiate wage rates below what would exist in a competitive market (for example, if the costs of searching for a new job are very high, if labor mobility was very low, if barriers to entry are very high, etc).
So we cannot simply assume that competition will always bid up wages without looking for more information.
Further, I am suggesting that your description of events is only valid with a phantom target of perfect competition to compare current wage rates against. Since there is never perfect competition, nor is there a non-entrepreneurial way to discover a higher wage rate that doesn't reduce employment, nor is there an aggregate way to make interpersonal utility comparisons such that you can say that any other prevailing wage rate is superior, the answer would be no; law cannot set wage rates with the expectation of increasing employment.
That is a very different question.
It seems very possible to me that law makers in the hypothetical scenario I outlined could, by pure chance, pick a minimum wage that increased employment. Is it *likely* that they will? No (at least partly for some of the reasons you describe). And thats one reason I typically don't buy arguments for increasing the minimum wage based on this argument (such as those offered by Paul Krugman a few years ago). But my personal feelings on this matter should be irrelevant (though its clear that they aren't for this discussion).
Its called being fair to your intellectual opponents. Even if I don't support minimum wage laws, I can certainly see why other smart, honest people would. And since I was only discussing minimum wage laws in the abstract (and not my views specifically), I felt that noting their complaints along the way was worthwhile.
Someone earlier said that I have a "superiority complex". I don't know if that's true, but I do know that I can admit that good and intelligent people can come to different conclusions than I have on this and other issues--not because they are ignorant, but because they are either making different assumptions or have different value judgements. Honestly, I think that might make the most humble man in this thread (though I guess a truly humble person probably wouldn't brag about their humility. ).
First, I was merely refuting the passage I quoted. You made a case for minimum wage laws that took a snapshot of market processes and only considered short-run effects. The fact that neoclassical method is static (partial and general equilibria analysis) has nothing to do with my alleged "political ideology." But it is true that the Austrian economist does not try to manage the economy or engineer society; he merely studies the way they operate. Any argument that supports price floors in the labor market is inherently political.
I didn't respond to your other comments because, well, I did not read them. Again, I was merely refuting your initial position.
There are only two kinds of economics: good economics and bad economics. Supporting minimum wage laws = bad economics.
for instance, i never said i would support a minimum wage (because i don't)
So then we agree. Okay, good.
^ if you believe you were refuting the position, then you did not understand it.
as i noted, you did not acknowledge the role that barriers to entry and search costs could play in the market process. Specifically that if barriers to entry are great enough they could prevent the introduction of new employers to the area or search costs are so high as to retard labor mobility. If this is the case, then it is *possible* for a minimum wage law in that area to increase employment and create an efficiency improvement (you can argue all you want about how unlikely you think it would be for the government to pick the right wage, but the possibility exists).
but even if you insisted that minimum wage laws typically reduced efficiency and employment, that still doesn't imply "minimum wage laws = bad economics". minimum wage laws are not economics at all, they are policy. and who ever said that the aim of all policy was to maximize efficiency? any mainstream micro textbook worth its salt will stress that efficiency is but one concern in policy adoption. i think you are having a hard time separating *politics* from *economics* and that is a bad sign.
anyways it is obvious we don't need to continue this conversation further. you already have the answers (governments always fail to allocate resources efficiently, markets always succeed) and you are so confident in them you deliberately ignored the majority of my post ("well, I did not read them" and *I* am the one with a superiority complex). i have no problem talking with people that disagree with me, but why would I want to be the gooseberry in a one-person conversation??? I will let you holler into the libertarian echo chamber. there are many other interesting conversations on this board.
Student: as i noted, you did not acknowledge the role that barriers to entry and search costs could play in the market process. Specifically that if barriers to entry are great enough they could prevent the introduction of new employers to the area or search costs are so high as to retard labor mobility, then it is *possible* for a minimum wage law in that area to increase employment and create an efficiency improvement
Yes, with a powerful enough imagination, one can certainly envisage a combination of highly unlikely circumstances (by highly unlikely, I mean practically impossible) that would make a price floor in the labor market both effective and appropriate. The same way that one could, at least conceivably, imagine playing tennis under water. And I didn’t respond to your barriers-to-entry and search-costs hallucination because, again, I did not read it. I was merely refuting the argument you made in the initial post, namely that imperfect competition may suppress wages below the marginal product of labor. If I read your other comments, then I would have responded by saying that the government cannot pick the “appropriate” wage, or the “appropriate” rental rates for NYC real estate, or the “appropriate” price of gasoline, because it lacks the necessary mechanisms to do so. This is what markets are for.
Student: but even if you insisted that minimum wage laws typically reduced efficiency and employment, that still doesn't imply "minimum wage laws = bad economics". minimum wage laws are not economics at all, they are policy.
