You don't need advanced economics to understand that setting a price floor will reduce quantity supplied and increase quantity demanded. It's evident from logic. What other good does not respond to changes in price? Everyone earns some amount of marginal revenue, say X, and they are paid Y where X > Y. Is there absolutely no-one where the marginal revenue that they earn their employer is between the old minimum wage and the new, higher minimum wage?
If you throw a rock in a lake, you probably can't reasonably measure the impact it had on the height of the lake. But you're certain that it had an impact. Similarly, you must use logic and reason to deduce that putting a mandated price floor on labor will reduce the amount of labor demanded.
The 5% of economists who suck up to politicians are always able to find data that shows that if you set a floor on the price of labor it somehow doesn't affect demand. The other 95%–the ones who aren't grifters–know that the only effect of minimum wage laws is unemployment for those who would otherwise make less than the price floor. This has devastating effects on teenage and young adult unemployment, and prevents those people from gaining experience, which is highly correlated with income.
Everyone can already set their own price floor under which they will not work. There's zero good reason to make it illegal for people to choose their own minimum. This is third parties making the decision because they feel icky about it. No one who's ever had a low wage would've preferred to not work at all. Ask all the people e.g. who worked for $10/h before California raised the minimum wage to $15/h.
When less experienced workers agree to receive less in compensation it's because they understand that they are not just being compensated financially, they are also gaining experience.
I at least provide reasoning for my position. It's basic economic theory that wages are set by supply and demand. Demand only increases in the aggregate from increase in productivity. Creating a mandatory price floor simply leads to less than all of the supply being consumed (which means higher unemployment). That's what price floors do. What they don't do is raise aggregate demand (meaning they don't increase total wages paid out).
>>This has nothing to do with price floors.
The quintessential labour standard is a minimum wage, which is a price floor. This has everything to do with price floors. In fact all labour standards can be assigned a monetary value and the combined value can be considered a price-including-benefits floor.
>>you're assuming that workers have a choice regarding where to work. That is simply wrong.
I don't understand. Why do you believe they don't have a choice?
>>So wrong that I understood your comment was a joke.
Modern economics seems to be relying on more and more empirical data rather than theory. I think this is unfortunate. If you throw a pebble into the ocean, you cannot measure that this pebble increased the water level but no one would argue otherwise. No empirical data necessary and it would be silly to argue anything else. Similarly, artificially increasing the cost of hiring labor will decrease the quantity demanded.
Put another way, if one were to ask an economist how does the price artificially increasing the price of X affect the quantity demanded of that product, an economist would easily be able to answer without much hesitation or inquiry into the product X. I think a higher burden of proof should be placed on those claiming that artificially increasing the cost of labor doesn't affect quantity demanded. Since there are never any real controlled experiments in economics (states or municipalities all have their own history and other factors at play), you have to rely on theory.
Someone can agree for an increase in the minimum wage, but at least be honest about it being based on a moral trade-off between decreased employment opportunities for those whose labor is not above the current clearing rate and the benefit to others who would keep their jobs and enjoy higher pay.
Economics 101 might start with that, but you need to progress to Economics 201 and so on. "Changes to price will alter the equilibrium point and therefore quantity demanded." is only true if certain assumptions are true, such as "people are rational actors that have sufficiently complete knowledge to act in their own self-interest", and "people always work to maximise meeting their own needs and wants".
In reality, people act against their own self-interest, people don't always act rationally, and people have limited knowledge.
This is why when we look at specific real world examples of price changes, sometimes a change to price does not affect quantity demanded. With minimum wage, a common explanation for this is that minimum wage workers have limited knowledge of the available supply of workers, and don't realise they could bargain for higher wages. In other words, there is a market inefficiency that they are unable to exploit because of limited knowledge; moving the minimum wage higher results in that inefficiency being reduced or removed, despite the workers not having increased knowledge.
We can see this at a very simple level: I have worked with colleagues who are unaware that they are being significantly under-paid for their skills and experience. Technically, the price on offer for their services is set at a higher point than what they are being paid, but due to limited information, they are not selling their services at that point.
Sometimes, even though they have the information, they don't act in their own self-interest and don't change job or bargain for higher pay, for a variety of reasons. Now, if the software firms around collectively increased pay to all those under-paid workers by $10,000, there would be no reduction in employment. There would be a reduction in profits for the software firms, because they were exploiting a market inefficiency that was reduced, but they are still making sufficient profits that they won't change their number of employees in response.
Exactly -- economics is a science. I don't pretend that the world is perfectly modeled by classical macroeconomic laws, but the burden of proof is on the pro-minimum wage camp to disprove the laws of supply and demand in this situation (labor market), rather than the other way around.
