Hi everyone, my first post here and before I explain my probably easy question I just want to offer preemptive thanks for any help. I'm your average young adult libertarian with a recently developed interest in economics and I've been trying to learn as much as I can lately (Probably too much even! This science is soo expansive I can hardly even integrate and remember it all!). Now, I'm currently in an email debate about the minimum wage with a particularly intelligent liberal friend of mine, and while acknowledging that minimum wages will usually increase unemployment in the lesser skilled, he maintains it isn't proper to assert such in any blanket statement kind of way. Namely, he mentions a situation in which a minimum wage will actually increase demand for labor to such an extent it offsets any decrease in hiring. He says there are certain factors which can lead to the "natural" wage (his quotations, I'm guessing this is the wage at the natural rate of unemployment?) being unable to reach equilibrium. This in turn leads to aggregate demand being unable to reach equilibrium, which in turn messes with the whole employment-demand-inflation balance. He says a raise in minimum wage can increase aggregate demand because the marginal propensity to spend is higher for lower income workers.
Now, I understand what all this means (except how inflation really ties in) and his argument seems to make sense on the surface... but it also seems (thinking with my gut unfortunately because I couldn't find anything with the site search, which is why I'm here) like he's missing parts of the bigger picture which, like I said above, I haven't really been able to fully integrate yet. Could a minimum wage really increase overall employment in a situation like this? Would it increase employment in some areas while decreasing it in others so that as an aggregate there is hardly any affect? Or, would it increase employment in some select few areas while still overall decreasing employment? If there is an employment increase, how long term could it be?
He says he got this from an empirical study that analyzed minimum wage increases in certain cities, but doesn't remember where he read it. Sorry, I know that makes it more difficult to address the study's methodology. Any help in understanding the theoretical aspects would be greatly appreciated.
Also, I'm aware this is some kind of Keynesianism despite being an argument I've never heard before. Is there a particular kind of Keynesiansim this would be attributed to (new, neo, post)?
EDIT: Sorry if I put this in the wrong forum.
Also, the focus on aggregate demand seems pretty flawed on its own. Is it important that those workers who now get paid more aren't going to spend all their money with their own employer? Or does that not matter much so long as they spend it somewhere?
PS, as a side note, according to Austrians aren't all prices imputed?
Find out how he defines equilibrium. For me equilibrium means balanced without outside influence. Perhaps he is using the word differently in which case some of my arguments against it won't hold.
As far as an excess supply of labor, the market will adjust excess supply to be in line with demand. Labor is a type of good but not a specific good. Software engineering is a good that is of type labor. Fork lift driving is a good that is of type labor. If there are too many software engineers in the market their cost will decrease until the market corrects and stops adding as many software engineers. It does this through retraining, career changes, etc.
If I am an unskilled laborer and I can only make $2 / hour because there are so many unskilled laborers I will be encouraged to learn a new skill, any skill, so that I can get a job that pays better. This may be as simple as learning to type, or getting a commercial driver's license or as complex as going back to school full time to get some kind of certification.
It sounds like your friend is suggesting that the market will not correct on it's own and the government needs to step in and force a correction. What this usually (i.e.: almost every time) means is the government will create unnecssary demand or unnecssary supply that reduces the overal quality/quantity/etc. of output of the system/society/market. In the process of screwing things up they will cost tax payers money to enforce their "fix" which further hurts the overal market, but that's another topic (taxation).
JackW: Also, the focus on aggregate demand seems pretty flawed on its own. Is it important that those workers who now get paid more aren't going to spend all their money with their own employer? Or does that not matter much so long as they spend it somewhere?
It doesn't matter where they spend their money, we aren't working with a closed system. They provided some good/service/labor to the market and the market gives them a return on that investment. Whether that return is food, clothing, shelter, widgets, prostitution or the same good that they produced doesn't matter.
Tell your friend to go to his employer and say that he is setting a minimum wage for himself at, say, $100/h because this will increase the demand for his services in some situations. Tell him to get back to you after he has done that and note the number of revolutions his employer makes on the floor laughing himself to death.
Thanks Micah I'll look into some of that and post back here in a day or two.
Also, whats with all the posts telling me to ask him about outrageously high MWs? I know they're trying to make a logical point about pricing workers out of the market, but it doesn't really fit the example. I ignored them at first, chalking it up to this being an internet forum after all and maybe some would misunderstand or not even read the whole first post, but it's been repeated quite a few times. Am I missing something?
