The Problems with a Minimum Wage (Economics 101)

[Lawrence of Arabia]

No problem madmario

[Imran Siddiqui]

Hmm. He did give a version of the social history, although inadequate, which is part of why I take issue

Well, it is Speer. We usually ignore his social ramblings. Though I guess you are correct .

Why do you say, "education and skills" when in fact (as I imagine you are aware) it requires "who you know" and "how did you grow up" much much more?

You still need the education. You can't be a CEO without an MBA, basically, and if you graduate from, say, Harvard, then it helps a lot .

Of course who you know is important, and always has been. Under any system of economics, the people you know are going to help you out... friendship transcends any economic theory.

you are saying that the meriticracy works, when it is a lie. It does require certain education and skills, but these are class skewed.

Not necessarily. There are many people who have climbed up because they were better than other, and not just because of who they knew. My dad for instance was an immigrant who knew basically no one, and now he works at a job where he makes around $100k a year. Because he worked hard and was better than some of the others.

It may be a matter of supply and demand, but I take serious issue with what those attributes of supply are and how they are acquired, which is largely (of course not entirely) on the basis of class and other social factors.

Perhaps, but less than you think. People succeed all the time without knowing many people when they move to a brand new place (such as when they go off to school). Merit is still the primary mover and shaker.

In this regard, min. wage is a morally based attempt to correct this larger problem

But it doesn't at all. All it does is create a pay floor for those individuals who didn't get the proper education in their youth. Doesn't address the 'who-you-know' factor at all, really.

[madmario]

Originally posted by Imran Siddiqui
Of course who you know is important, and always has been. Under any system of economics, the people you know are going to help you out... friendship transcends any economic theory.

I would say classist prejudices, from people or the society, also skew ec. theory.

Not necessarily. There are many people who have climbed up because they were better than other, and not just because of who they knew. My dad for instance was an immigrant who knew basically no one, and now he works at a job where he makes around $100k a year. Because he worked hard and was better than some of the others.

Or, because he was lucky and met your father. Or, because he had access to certain gateway skills.

Or not. The exception proves the rule. Consider why women and minorities are underepresented in upper management. As I said in another post, are they inately less capable? Everyone knows someone who is an exception, and this keeps the myth going.

Perhaps, but less than you think. People succeed all the time without knowing many people when they move to a brand new place (such as when they go off to school).

Well, school is not entirely merit based either (education is my thing), but this is a huge issue. Take the SAT's. The SAT's are les than 40% accurrate at what they are supposed to measure, yet they are a major factor in what college you go to, and how you are recieved, and how much money is available. Studies have pointed out how linked SAT scores are with class and family financial status. But the system as a whole continues to use them.

And when it comes to Grad school? heh. 600 people for 8 positions? Everyone's got merit (ok, not everyone, a lot of people do). And Ivy league schools often don't want to even hear about people who went to non Ivy league schools, forget merit.

We could also talk about public school funding issues. The differences betweem $1,600 per child, $2,100 per child, and $23,000 per child are *each* stark, although these are all averages in the Downstate NY area. $500/child can be the difference between school crayons and the teacher paying out of pocket.

Merit is *a* mover and shaker, but I don't know how anyone decides what is *the* primary one. It is enough to me that the idea of a meritocracy is far too problematic on the large scale, and honestly, I don't think it ever was not like that.

Now, we can talk about personal triumph despite the system, but even so, that points out how the ground is not levelled.

I am not sure you are American, but if you are, you seem to believe the American Education system (I don't think I can even use that phrase) is somehow "fair" and largely merit based. I will just suggest that you do a little more research. There are enough exceptions to keep the myth of merit alive, but it isn't a fair system at all. This goes outside the purview of this post, but I would encourage you to do some more reading. Even Reganites like Diane Ravitch (who I strongly dissagree with) do not support this.

But it doesn't at all. All it does is create a pay floor for those individuals who didn't get the proper education in their youth. Doesn't address the 'who-you-know' factor at all, really.

It suggests that everyone should get a respectable wage regardless of what your job is. Since jobs have less to do with merit than class, or even education -- as evidenced by the biography of our President, who is sadly examplary -- in that regard it attemps a correction.

-mario

[Imran Siddiqui]

I would say classist prejudices, from people or the society, also skew ec. theory.

Classism is something artificially created by Marxist theory, just like nationalism is something artificially created by nation-states.

Or, because he was lucky and met your father. Or, because he had access to certain gateway skills.

Or not. The exception proves the rule. Consider why women and minorities are underepresented in upper management. As I said in another post, are they inately less capable? Everyone knows someone who is an exception, and this keeps the myth going.

Actually I know a lot of exceptions then. If you have the education, chances are you can end up doing great things. Why are women and blacks underrepresented, because until recently, they didn't recieve the same educational benefits as white males. Very unfortunate, but that hurts. With more equitable education, you see more equitable job market. Like it is said, Capitalism doesn't care what color you are.