That was my point precisely:
Esuric: Any argument that supports price floors in the labor market is inherently political.
Only bad economics could ever justify such a horrific “policy recommendation.”
Student: anyways it is obvious we don't need to continue this conversation further. you already have the answers (governments always fail to allocate resources efficiently, markets always succeed)
How many times are you going to pull the “you’re just too ideological” card? If you want to debate the government’s ability to set market clearing prices then fine, if not, move on.
"Yes.." - Esuric
Excellent! I am glad we can end this conversation on a note of agreement so it was not a total waste of time.
But just a quick note. What you call "hallucinations" most people would call "assumptions". Whether you assume search-costs or barriers-to-entry are high or low will influence the outcomes you expect from the market. Stating these assumptions explicitly is just good *economics*.
This shouldn't be confused with good rhetorical politics, where stressing the conclusions you support and that your constituents favor ("governments should never/always do X") will probably win you more points than slowly describing the assumptions that led you to that conclusion. These could be considered "ideological" arguments and might be why I "pulled that card".
just some thoughts for the future.
Student:i said that you seem to start with your political conclusions and find your economic arguments by working backwards from there.
This is a baseless accusation. You do not know me, and you don't know why I hold the positions that I hold. Either way, stating that government interventionism is inherently self-defeating is not a political position; it is sound economics. The fact that you have a "criteria for government intervention" makes your position political (not mine). Again, I'm wholly uninterested in social engineering.
Student:and that is probably why you had (and apparently continue to have) a hard time believing that I can both dislike minimum wage laws (a political position) and still recognize that there are circumstances when they may increase employment (an economic argument)
I dealt with this:
Esuric:Yes, with a powerful enough imagination, one can certainly envisage a combination of highly unlikely circumstances (by highly unlikely, I mean practically impossible) that would make a price floor in the labor market both effective and appropriate. The same way that one could, at least conceivably, imagine playing tennis under water.
Again, I understand that it is possible to imagine the occurrence of certain impossible events, such as playing tennis underwater.
so you don't want to talk about the economics of the situation, you want to talk about the discussion we had 4 weeks ago? yah thats how i want to spend my lunch hour.
look. i was responding explicitly to a M Green's post, which stated "Ceteris paribus, enforcing a minimum wage above a market wage results in unemployment. Obviously, it is rarely the case that all other things are held constant." The purpose of my post was to expand on / correct his post and note cases where these conclusions may not be true (primarily, in his post he neglects to mention his implicit assumption that we are dealing with a competitive market with low search costs).
below you will find my response to m. green. and i don't see a hint of me advocating for a minimum wage. the only thing i said that i can see that was not strictly about economics was where i noted that even though dynamic market forces may eliminate monoposonies and lower search costs in the long run, it still leaves people in the short term with lower wages than they could have earned if their employer didn't have as much market power. but that is a simple implication of the economic argument. and even though i do honestly feel sorry for those people, i don't see at all how it can be taken as an argument for the minimum wage. i mean, if i said it was a pity market prices are so high that not everyone can enjoy champagne for breakfast, would you accuse me of wanting to set a price ceiling on imported wine?
honestly esuric.
now this is far more than i intended to write. I am happy with where the discussion ended and i am not going to get back into it. if you want to think i actually supported minimum wages but abandoned that position when faced with the power of your logic, then i can only congratulate you on your fine performance. you have helped me see the light and i am grateful.
"^ labor markets are not perfect. if you have a situation where there is only one major employer in your area (factory towns say), then the employer could potentially nagotiate wages below those that would result from a more comepetitive labor market. this implies that setting a minimum wage above that amount could actually INCREASE employment and in a net welfare improvement. similar logic could be applied in situtations where you have multiple employers but high costs for job search. the fact that its costly to search for a job could give an employer enough market power to nagotiate rates below competitve rates, implying that welfare could be improved through a minimum wage. now, one could argue "oh well, eventually the market will solve those problems. how many factory towns are left?? and look at monster.com!! thats reducing job search!" which I think makes sense. but i doubt those arguments serve much comfort those people that have to suffer the conditions in the mean time. in any case, i think the op's point stands. life is more complicated than micro 101. and minimum wages need not always result in unemployment (in either theory or practice)."
"^ labor markets are not perfect.
in any case, i think the op's point stands. life is more complicated than micro 101. and minimum wages need not always result in unemployment (in either theory or practice)."
Awesome posts student. I'm a full blown AnCap and often disagree with you but your argumentation style is commendable and refreshing (you do come off as arrogant sometimes but in the grand scheme of things it's easy to overlook). Keep posting in this forum please.