What price minimum wage?

[Collin Li]

The workers who keep their jobs will win, but that is only a special interest group being protected by the government. Those who do not keep their jobs will lose, because they will go to unemployment.

If there is an extreme demand for work (large supply of workers), like in your example, then a minimum wage will only exacerbate an excess of supply (of workers). This will either cause an increase in unemployment, because employers simply do not value many of the employees as high as the minimum wage, or it will cause an increase in labour competition. This increase in competition will lead to overworking so that employees can justify their work placement to the employer. Overworking simply offsets the benefit provided by the minimum wage in the first place, and it restricts the market from flexibility (in a free market, you could choose to overwork and be paid more, or you could choose to work normally and be paid at market prices - under a minimum wage regime, overworking is the only option).

If you are suggesting that neither of these effects will happen, then you believe that the employer is exploiting the employee in more cases than none, and would happily increase wages (hence why you continue repeating this "safety net"). This is unlikely, because if wages are "undervalued", then there would be an excess demand for workers (since workers would not accept low wages), and a new employer would step in and offer a higher wage in order to capture some of the untapped labour market, while still making a profit (the profit is crucial in determining whether an employee is "undervalued" or not, not the minimum wage).

[costargh]

This is unlikely, because if wages are "undervalued", then there would be an excess demand for workers (since workers would not accept low wages), and a new employer would step in and offer a higher wage in order to capture some of the untapped labour market, while still making a profit (the profit is crucial in determining whether an employee is "undervalued" or not, not the minimum wage).

But see that is where economic theory and practical implementation do not see eye to eye.
In theory that is what should happen but in practise potential employees will be looking at their kids starving and saying, I either do no work or I do some work and get paid crap wages. Economic theory sometimes seems to be so *snap your fingers and it happens* when in practise  human emotions come into play.

[Collin Li]

But then you are suggesting the above case, where market equilibrium has occurred, but instead there is the problem with an excess supply of labour. A minimum wage will not fix that, because there will be either unemployment problems, or overworking issues.

[brendan]

This is unlikely, because if wages are "undervalued", then there would be an excess demand for workers (since workers would not accept low wages), and a new employer would step in and offer a higher wage in order to capture some of the untapped labour market, while still making a profit (the profit is crucial in determining whether an employee is "undervalued" or not, not the minimum wage).

But see that is where economic theory and practical implementation do not see eye to eye.
In theory that is what should happen but in practise potential employees will be looking at their kids starving and saying, I either do no work or I do some work and get paid crap wages. Economic theory sometimes seems to be so *snap your fingers and it happens* when in practise  human emotions come into play.

This is where intentions and reality do not see eye to eye. The fact is that the minimum wage laws are labeled as being for the poor, for the needy, yet have effects exactly the opposite of those which their well-intentioned sponsors intended them to have. The sponsors believe that a law saying that nobody shall get less than say $10 an hour, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify $10/hr will be unemployed.

The minimum wage law says to employers that they must discriminate against people who have low skills. Let's say there is a man who has a skill set which would justify a wage rate of $6, $7 an hour. The law says you can't, you may not employ him. Because if you employ him, you have to pay him $10. Well, what's the result? Why engage in activities where the costs ($10) exceed the benefits ($7)? The firm will simply not employ him. So what now for his starving kids? Their father is now unemployed because it is illegal for him to work for $7/hr. Moreover, these disemployment effects have been concentrated on the least-skilled and most disadvantaged groups that the sponsors would most like to help: see David Neumark and William Wascher (2007)

[Eriny]

What if you're unskilled and you work in a peach factory or something (for the sake of the argument)? Without a minimum wage, you could say that the market mechanism will work things out. Obviously nobody will work for free. However, if you're suited to a job in peach canning, you probably aren't very qualified (this could be your own fault, or it could be due to other unavoidable problems), and you certainly aren't in a very good bargaining position. If you run a household you will need some source of income (assuming that this economy has limited/no welfare scheme). So, your employee essentially has the power to determine your working conditions. You essentially agree to them out of obligation to your family. And still, what you're paid is barely enough to get by, and if an emergency happens you're put in a very precarious condition indeed. There is also a risk that there will be a lack of investment in your children's education, which may end up leading to future generations having to live the same standard of living as well. At least with the minimum wage, there isn't a threat that your wage could go any lower, assuming the company still needs the same amount of workers regardless of what they are being paid, and there is enough to give younger generations of unskilled workers a chance.

