Economics Questions

Re: Minimum Wage: Unemployment or Higher Prices?

Clayton — Mon, 18 Feb 2013 01:52:23 GMT

And Rothbard's classic essay on this topic was just on LRC this week. You folks need to read that essay, comprehend it, then come back.

Also, please watch this, so we're not constantly talking past each other:

(Please visit the site to view this media)

Clayton -

Re: Minimum Wage: Unemployment or Higher Prices?

Clayton — Mon, 18 Feb 2013 01:42:58 GMT

("a squilion doller MW will create unemployment, therefore a 10 cent MW will do so too")

This is not the claim. The claim is that a million dollar/hr. minimum wage will increase unemployment, therefore, raising the minimum wage must at some point between its current level and $1M/hr. increase unemployment! Furthermore, this claim is a priori, so we don't have to "test" it to see if it's true. We already know it's true. Thus, we can use it to draw other conclusions, when appropriate. Finally, while we acknowledge that a vanishingly small increase in MW, such as a few cents, will have no real impact on unemployment, the fact is that MW-increase proponents don't know at what point it does begin to have an impact. Finally, due to the very confounding factors that have already been mentioned, we can't know precisely what this level is, but we can speculate that it is actually fairly small as the gradations between pay grades at the low end of the employment spectrum are as small as a few cents, so substitution effects are probably occurring even for very small changes in the MW.

Clayton -

Re: Minimum Wage: Unemployment or Higher Prices?

Meistro — Mon, 18 Feb 2013 01:33:22 GMT

a 10 cent minimum wage will not increase unemployment it will be totally ineffective and not do anything except create jobs for bureaucrats. the only impact of a minimum wage is to increase unemployment (if the minimum wage is higher than the market price of the job in question), to slightly increase wages for high skilled workers (by reducing their competition from unskilled workers) and to employ bureaucrats who enforce this regulation.

Re: Minimum Wage: Unemployment or Higher Prices?

Consumariat — Mon, 18 Feb 2013 01:33:00 GMT

I think that, while this would have a different sort of affect, that in the end you'd probably have similar results.

Why so?

I'm also sure that you could do a lot of interesting things with expectations here too.

I think you're probably right. So many variables, so many possibilities; it is for this reason I think computer simulation might provide a lot more insight when probing into the subtler issues of an economic model. Keeping so many variables in mind at once makes the purely deductive method intractible without the aid of modern technological tools.

Re: Minimum Wage: Unemployment or Higher Prices?

Consumariat — Mon, 18 Feb 2013 00:48:44 GMT

double post.

Re: Minimum Wage: Unemployment or Higher Prices?

Consumariat — Mon, 18 Feb 2013 00:46:14 GMT

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.

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.

Re: Minimum Wage: Unemployment or Higher Prices?

Consumariat — Mon, 18 Feb 2013 00:28:35 GMT

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.

So what? What does this have to do with the question that was originally being addressed: does increasing MW reduce employment or not?

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?

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.

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.

Re: Minimum Wage: Unemployment or Higher Prices?

Neodoxy — Mon, 18 Feb 2013 00:27:34 GMT

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?

@Consumariat

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.

Re: Minimum Wage: Unemployment or Higher Prices?

Clayton — Sun, 17 Feb 2013 23:54:31 GMT

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.

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 -

Re: Minimum Wage: Unemployment or Higher Prices?

Clayton — Sun, 17 Feb 2013 23:49:18 GMT

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).

Clayton -

Re: Minimum Wage: Unemployment or Higher Prices?

Consumariat — Sun, 17 Feb 2013 23:10:53 GMT

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.

Re: Minimum Wage: Unemployment or Higher Prices?

Neodoxy — Sun, 17 Feb 2013 22:54:32 GMT

@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.

Re: Minimum Wage: Unemployment or Higher Prices?

Consumariat — Sun, 17 Feb 2013 22:41:53 GMT

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.

Re: Minimum Wage: Unemployment or Higher Prices?

Clayton — Sun, 17 Feb 2013 21:33:16 GMT

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.

Clayton -

Re: Minimum Wage: Unemployment or Higher Prices?

EmbraceLiberty — Sun, 17 Feb 2013 20:18:09 GMT

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.