The Economics Thread

[Bahnz]

Pretty sure in the US at least that the minimum wage has been substantially eroded by inflation over time. It's one of those things that really should be adjusted up every 3 years or so to account for the increase in living costs, but Government's tend to get spooked about the (real or imagined) employment effects of raising the minimum wage.

 

[harsh.ag]

Question about the Minimum Wage: It seems to be a hot topic for the next election in the states. A lot of the discussion seems to be centred around the fact that the minimum wage has failed to track inflation. Is this true? Why wasn't the minimum wage linked to inflation in the first place? Was it meant to be a temporary measure?

Minimum wages in the US have not kept up with inflation. They are not linked to inflation because that would be very difficult to reverse in case the nature of the world markets change.

It's a toughie. On the face of it, raising minimum wages in line with inflation, aside from being "fair", would revive domestic demand, as the bottom quartile receives more income (since poorer households tend to spend more from additional income than richer households). It should also result in a better workforce, with lower attrition rates, which leads to lower training and replacement costs. Productivity has anyways been eclipsing wage growth across the board for a long time now.

However, unskilled/low-skilled workers have been facing pressure from the developing markets' wages for some time now. Raising the minimum wages could lead to more shifting of business in the medium term. There are some good studies out there, however, which show that raising minimum wages have little to no effect on minimum wage employment. These are limited studies though, and one look at Europe can make you understand what people are talking about. Regular jobs in restaurants and the like should not be affected as such.

There is one big change coming which could upend all these factors, and that is of course the imminent arrival of intelligent robots who may soon relieve humans of many unskilled jobs.

One of my favorite policy proposals is a small basic income given to the bottom quartile which supplements their wages. You could even pair the basic income with a reduction of minimum wages, thus incentivising more business to stay in the domestic market.

 

[Ikki]

IMO raising the minimum wage is likely to be disastrous when you consider the whole of the economy but it simply doesn't go the root of the problem. That is, most jobs on minimum wage should not be a living wage - or the kind you can raise a family on. They're the kind of jobs that require no real knowledge or experience and should be the minimum, entry-level, kind of jobs to help you move up. If you don't provide enough value to your employer to pay you a higher wage, changing minimum wage level will just result in this:

More important are the effects of inflation and currency devaluation. Even the CPI calculator from the Bureau of Labour Statistics (USA) shows that savings in Obama's tenure alone (2009-now) have lost 10% of their value. The wages stagnating, the cost of living rising, and you have a bit of a cluster****.

One of my favorite policy proposals is a small basic income given to the bottom quartile which supplements their wages. You could even pair the basic income with a reduction of minimum wages, thus incentivising more business to stay in the domestic market.

Friedman's negative income tax?

 

[harsh.ag]

IMO raising the minimum wage is likely to be disastrous when you consider the whole of the economy but it simply doesn't go the root of the problem.

More important are the effects of inflation and currency devaluation. Even the CPI calculator from the Bureau of Labour Statistics (USA) shows that savings in Obama's tenure alone (2009-now) have lost 10% of their value. The wages stagnating, the cost of living rising, and you have a bit of a cluster****.

Friedman's negative income tax?

How would it be disastrous?

The Obama tenure is the second greatest economic downturn in a hundred years, so let's not use that as an indicator for normal policy.

Similar to the negative income tax, but not the same thing.

 

[Ikki]

Because IMO it undercuts the advantage lower skilled people have in terms of getting into an industry, which is particularly bad for african americans and low-income people. I think it will also distort the value of labour in comparison to what low income earners will then earn, in effect inflating the cost of human capital across the economy.

Don't get me wrong, by using Obama's tenure I am not trying to blame him for the downturn but it's simply the most recent Presidential tenure. It's not like Bush's tenure was better in terms of curbing inflationary effects with regard to the value of the currency. If you keep printing money by the time it reaches the hands of the low income (and middle) class it will simply be worth less. Not being particularly skilled, they'll hurt the most, and 10% for these people will have graver consequences as they're living pay check to pay check just to survive.

It's an ongoing problem, regardless of which party holds the presidency.

 

[harsh.ag]

Because IMO it undercuts the advantage lower skilled people have in terms of getting into an industry, which is particularly bad for african americans and low-income people. I think it will also distort the value of labour in comparison to what low income earners will then earn, in effect inflating the cost of human capital across the economy.

Don't get me wrong, by using Obama's tenure I am not trying to blame him for the downturn but it's simply the most recent Presidential tenure. It's not like Bush's tenure was better in terms of curbing inflationary effects with regard to the value of the currency. If you keep printing money by the time it reaches the hands of the low income (and middle) class it will simply be worth less. Not being particularly skilled, they'll hurt the most, and 10% for these people will have graver consequences as they're living pay check to pay check just to survive.

It's an ongoing problem, regardless of which party holds the presidency.

Inflation has been lower than the traditional 2% target of the Fed for a while now. So how on earth has this made minimum wage workers worse off than any other years?

 

[harsh.ag]

 

[harsh.ag]

Real minimum wages (in 2013 dollars) have been hovering around $7-$10 since 1950.