If you are not familiar with what classical economic laws would suggest about a minimum price control on labor (minimum wage), it would
1. reduce the demand for labor
2. create deadweight loss (net value changing hands decreases)
The politicization and down-voting of ideas that people (particularly liberals, in this case) disagree with has a chilling effect. As Warren Buffett says, the human mind is best at interpreting all information such that prior conclusions remains intact.
I mean ceteris paribus. There are numerous other factors that can counter-act the negative impact of price floors, so introducing a price floor, especially one that only affects on the order of 4% of the merchandise, as in the case of minimum wage, does not always correspond with a rise in un-used capacity (unemployment), let alone one that is profound.
> Having a floor only limits labor’s ability to find buyers.
It is not a priori true that a minimum wage is not utility maximizing, depending on the regime of the supply/demand curve we're on. This is supercharged when you consider the diminishing marginal returns to wealth.
I can respect that it's difficult to isolate for the variables and testing the effects of minimum wage (ie you would have to isolate the "value" created from the various businesses like the food service companies), but the laws of supply and demand are pretty straightforward. Price floors (e.g. minimum wage) result in surpluses, price ceilings (e.g. rent control) result in shortages.
From an employer's perspective it's easy to see that the more you pay the more interest you'll get from those who can perform work better. The idea that employers would naturally exploit their workers is a bit silly given the ability for those workers to look elsewhere. And they do - which is why real wages have risen substantially over time (capturing some of the value in productivity improvements) to the point that in many cases entry level/effective minimum wages greatly exceed legislated minimum wage. The idea however that government should impose a choice means higher costs on society - in this case borne by the lowest wage earners as they are the ones who are least employable for whatever reason (by definition), means that fewer get hired.
No. Draw a supply and demand curve. Shift the demand curve to the left (representing lower demand). Clearly the lower demand causes lower prices.
>But when other things change, they move the supply and demand curves and the equilibrium price will move.
And that is exactly the problem. Raising the minimum wage does not cause "other things [to] change." It is changing a single variable. With just a rudimentary understanding of economics the result is lower demand for labor (unemployment).
What point is there pretending that the giant debate about minimum wage doesn't exist? These points have been argued to death. It is not like everybody hasn't thought of "with a minimum wage people whose labor is worth <15$/hr won't be employed", and that's a first-order "naive" observation that is only useful when considered alongside all the other arguments that correct it.
If a person working can't afford basic expenses they're slightly better off than not working, locally, but at a policy level neither outcome is acceptable---and part of the solution is to ensure that there is a floor because, surprise, employers will pay powerless people less if they are allowed to do so. It is a tradeoff between "making some jobs uneconomical" versus "putting a floor on people's ability to be exploited", and the obvious next step of logic is to look for, given that that floor is in place, what other parts of the economy will transform around it? Well: some jobs are removed (bad maybe) but other jobs will pay more than they would (good maybe), plus some prices for things will go up (bad) but they go up in a way that allows people to make non-exploitative wages (good), which means that the much richer and greater-agency employers may have to share more profits with labor (good) which means that some business ventures might not be profitable anymore (maybe bad) but then they'll have to innovate to find more profitable ones (good)...
etc.
Pretending like there is one argument and ignoring the rest of the picture is ignorant and a waste of everyone's time.
Thanks for the thoughtful response. The argument for propping up the price of labor is that 1) we don't want working people to starve on the streets, 2) politically we've decided it's not the government's job to keep able-bodied workers off the streets. #1 is clearly right, while #2 should be up for debate.
As for wage floors killing jobs, the effect would depend on the height of the floor. Modest increases in the minimum wage have had practically no effect on employment, but I'm sure massive hikes would cause problems.
It goes without saying that if you remove the price floor for labor, the amount of labor consumed by the market goes up.
But is it good for the laborers themselves? Or for society at large?
Do minimum wage laws or lack thereof correlate with broader measures of wellness and prosperity? How do countries with and without minimum wages compare on life expectancy, infant mortality, obesity rates, cancer rates, median disposable income, median wealth or net worth, suicide rates, divorce rates, accident rates, vacation time or leisure time, levels of pollution? How about harder to quantify stuff such as happiness, contentment, and stress levels?
The market exists to serve human needs and wants. "GDP go up" is not the point of all this effort.
If you raise the price of something–anything–it lowers demand. That's why minimum wage laws create unemployment.
> It may or may not yield less employment depending on elasticity.
If you're earning your employer $10/h and the minimum wage rises to $11, you will not have a job. Either right away if the employer realizes it, or eventually when they go out of business if they don't.
