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January 05, 2007


I will give you the counter argument. Image a city with two dry cleaners, All-American cleaners that employees parttime workers and Peking Cleaners that uses an extended family that are not paid wages.

Payroll expenses for All American cleaners is 30% of expenses. If the cost of labor goes up 40% then payroll expenses as a percentage of total costs goes up. Yet All-American Cleaners cannot raise his prices since Peking Cleaners is not raising their prices.

The owners of All-American Cleaners either lowers his profit and thus standard of living, adopts labor saving technology, or sells out to an immigrant family who also has the business advantage of not having a payroll and the associated payroll taxes.

An increase in minimum wages gives immigrant run small business a huge advantage versus their competitors.

Gasoline's a bad example of inelastic demand because people are basically addicted to it, just like cigarettes.

"An increase in minimum wages gives immigrant run small business a huge advantage versus their competitors."

This is a good point. Immigrant run small businesses employ mostly family members.

Also it also gives incentive to hire illegal workers and pay them under the table. The higher the minimum wage gets, the more attractive hiring illegal immigrants gets.

Peter, I don't like the word "addicted" in the context of gasoline consumption. It implies that there's something morally wrong with buying a lot of something that's cheap.

People ARE biologically addicted to cigarettes, so that's an appropriate use of the word there.

Cafe Hayek isn't predicting massive unemployment overall, just increasing unemployment for the least skilled workers. And they're not predicting massive inflation, just a rise in the price of McNuggets and whatnot.

And it's not a 40% increase everywhere. Illinois is going to $8.25 an hour. We're starting to get state level variation in the minimum wage, as well as some very large increases. In the next few years there will be lots of econometric data to help settle the issue.

i always wonder if an increase in minimum wage really helps anyone at all.

If it really helps so many people have more money, then goods will cost a little bit more since owners know they can charge higher values and you'll basically keep the status quo.

So you are back where you started.

personally, I am for allowing companies to pay what they want. If the amount is too low, then they won't get employees.

If someone has zero skills, then even at min wage there are people who wouldn't think he is worthwhile. so he is basically shut out of offering his services at $3/hr just to gain some experience.

One way that a raised minimum wage could hurt the lowest rung of employees is that it'll increase a shift to business models that require hiring less people. For instance, we could order our Big Macs through a computer rather than a person. We can have computers tell us where to find something in the store rather than salespeople. Raise the minimum wage enough and replacing people with computers where applicable (which certainly wouldn't be everywhere even in a worst-case scenario) becomes more economically sound.

I'm in favor of raising the minimum wage and have been for some time, but I don't think that the workforce is quite as impervious as HS does.

Image what will happen if the U.S. has a very high minimum wage along with single payer health care. Cheating on our taxes and gaming the system to have unreported income will skyrocket.

Gasoline's a bad example of inelastic demand because people are basically addicted to it, just like cigarettes.

Start making sense, you analogy-abusing imbecile. In what world does using gasoline cause a dopamine response? Not ours. Or maybe you were huffing gasoline this morning so this analogy popped into your head. Gasoline is a great example of inelastic demand (and indeed, so are addictive drugs, so your argument would be a failure even if your analogy weren't some sort of missive from the Land of Stupid).

They are constantly predicting massive unemployment

Actually, the Cafe Hayek article suggests 'significant' (not massive) unemployment increases if the minimum wage were increased to $15 (which is more than 40%). So you're kind of caricaturing your opposition here.

An increase in the cost of production (such as a cartel forming in inputs) decreases supply, and leaves the demand curve the same. However, the shift raises the price, which means quantity demanded will fall. The higher the increase in production costs, the more this will happen.

If minimum wage increases, the same thing happens, resulting in fewer manhours of low-wage labor purchased by firms and an increase in the cost of their products.

Elasticity is always much greater in the long haul. If gas priced doubled tomorrow, people would still have to buy gas. But if prices stayed high for five years, people will buy more efficient cars, take jobs closer to home, etc.

If min wage is not tied to the CPI, inflation would be one method of reversing the harmful effects of MW on the poor.

Gasoline is "addictive" because people keep using the same amount no matter how high the price might go. They just spend less on other things. The concept of, y'know, driving less is almost meaningless. People consider it a God-given right to drive as much as they want.

>>Gasoline is "addictive" because people keep using the same amount no matter how high the price might go.

Not true. People don't use much less, but they do use less. For example, Prius sales are highly correlated to the price of gas. That's an example of HOW people use less gas. Other examples are driving less, trading in the SUV, etc.

In the 1970s, sales of diesels soared as the price of gas increased. In the early '80s, 70% of Mercedes sales were diesel. So people do change their behavior.

Conversely, we are using a lot more gas than we used to because it has been so cheap for so long. We're driving a lot more than we used to.

Gasoline is "addictive" because people keep using the same amount no matter how high the price might go.

I don't see why that's "addictive." People are properly valuing transporting themselves from point A to point B.

For example, if the amount of gasoline needed to transport yourself to work increases from $2 to $4, unless you're making an awfully low salary, there's no reason you would use less gas.

people keep using the same amount no matter how high the price might go

The short-term marginal elasticity of demand for gasoline is estimated at about 1/4 as I understand it. If the price of gas goes up by 20%, consumption only goes down by 5%. That's fairly inelastic, but you're still wrong. And if we look at the other costs of driving (insurance, car payment, your own time behind the wheel) you can see that this is because the cost of the gasoline, at $2 or $3 per gallon, is indeed one of the smaller inputs in the equation. If a car consumes 2gal/hr of gasoline, the cost of the gas is still less than the time cost associated with the driving even for a minimum wage worker.