 

[Ikki]

Inflation has been lower than the traditional 2% target of the Fed for a while now. So how on earth has this made minimum wage workers worse off than any other years?

What does what you've quoted have to do with what you've replied to? The proposed rises for the minimum wage are for $15, right? My point is that apart from the fact that this will be above the market rate, it will also have a knock-on effect in other industries because it is artificially inflating the cost of employing people. This could have big ramifications when you consider international markets and the competitiveness of industries.

AFAIK, the core inflation doesn't measure inflation. Just the price changes of some selected things. That's not the same thing. Tell any low income earner that costs have only risen 1-2% and they'd either laugh at you or punch you in the face.

 

[harsh.ag]

What does what you've quoted have to do with what you've replied to? The proposed rises for the minimum wage are for $15, right? My point is that apart from the fact that this will be above the market rate, it will also have a knock-on effect in other industries because it is artificially inflating the cost of employing people. This could have big ramifications when you consider international markets and the competitiveness of industries.

AFAIK, the core inflation doesn't measure inflation. Just the price changes of some selected things. That's not the same thing. Tell any low income earner that costs have only risen 1-2% and they'd either laugh at you or punch you in the face.

Well I was replying to this bit

"It's not like Bush's tenure was better in terms of curbing inflationary effects with regard to the value of the currency. If you keep printing money by the time it reaches the hands of the low income (and middle) class it will simply be worth less. Not being particularly skilled, they'll hurt the most, and 10% for these people will have graver consequences as they're living pay check to pay check just to survive."

I'm sure the low income earners would laugh or punch me in the face for a great number of things. Doesn't make them right. Core inflation, afaik, is the best known indicator of inflation. Only includes urban prices, so can't be accused of understating things.

I share the concerns regarding loss of competitiveness. But many states with higher minimum wages than the Federal minimum of $7.25 have not been hit hard. So, it should make us both circumspect.

 

[Ikki]

Doesn't core inflation not regard food and energy costs? In any case, I think it's best left alone that in this discussion we're not going to agree with the inflation indicators because of our different schools of thought on economics.

I just thought it's pretty non-controversial to state that once you artificially rise wages, it's going to affect other wages. Especially when you're close to doubling it. I'll repeat my earlier stance; raising the minimum wage will not help and it's just putting a rancid bandaid on a puss-filled wound. The Card-Kruger study that a lot of people on the left crow about itself hedged its bets greatly and it has been misinterpreted to boot. Their methodology has also been questioned by many. There are many other studies that counter it varying from little to large decreases in employment, especially when it comes to the low income group. And it fits into straightforward and acknowledged economics: the demand curve is downward sloping, the more increases will cause more jobs. The rise of the input will make the product more expensive and hence less people than otherwise would be able to enjoy it, enjoy it.

 

[harsh.ag]

Well, let me make a few arguments which may or may not persuade you towards making your stand more flexible.


a) In February 2014, CBO published a new study which claimed GDP overall would be marginally higher after raising the minimum wage, indicating a small net positive increase in growth. Raising the minimum wage to $10.10 and indexing it to inflation would result in a net $2 billion increase in income during the second half of 2016, while raising it to $9.00 and not indexing it would result in a net $1 billion increase in income. This was because of MPC being higher in case of lower income groups. It would reduce the number of persons below the poverty income threshold by 900,000 under the $10.10 option, and by 300,000 under the $9.00 option. This would result in less transfers to these people, thus lowering the deficit and tax burden.


b) Productivity has nearly doubled since the 60s, but the real minimum wage is still similar to those times. If we think markets should pay as per marginal productivity, then we should be careful of arguing against increasing minimum wages.


c) That there will be negative impact on employment is very, very uncertain at best. Numerous studies disagree with each other. When controlling for regional variations, negative effects on unemployment have been seen to disappear. Belman and Wolfson synthesized 200 papers on this issue and concluded that

"Evidence leads us to conclude that moderate increases in the minimum wage are a useful means of raising wages in the lower part of the wage distribution that has little or no effect on employment and hours. This is what one seeks in a policy tool, solid benefits with small costs. That said, current research does not speak to whether the same results would hold for large increases in the minimum wage."

Many successful states already have $9 as the minimum wage. Just claiming demand curve is downward sloping is not going to do the trick here.

 

[Pothas]

This is Ikki, he has never had a flexible stand on anything.

 

[Ikki]

harsh, thanks for your response, can you link me to the study? On the face of it, I think it is going with more assumptions than reality in those predictions and I can probably guess which assumptions they're making.

Productivity can/will increase with efficiency, especially in terms of non-human labour intensive tasks where things like computation may play a big role. If that doesn't translate into the work minimum wage employees do being more valued, then it simply shouldn't. The idea that you should only be paid what your labour is worth is straightforward I feel.

From the literature I've read (and this is not exclusively free market stuff) there seems to be far more to go towards minimum wage being harmful and only recent studies like Card-Krueger being held as some sort of opposition to what has been believed well established ideas on minimum wage. That Card-Krueger study was debated by Neumark-Wascher who showed that in actual fact, in their study, the minimum wage increases in New Jersey created ~4% decrease in employment. I'm wary of any amalgamation of the topic - especially when the methodologies can be abuse to suit a political stance - but if you have the study I'll give it a read when I have time.