Adding elasticity to the equation unnecessarily complicates this. Some things have elastic demand, others have inelastic demand. Why focus only on the relevant case for the point you're making? The overall effect of a price increase is decreased demand.
> If businesses are flush with profits, then they'll eat the higher labour input and that's it
Profits have nothing to do with it. If a business has employees at some wage and the minimum wage rises above that wage, they will, at least eventually, replace the low-wage employees with new ones (or with automation) that add at least as much value as they are paid (or cost). Profits don't magically make businesses waste money on inexperienced employees where they could otherwise be more efficient with more experienced employees at the same price or with automation.
> Otherwise, prices may rise
Not without an associated drop in demand.
> You can see this more acutely in healthcare, where there are stronger regs, because the power asymmetry is bigger aka the supplier has the power of 'life or death' over the customer.
Assuming you are talking about the US, there is no difference there. The supplier has power because they are able to limit the supply, e.g. the AMA limiting (with govt help) the number of doctors who graduate every year. https://blog.petrieflom.law.harvard.edu/2022/03/15/ama-scope...
Setting the price does not set demand. The only thing that makes min wage bumps sustainable is a strong economy.
Additionally, it’s easy to increase the average by eliminating people on the lower end.
If a min wage increase results in a 50% loss of jobs in that range, it’s still an average wage increase for the workers that survived. There’s just a higher unemployed pool that isn’t counted in the average.
I'm explaining it through logic because statistical correlation is especially complicated and difficult to tease out in social science. You can't take a snapshot of one city, pre and post minimum wage and definitely conclude that the change (or lack of change) in unemployment is due to the minimum wage. Here's a few things to consider:
There are more people being paid under minimum wage than there are being paid minimum wage [0]. The unemployment effect of a price floor could be partially offset by a larger number of people being pushed to below-minimum wage jobs (presumably under-the-table). The minimum wage isn't changed randomly, often hire minimum wages get imposed on higher income cities. There are other factors that happened between pre-min wage increase and post-min wage increase. Expectations of wage increases are often implied in current conditions. For instance, if you do that math that you can open a business and make 10% profit margin with 50% of your expenses coming from min wage labor, you would know that your profit margin is complete wiped out with a 20% increase in labor cost. You know that it is likely that min wage will go up rather soon, you will not bother opening the business. And so on...
In your corn example, sure, we don't know what would happen if a price floor of corn at $10 were mandated (assuming the market price is less than $10). But I think we can be pretty certain that the amount of corn demanded would drop. Similarly, at a price ceiling below the market price, the quantity demanded will rise, although the quantity supplied will drop, causing a shortage. Look at Venezuela where price ceilings exist for many products.
With economic policy, I sometimes wonder if artificial floors tend to cause less strange distortions than artificial ceilings, because there's usually already a floor: zero. We just raise it a bit.
I feel like it's easier to anticipate the side effects of raising a minimum wage than it is for an earnings cap.
Yes. If one were to analyze the effects of a minimum wage, why would one look at the minimum wage itself? The minimum wage is a price floor that can only drive wages up. It would be logical to understand that an hourly wage ( for example, minimum wage + $0.50) is a function of the minimum wage.
I read this comment and think instantly of a creation vs evolution debate. Neither side can disprove the other and things just get more heated as we talk past one another.
There is a fundamental logic to thinking that the floor for wages should be 0. Otherwise one can generate a bunch of facts regarding different values and circumstance and controls.
Neither set of arguments proves the other is wrong, they just reference different basic truths. With minimum wage is there are two competing claims, that interfering in the price of exchange is bad and that thumbing the price in favor of the worker vs business has good results. While both can be true, the moral claim can be completely true while the data based claim is at best true to an unknown point.
Studies like this do nothing to convince me there should be a minimum wage, regardless of the claimed optimum point, because a more transparent mechanism to increase lower income worker pay would be a government redistribution that is proportional to all transactions, not acutely affecting specific transactions. I.e. Tax and spend or print and spend, don't price control.
Just like creation and evolution, you can have it both ways but you need to iron it out consistently.
Wooosh. Yes, I am specifically speaking to the fact that declaring an arbitrary "minimum wage" does not effect the true minimum wage which is $0. By enforcing an arbitrary floor all you're doing is making it illegal for someone to work unless their output is more valuable than the floor. Good intentions, completely illogical.
If you throw a rock in a lake, you probably can't reasonably measure the impact it had on the height of the lake. But you're certain that it had an impact. Similarly, you must use logic and reason to deduce that putting a mandated price floor on labor will reduce the amount of labor demanded.
reply