Ordinarily, I think that the market mechanism is essentially quite good at allocating prices and resources. I don't agree with supporting price fixing or uncompetitive industries. But I think labour is different to other resources because even though both the employer and the employee technically "need" each other in order to work, oftentimes the employee is in a position where they don't have equal power as the employer. When it comes to consumers and producers, there will usually be an "equality" of sorts (unless the good is technically a necessity such as education or health - which is probably why these things are greatly subsidised by the government), but that's not always true when it comes to labour, especially unskilled labour.

When I think about no social safety nets such as the minimum wage and workers rights, I usually think of England during the Industrial Revolution. The working poor, the unsafe conditions, huge divides between rich and the poor, little opportunities to "lower classes". Some governemnt intervention is good, it smooths business cycle fluctuations (Keynesian policies technically helped to get us out of the depression), it doesn't necessarily bring equality (which is good), but it does at least give everyone a certain amount of opportunity. Obviously if it's excessive, it's bad, for example, I think centralised wage fixing is a horrible idea, but again, there's a balance. Both extremes are flawed, I believe.

[Collin Li]

I suggest you look at brendan's rational analysis above. The so-called "safety net" will just cut people out. People won't be ensured that their wages won't decrease, but they will instead gamble with either the minimum wage, or nothing. I have explained how "bargaining" is not required because for situations where employers are offering less than the "market value" of labour, the system will self-correct:

This is unlikely, because if wages are "undervalued", then there would be an excess demand for workers (since workers would not accept low wages), and a new employer would step in and offer a higher wage in order to capture some of the untapped labour market, while still making a profit (the profit is crucial in determining whether an employee is "undervalued" or not, not the minimum wage).

If workers are accepting low wages, the benefits outweigh their costs (the forgone hours and effort put into their labour is worth the money they require). This is the market price. It might be a "cruel" fact, but unfortunately, government intervention will not do any better, because as explained above, a price floor will cut employment or cause overworking (which would be the only way to justify the higher wages they must now be paid, to the employer).

Cutting employment destroys the concept of a safety net, because unemployment is far from safe, while overworking is an option that is already available in the free-market. Government intervention simply just stops those who do not wish to overwork from becoming employed. If one is earning below the poverty line, as suggested, then they could similarly negotiate to earn higher wages by accepting overtime. Similarly, all safety nets and "fairness" laws add to the cost of employment, and ultimately reduce employment. These costs are passed onto the labourers. Government intervention does not work.

[Eriny]

But when it comes to low skilled industries, there isn't much scope in what these people's skills are worth in value. If everyone has the same level of skills, the person who will be employed is the one willing to work for the least amount of money. And if you are low skilled, you may be very desperate.

[brendan]

But when it comes to low skilled industries, there isn't much scope in what these people's skills are worth in value. If everyone has the same level of skills, the person who will be employed is the one willing to work for the least amount of money. And if you are low skilled, you may be very desperate.

Even assuming this is all true - how does it justify a minimum wage law? If anything it is another argument against it. The minimum wage law says to employers that they must discriminate against people who have low skills. If there is a man who has a skill set which would justify a wage rate of $6, $7 an hour. The law says you can't, you may not employ him for $7/hr. Because if you employ him, you have to pay him $10. Why would any firm engage in an activity where the costs ($10) exceed the benefits ($7)? That is a loss-making proposition. The firm will simply choose not employ him. This man is now unemployed because it is illegal for him to work for $7/hr. Moreover, these disemployment effects have been concentrated on the least-skilled and most disadvantaged groups that the sponsors of a minimum wage law would most like to help: see David Neumark and William Wascher (2007)

[Eriny]

I undertand what you're saying, but how do you value that kind of labour? Even with the minimum wage, most large firms (such as factories and so on) would profit from the workers anyway. I can see definitely that it may cause higher unemployemnt in small businesses where your work is easily valued by the profits you bring in, but can you really calculate the profits brought by a peach canner or a check-out chick?