Again, I restate: the demand curve is downward sloping, we know that if the prices are higher because the production costs rise (in this case it would be minimum wage) then less is sold because less people will be able to enjoy it. I'd contend that if raising the minimum wage has had little negative or no effect at all, then it could very well be showing that it has been kept artificially low (that is, in such an economy, even those low wage earners are valued higher by the market)* which would be another argument to abolish the minimum wage altogether. Or, that companies are becoming more efficient despite the restraints and being able cope with higher costs and while they have been able to eat the increases, they could very well be providing a good or service at a lower cost in which all people could enjoy and hence help the economy with the extra that they save. There are probably many, many more reasons as well where other factors are helping to lessen the effect of this negative law, but it does not mean it is not in itself a negative law nor does it argue for its adoption.

So before we throw out what is basically a universally held tenet (actually, it's termed "law of demand") amongst economists of all stripes, we'll need far more conclusive proof towards these effects to conclude that the minimum wage law is not negative in this respect. And I don't think that's possible.

*I guess this would be more a short term phenomena
EDIT: Actually found the main article I remember seeing a while ago, it's now hosted on webarchive: 50 years study on the minimum wage http://web.archive.org/web/20110629183749/http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm

 

[Ikki]

This is Ikki, he has never had a flexible stand on anything.

Nah mate, I thought you were OK before, now I think you're a bit of a ****.

 

[Prince EWS]

Again, I restate: the demand curve is downward sloping, we know that if the prices are higher because the production costs rise (in this case it would be minimum wage) then less is sold because less people will be able to enjoy it.

This is obviously true, but harsh's argument is that the increased production costs may be offset by the increase in demand from those with suddenly higher wages. He's hypothesising a shift in the supply curve to the left as you are as a result of higher production costs, but a shift in the demand curve to the right as a result of the higher wages to a degree large enough to find an equilibrium position further to the right.

I think there are all sorts of problems with using this argument to formulate policy, but it's certainly at least theoretically possible that an increase in the minimum wage could directly result in increased consumption.

 

[Dan]

But the demand curve slopes down! You've glitched again PEWS, trying to break natural laws and truths universally acknowledged.

 

[Ikki]

This is obviously true, but harsh's argument is that the increased production costs may be offset by the increase in demand from those with suddenly higher wages. He's hypothesising a shift in the supply curve to the left as you are as a result of higher production costs, but a shift in the demand curve to the right as a result of the higher wages to a degree large enough to find an equilibrium position further to the right.

I think there are all sorts of problems with using this argument to formulate policy, but it's certainly at least theoretically possible that an increase in the minimum wage could directly result in increased consumption.

If the supply curve shifts left, and the demand curve shifts right, enough so to keep quantity produced the same; it will still result in a higher price. Those same people now have to pay a higher price and it gives efficient competitors (like those that may automate) an even greater advantage.

The problem with assuming that the raise of wages in itself will have a negligible, if not positive effect, on the economy is that it basically legitimises raising the minimum wage to $100. Multiplier effect eh?

And if the counter is that we simply do it incrementally without such a big shock to the economy, then are we not basically mimicking the market but actually providing more lag?

 

[Dan]

How about we cut a zero off every single wage across the board? Maybe three zeroes for those right at the top.

 

[harsh.ag]

There are more subtleties than just "shift supply curve to the left, demand curve to the right". Increased minimum wages would lead to lower training and replacement costs, and it's possible (though this is less certain) would increase the quality of work. This is a boost to the supply side. The lowering of people under the poverty line would also lower transfers and deficits.

Productivity can/will increase with efficiency, especially in terms of non-human labour intensive tasks where things like computation may play a big role. If that doesn't translate into the work minimum wage employees do being more valued, then it simply shouldn't. The idea that you should only be paid what your labour is worth is straightforward I feel.

But that's not how the markets work at all. CEOs get paid superstar compensations, not anywhere near worth their labour. The divergence since the 70s between productivity and pay is well cited. You can't be certain the markets are working well with the massive pay gap and huge increase in inequality, even as people are working longer hours.

From the literature I've read (and this is not exclusively free market stuff) there seems to be far more to go towards minimum wage being harmful and only recent studies like Card-Krueger being held as some sort of opposition to what has been believed well established ideas on minimum wage. That Card-Krueger study was debated by Neumark-Wascher who showed that in actual fact, in their study, the minimum wage increases in New Jersey created ~4% decrease in employment. I'm wary of any amalgamation of the topic - especially when the methodologies can be abuse to suit a political stance - but if you have the study I'll give it a read when I have time.

Even if you disagree with the Card-Kreuger study, and other studies like it, there is the fact that by 2007, New Jersey's unemployment rate was 4-5%, which is what is considered the standard full employment rate. What does this say about long term effects? We should be wary of holding certain opinions on this negative effect, especially in the long term.