I think the idea is that if you are willing to set the minimum wage at $5/hour, why not $5.01? Why not $6? Why not $10? Why not $100? The point being that it's an arbitrary line in the sand with no logical reason behind it. I'm sure your friend will only counter argue that the minimum wage is calculated through fancy equations and whatnot but austrians don't believe humans are capable of calculating the market better than the market calculates itself.
Am I missing something?
Yes. The point is that you can't find a real exception to constitute the supposed aggregrate. You can't have a "glass of water" without water molecules. Well, except in the magic of macroeconomics.
JackW: I know they're trying to make a logical point about pricing workers out of the market, but it doesn't really fit the example.
What "example"? As I hinted with my Law for Minimum Underwear Price, if one accepts labor as just another resource (commodity, service) amenable to market supply/demand forces, what is the premise under which a coerced price floor for anything (i.e. prohibition under threat of force of all transactions below a certain price level) may be more "optimal" (beneficial, and to whom?) than no coercion at all? If someone is suggesting magical benefits from prohibiting underwear transactions under price floor $X but claims non-existence of such benefits for X=0 and X=100, what would be the formula for calculating such "optimal" price floor for underwear residing between $0 and $100? What is the objective (optimality) function f(X) that supposedly peaks somewhere between 0 and 100?
Well, I just sent him this. Will let you know what he says. "1. Which it will. If a company is required by law to pay employees more than those employees would work for without that law then the companys budget wont allow it to hire as many employees as it otherwise could. It doesnt even matter if the company does hire more workers, they cant have hired as many as they otherwise wouldve. Those workers excluded from company A cant work at company B either, as we've already established their skills are worth $5 and company B, C, D etc all have to pay $10 just like A. 2. By definition a system with a minimum wage is not in equilibrium so I'm not sure what you're getting at. Are you just saying there is an excess of labor or wages are sticky? What are these "many factors" you're talking about since this is really the heart of the matter. 3. No it doesnt, it assumes an unhampered market eliminates incompetent employers. " And thanks for clarifying your points Caley and Z. Puts into words something I was trying to embody myself.
Wages are a price. We use a different word for it but the burden is on those who would propose that wages follow different economic laws than other prices to explain what the difference is between a wage price and any other price. Another poster mentioned underwear price supports leading to an increase in aggregate demand for underwear... if this is how wage prices work, why isn't this how other prices work??
Clayton -
to explain what the difference is between a wage price and any other price
IANAL (I am not a leftie), but I guess the main (perceived) difference is that (on the surface of things) wages are in positive correlation with livelihood for more people than do other prices, so minimum limit on them is easier to bring into a "social justice" discussion. By the same token, a maximum limit on other prices is also easier to sell to the masses. That's how wages are special, though I do not see how this distinction from other prices could explain anything for the issue mentioned in OP.
I'd say the biggest problem with your friends argument is the focus on aggerate demand.
But in this case, I'd say its best to argue with him on his turf: If the minimum wage tends to increase unemployment, then how can it increase aggerate demand? Since any increase in (some) worker's wages would be offset(and probably more so) by there being fewer people working. Somebody with no income cant 'demand' anything in the Keynesian sense.
He's exploiting fuzzy language here.
So wages rise and prices rise at the same time, what's the net effect? It will depend on market asymmetries. But it basically means that minimum-wage produced goods become more expensive for >> everyone <<. This may be offset by the higher minimum wage, but everyone not effected by the min wage will have to decrease their consumption of these goods. So I'd say the net effect is negative. What a surprise - you raise the price of an input and now you can't consume as much of it.
Also, ask your friend why (from a technical standpoint) we can't multiply every wage and every price by a factor of 100. Wages and prices would still be proportionately the same... so no net effects right?
As others have said,
is the perfect place to start. You and your friend should both read that before you continue the discussion further. Also, I highly (highly) recommend this lecture. It is quite possibly the best introduction to economics I've ever seen. (You can download it here.)
What he is saying in simple English is that sure, many workers will be left to starve in the streets because of minimum wage, but don't you worry.
That's not what he's saying at all. I think he's assuming the old "consumption spending drives the economy" nonsense, and saying that if the workers are paid more, they'll spend money which otherwise wouldn't be spent (minimum-wage workers are more profligate than rich companies), therefore there's more "turnover" in the economy, and this will make the employers will be more profitable, and therefore able to pay the higher wages without disemploying people, so it won't cause unemployment.
Which is a roundabout way of saying that if you take a $10 bill out of your wallet with your right hand, pass it to your left hand, and put it back in your wallet, you'll be richer than when you started. Or the "Ford paid his workers enough that they could afford to buy his cars" thing.