The Problems with a Minimum Wage (Economics 101)

[Imran Siddiqui]

Imran ever heard of the Natural Rate of Unemployment? (including structural, frictional, and voluntary unemployment)

But of course . However, what it is, no one knows. I mean, during the late 90s we actually went BELOW the Natural Rate of Unemployment, forcing a rethinking of how to calculate it.

[Moral Hazard]

DP

[Moral Hazard]

But of course . However, what it is, no one knows. I mean, during the late 90s we actually went BELOW the Natural Rate of Unemployment, forcing a rethinking of how to calculate it.

In response to your zero percent comment.

I think it's pretty evident that natural unemployment varies over time, the late nineties was in response to a fall in voluntary and frictional unemployment, I think.

[Tingkai]

Originally posted by Imran Siddiqui
Well, we agree that unemployment would fall?

No. That's my question. If the minimum wage is eliminated, why would employers hire more people. What incentive would they have?

If I am running a shop and I need and have four workers, eliminating the minimum wage does not increase my demand for more workers.

[Imran Siddiqui]

In response to your zero percent comment.

Well, I mean, when the unemployment reached the Natural Rate, it was said that there was NO unemployment, and that is usually said, so that is what I was refering to.

[Imran Siddiqui]

No. That's my question. If the minimum wage is eliminated, why would employers hire more people. What incentive would they have?

If I am running a shop and I need and have four workers, eliminating the minimum wage may does not increase my demand for more workers.

Well, it is basic economic theory that minimum wage prevents equilibrium. It sets a wage floor, and at that point there is excess demand. At that price more people want to work than there are jobs for. Ok?

So, when the wage floor is eliminated, people would be able to higher more people at the lower wage. At a lower wage, the quantity supplied would increase. For the simple reason that usually more workers in minimum wage businesses are something that is very highly wanted, but cannot be supplied at the minimum wage price. At the lower price, the extra wanted workers can be hired, and there will be no excess demand.

You don't believe that every min wage business has exactly the workers it needs, do you? I can verify that at the CVS I used to work at, we always *****ed about needing more workers, and always wanted one. Just that senior management decided we couldn't afford any more. If the minimum wage were lowered or eliminated, that CVS would be able to, and would, hire at least a few more people.

[Tingkai]

WRT min. wage preventing equilibrium, that is only true if the min wage is above the equibrium point.

Assuming that it is, and taking your example, if the minimum wage is eliminated, the employer could hire more workers, but what's the incentive? The only benefit is increased production, but if the employer believes there is no demand for this increased production then why would the employer want to increase production? The employer may decide that even if the employers are complaining about being overworked, they're still doing the job that needs done so there is no need to hire more people. If I have 20 people working at MacDonalds and the min. wage drops, what benefit do I gain by reducing my profit windfall to hire more workers? How do these additional workers increase my profit?

Essentially, my not-well-thought-through proposal is that the Marshallian demand-supply curve may not be useful for labour economics. But maybe I have missed some big factor.

[Imran Siddiqui]

WRT min. wage preventing equilibrium, that is only true if the min wage is above the equibrium point.

That's the whole point .

--

You are kind of looking at it the wrong way. Most min wage firms would rather have more workers to increase productivity because everything isn't being done. The place looks like a mess because there are too few workers on the same shift (once again, going back to my experiences at CVS.. and talking to other people in the mall). By increasing productivity (marginal rate of productivity increases until you hit a high point... which is usually not even close to be met by most min wage firms), you increase your profits.

Simply put there is always an incentive to hire more workers . Look at what happens when taxes drop, unemployment goes down. Why? Because now companies can afford more workers that they couldn't before. Whenever the relative price of labor goes down, you will always see hiring of more workers. That is just one of the facts of life.

[Moral Hazard]

The service sector is a *****. But take lunch hour at say Micky D's sure that day the 20 people might be able to handle the workload and no revenue will be lost. But some of the customers might be disastisfied with the waiting time, and decide to go to BK instead on thier next lunch. This extra revenue might not be justifiable at $7/h, but it might make sense at $6/h.

[Asher]

I think the minimum wage should be raised to $50 an hour so everybody benefits. Yeah.