George Will has a current column on raising the minimum wage. Here's part:

Jewish World Review Jan. 4, 2007 / 14 Teves, 5767

Federal minimum wage unneeded

By George Will

http://www.JewishWorldReview.com | A federal minimum wage is an idea whose time came in 1938, when public confidence in markets was at a nadir and the federal government's confidence in itself was at an apogee. This, in spite of the fact that, with the 19 percent unemployment and the economy contracting by 6.2 percent in 1938, the New Deal's frenetic attempts had failed to end, and perhaps had prolonged, the Depression.

Today, raising the federal minimum wage is a bad idea whose time has come, for two reasons, the first of which is that some Democrats have a chronic and evidently incurable disease — New Deal Nostalgia. Witness Nancy Pelosi's "100 hours" agenda, a genuflection to FDR's 100 Days.

Perhaps this nostalgia resonates with the 5 percent of Americans who remember the 1930s.

Second, the President has endorsed raising the hourly minimum from $5.15 to $7.25 by the spring of 2009. The Democratic Congress will favor that, and he may reason that vetoing this minor episode of moral grandstanding would not be worth the predictable uproar — Washington uproar often is inversely proportional to the importance of occasion for it. Besides, there would be something disproportionate about the President vetoing this feel-good bit of legislative fluff after not vetoing the absurdly expensive 2002 farm bill, or the 2005 highway bill larded with 6,371 earmarks, or the anti-constitutional McCain-Feingold speech-rationing bill.

Democrats consider the minimum wage increase a signature issue. So, consider what it says about them: Most of the working poor earn more than the minimum wage, and most of the 0.6 percent (479,000 in 2005) of America's wage workers earning the minimum wage are not poor. Only one in five workers earning the federal minimum live in families with household earnings below the poverty line.

Sixty percent work part-time and their average household income is well over $40,000. (The average and median household incomes are $63,344 and $46,326 respectively.)

Forty percent of American workers are salaried. Of the 75.6 million paid by the hour, 1.9 million earn the federal minimum or less, and of these, more than half are under 25 and more than a quarter are between 16 and 19. Many are students or other part-time workers. Sixty percent of those earning the federal minimum or less work in restaurants and bars and are earning tips — often untaxed, perhaps — in addition to their wages.

Two-thirds of those earning the federal minimum today will, a year from now, have been promoted and be earning 10 percent more. Raising the minimum wage predictably makes work more attractive relative to school for some teenagers, and raises the dropout rate. Two scholars report that in states that allow persons to leave school before 18, a 10 percent increase in the state minimum wage caused teenage school enrollment to drop 2 percent.

The federal minimum wage has not been raised since 1997, so 29 states with 70 percent of the nation's work force have set minimum wages of between $6.15 and $7.93 an hour. Because aging liberals, clinging to the moral clarities of their youth, also have Sixties Nostalgia, they are suspicious of states' rights. But regarding minimum wages, many have become Brandeisians, invoking Justice Louis Brandeis' thought about states being laboratories of democracy.

But wait. Ronald Blackwell, the AFL-CIO's chief economist, tells The New York Times that state minimum wage differences entice companies to shift jobs to lower-wage states. So: states' rights are bad, after all, at least concerning — let's use liberalism's highest encomium — diversity of economic policies.

The problem is that demand for almost everything is elastic: When the price of something goes up, demand for it goes down. Obviously were the minimum wage to jump to, say, $15 an hour, that would cause significant unemployment among persons just reaching for the bottom rung of the ladder of upward mobility. But suppose those scholars are correct who say that when the minimum wage is low and is increased slowly — proposed legislation would take it to $7.25 in three steps — the negative impact on employment is negligible. Still, because there are large differences among states' costs of living, and the nature of their economies, Sen. Jim DeMint, R-S.C., sensibly suggests that each state should be allowed to set a lower minimum.

I agree with Will - the federal minimum wage should be abolished. States have the right to set their own minimum wages if they choose to do so. The question is how one views those at the bottom end of the wage scale - as passive recipients of government largesse or as active participants in their own self-improvement. When I was in high school, I worked at a near-minimum wage job, and it was rotten. Gave me a good incentive to stay in school.

And low-skilled labor is more akin to sprockets than widgets in your example. That's the key idea you're missing. For employers who use low-skilled labor, labor is certainly highly substitutable (because the workers you have are easily replaced); also for most industries that use low-skilled labor, labor costs are the highest-cost input.

As an aside, who knows what's wrong with the following statement?

"Demand falls when the price goes up."

- Demand is not a scalar, so to talk about it rising or falling is kind of dubious to start with
- the demand curve doesn't move when the price changes. Only the market-clearing price (and quantity) moves.

My guesses anyway. Not sure what answer you're looking for.

Half Sigma: "What happens to demand for widgets? There is probably no change in demand at all, because even at $1,400 per widget, Cogco has a $9,600 profit per cog. Cogco's manufacturing costs have only increased by 0.4% as a result of the 40% increase in the cost of widgets.

We can say that widgets have a perfectly inelastic demand curve between $1,000 and $1,400. "

Why do you say that? In what industry is there a perfectly inelastic demand curve? The profits just lowered for Cogco, so even though they still make a profit investors will probably shift their investments to more profitable industries, leaving less funds to buy widgets.

"- the demand curve doesn't move when the price changes. Only the market-clearing price (and quantity) moves."


re: "What does this have to do with the minimum wage? The minimum wage worker is like the widget in the example above. About 3% of workers earn the minimum wage, and that wage is about 25% of the average wage, so minimum wage workers represent less than 1% of the economy's labor inputs."

No the minimum wage worker is not very like the widget in the example above. The minimum wage worker's wages might be less then 1% of the wages for the whole economy, but the issue isn't the whole economy. Minimum wage workers represent a lot more than one percent of the costs in many industries or particular businesses.

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