[Collin Li]

This is off-topic, but it is a necessary economic face-off

Some government intervention is good, it smooths business cycle fluctuations (Keynesian policies technically helped to get us out of the depression).

Depressions corrected by Keynesian policy will increase inflation. There is a new business cycle theory in line with Friedman's ideas on the free market that suggests government interventions spark recessions by creating malinvestment. Recessions are essentially "clean-ups" of the economy. Malinvestment begins the road to a recession, because whenever governments distort prices (particularly subsidies), by causing unwise investment or spending into an unnecessary good. It also fuels the growth of industry that would have been otherwise commercially unsustainable, and eventually an expectation will arise that this cannot continue, and a market shock occurs. In a free market, these occurrences would be minimised. Keynesian policy is not taken very seriously by economic advisers today.

[brendan]

I undertand what you're saying, but how do you value that kind of labour? Even with the minimum wage, most large firms (such as factories and so on) would profit from the workers anyway. I can see definitely that it may cause higher unemployemnt in small businesses where your work is easily valued by the profits you bring in, but can you really calculate the profits brought by a peach canner or a check-out chick?

If I was an employer, and you had skills that was worth say $5/hr to my business, why would I bother hiring you if the government said it was illegal? If the government said that the minimum wage is $10 why would I bother? I simply won't hire you. I'm not going to incur a $10 cost to get a $5 benefit. That's a loss-making proposition. So what good has the minimum wage law done? None. It's made us both worse off.

[brendan]

Some governemnt intervention is good

Well it depends what government intervention you are talking about.

[brendan]

If minimum wages, why not price caps? Poor people don't have much "bargaining power" when it comes to buying milk either.

[Collin Li]

Minimum wages actually destroy "bargaining power," because it destroys the ability for workers to offer the services at a lower price. What is wrong with that?

[Eriny]

Well, yeah, like I said. Too much intervention is bad. Also, unwise intervention (like the Two Airline Policy) is also bad.

I suppose the main thing with the minimum wage is that there is a lower limit on how much a worker will be worth to a company. If you underperform, you'll still be fired, but you won't be undervalued. And also, employees will have to employ somebody to do the work, otherwise they won't be able to produce anything. Given that a factory produces nothing without workers, it's unlikely that they could be overvalued by a safety net. The work they do should at least entitle them to/be worth a decent standard of living, no?

And I don't agree with price caps necessarily. As long as everyone has access to the necessities, I'm happy with that. If competition puts the price of milk up to a million dollars (which I doubt, lol), then poor people will just have to switch to water (and maybe supplement it with additional health care due to a lack of calcium).

This is off-topic, but it is a necessary economic face-off

Some government intervention is good, it smooths business cycle fluctuations (Keynesian policies technically helped to get us out of the depression).

Depressions corrected by Keynesian policy will increase inflation. There is a new business cycle theory in line with Friedman's ideas on the free market that suggests government interventions spark recessions by creating malinvestment. Recessions are essentially "clean-ups" of the economy. Malinvestment begins the road to a recession, because whenever governments distort prices (particularly subsidies), by causing unwise investment or spending into an unnecessary good. It also fuels the growth of industry that would have been otherwise commercially unsustainable, and eventually an expectation will arise that this cannot continue, and a market shock occurs. In a free market, these occurrences would be minimised. Keynesian policy is not taken very seriously by economic advisers today.

You're right, it's not, I just thought it was an appropriate point to make, lol. But I think that the government is an okay regulating force on the economy. I mean, if there is a skills shortage or something there may be some unwanted fluctuations that restrict growth and really put us in a tight spot. So, the government can invest more in education or whatever and that can be effective in promoting growth and even freeing up the market mechanism (e.g. providing more choice of skilled labour). I guess the free market will sort that out by itself eventually (higher wages in skill shortage industries make more people go out and learn the skill - if they are able to), but that's off topic, lol. (I probably didn't choose the best example there)