[Tingkai]

Originally posted by Imran Siddiqui
Simply put there is always an incentive to hire more workers . Look at what happens when taxes drop, unemployment goes down. Why? Because now companies can afford more workers that they couldn't before. Whenever the relative price of labor goes down, you will always see hiring of more workers. That is just one of the facts of life.

The incentive to hire workers is based on marginal returns so it is not necessarily true that you always have an incentive to hire workers.

You may be right, but a cut in taxes creates the expectation that spending will increase so hiring new workers makes sense because employers would expect there will be more business.

But cutting the minimum wage creates the expectation that people have less money to spend, so employers would have no incentive to hire because they would assume the consumption will fall.

As well, the increased profit margin caused by lower labour costs could entice some businesses to lower prices in the belief that they will gain a larger share of the market. All businesses then follow suit and we end up at the same place as before. The deflationary effects could increase min. wage workers purchasing power to previous levels, but I'm not sure about this one.

[Imran Siddiqui]

The incentive to hire workers is based on marginal returns so it is not necessarily true that you always have an incentive to hire workers.

In the service sector min wage jobs, there high point of the marginal return cost hasn't been reached, so there is that incentive.

You may be right, but a cut in taxes creates the expectation that spending will increase so hiring new workers makes sense because employers would expect there will be more business.

Not really... the reason that more people are hired because of lower taxes is because they have more money to spend on labor. The fact that people have more money doesn't enter into it, because individuals don't spend more if only the corporate taxes are cut, but yet, still more people are hired.

But cutting the minimum wage creates the expectation that people have less money to spend, so employers would have no incentive to hire because they would assume the consumption will fall.

You might be correct if a vast number lived on min wage. But the numbers are more like 5% of the population who are living on the current min wage in their area. A drop in income of 5% of the population really doesn't factor that much into companies plans. And with a fall in income, the average propensity to consume would increase. Where the avc might be 70% before, it would rise to 80% afterwards (as the income gets that low, the more percentage of it is spend on consumption rather than savings).

As well, the increased profit margin caused by lower labour costs could entice some businesses to lower prices in the belief that they will gain a larger share of the market. All businesses then follow suit and we end up at the same place as before. The deflationary effects could increase min. wage workers purchasing power to previous levels, but I'm not sure about this one.

Usually this doesn't happen, based on empiracle evidence. What occurs when companies have more money to spend, is they increase employment. This is why after every tax cut, unemployment has fallen.

[Urban Ranger]

Originally posted by Imran Siddiqui
You are kind of looking at it the wrong way. Most min wage firms would rather have more workers to increase productivity because everything isn't being done. The place looks like a mess because there are too few workers on the same shift (once again, going back to my experiences at CVS.. and talking to other people in the mall).

That can be also caused by a lack of experienced workers as opposed to just a lack of workers. You may have to pay them twice as much but they can do the work of three inexperienced workers.

Originally posted by Imran Siddiqui
Simply put there is always an incentive to hire more workers .

I don't see how that can be. There is only so much resource available for each worker. When you increase number of workers, you decrease the amount of resources available to each, driving down productivity.

[Imran Siddiqui]

That can be also caused by a lack of experienced workers as opposed to just a lack of workers. You may have to pay them twice as much but they can do the work of three inexperienced workers.

Experience hardly matters at all in min wage income jobs. You can teach someone how to do it in a day.

I don't see how that can be. There is only so much resource available for each worker. When you increase number of workers, you decrease the amount of resources available to each, driving down productivity.

Only if you assume you've reached the peak for marginal rate of productivity (MRP). I believe that you have not in most (if not all) min wage income firms. You are still on the upward slope of the MRP.

[*End Is Forever*]

According to theory, unemployment will increase, but only if the minimum wage is imposed above the equilibrium level. Of course, as we all know, economic theory has it's limitations, and also, it's almost impossible to distinguish the equilibrium level, especially for an economy as a whole.

Now, even according to the theory, if you are to set a minimum wage *below* the equilibrium level, this will deter the cowboys and the exploiters whilst having minimal effect on unemployment.

In the UK, the recent introduction of the minimum wage did not cause unemployment. In fact, unemployment was falling significantly at the time. However, it's difficult to tell whether the lack of a minimum wage would've allowed unemployment to drop even further.