Well, school is not entirely merit based either (education is my thing), but this is a huge issue. Take the SAT's. The SAT's are les than 40% accurrate at what they are supposed to measure, yet they are a major factor in what college you go to, and how you are recieved, and how much money is available. Studies have pointed out how linked SAT scores are with class and family financial status. But the system as a whole continues to use them.

Because higher 'class' and financial status generally lead to better education. They can send their kids to private schools for one.

The whole crap about the SATs being biased against blacks is just covering up that more blacks (as a proportion) are impovershed and thus recieve a worse education, because they can't afford, say, private schools, and the public school system sucks.

And when it comes to Grad school? heh. 600 people for 8 positions? Everyone's got merit (ok, not everyone, a lot of people do). And Ivy league schools often don't want to even hear about people who went to non Ivy league schools, forget merit.

I doubt that... if you come from Duke and have a 4.0 and aced the Grad tests, I bet they will allow you to enter the grad program.

We could also talk about public school funding issues. The differences betweem $1,600 per child, $2,100 per child, and $23,000 per child are *each* stark, although these are all averages in the Downstate NY area. $500/child can be the difference between school crayons and the teacher paying out of pocket.

Well that comes from the whole thing about paying for public schools through property taxes. The whole public school system is messed up. But there are people that succeed in these bad situations.

Merit is *a* mover and shaker, but I don't know how anyone decides what is *the* primary one. It is enough to me that the idea of a meritocracy is far too problematic on the large scale, and honestly, I don't think it ever was not like that.

I disagree. I think merit is the primary mover and shaker, and you have those exceptions that become the rule or the cronyism. After all, you can't just say you are going to be CEO because your dad is rich. You need that MBA for one. You need to show that you are competant enough to do it.

I am not sure you are American, but if you are, you seem to believe the American Education system (I don't think I can even use that phrase) is somehow "fair" and largely merit based. I will just suggest that you do a little more research. There are enough exceptions to keep the myth of merit alive, but it isn't a fair system at all. This goes outside the purview of this post, but I would encourage you to do some more reading. Even Reganites like Diane Ravitch (who I strongly dissagree with) do not support this.

The education system sucks. What we need is more privatization of the system. Have a somewhat public school voucher system and charter schools and allow them to be quasi-independant. Force them not to charge above the voucher price for each student... and allow competition to do its work.

It suggests that everyone should get a respectable wage regardless of what your job is. Since jobs have less to do with merit than class, or even education -- as evidenced by the biography of our President, who is sadly examplary -- in that regard it attemps a correction.

Education is merit to a large degree. As for the President, another exemption that you are using as a rule.

---

A vast majority of the people in this country are in the middle classes. The who-you-know factor is not as important as the quality of the job they do. Especially when you have people moving from state to state so often, it is hard to 'know' people in the new area you are moving into. What is left? Merit. Yes, some at the top get by on who they know and who their father is, but these make up a very very small portion of society.

[Spiffor]

First : there is always a minimal wage, even when the law and the State don't say it : it's the cost of survival. Everyone will work at least for survival.

Lawrence of Arabia :
There is no need to have a PHD in economics to talk about economy. Basically, what liberal (and marxist) economists are saying has nothing to do with the real world : both theories work in a perfect theoretical frame, not in reality.
Want details ? All the liberal theory works when :
1 There are an immense number of producers
2 Products are homogeneous
3 There is a perfect information, every person is consious of every prices
4 Entering / leaving a market has no costs
5 All production factors are free to move.
6 (the unsaid condition) : everyone is perfectly rational
Only when these conditions are met, the liberal theory becomes consistent. Sadly, they cannot be met in the real world : there are huge vs. small companies, transactions do have a cost, there are more and more variations between products etc.

The economists live in their wonderful theoretical model, think this way, and think they can fix the real world with it. It leads to absurd statements such as "removing the minimal wage will allow to reach the perfect equilibrium and set unemployement to zero (loosely, Imran)". As it was pointed out, there was unemployment before the minimal wage, and poor countries without minimal wage still suffer of terrible unemployment.
Some economists leave their university and deal with the real world. Then, they have to make many arrangements to the model, so that the conlusion they say the most often is "I don't know".

Albert Speer :
I know that Unions are important in the US, but I don't think they control the labour and the working class. When the workers are unorganized, like in short term tertiary jobs (cashier etc.), they are in a weak position. If they try to organize themselves, they suffer from pressures / firings from their employers. For example, in Eurodisney, the 3 only unionists were fired several times, and came back each time because they sued their employer.
Thus, the Unions cannot have as much power as the State, and what they get come from their relative power compared to the boss. I know every American is not at the AFL-CIO, and those who aren't, if they have a uneducated job, are very fragile.

[Lawrence of Arabia]

Let the debate begin.

Lawrence of Arabia :
There is no need to have a PHD in economics to talk about economy.

Well you see, I never actually said that. I just said you needed some backround maybe a year or a semester or a course. I was aiming this at the person who responded with "BS" and used that as his argument to disprove Imran.

I think that the points which you are stating come from the Perfect Competition Theory. In fact, we can never have a perfect competition

"removing the minimal wage will allow to reach the perfect equilibrium and set unemployement to zero (loosely, Imran)"

This would be a bad idea, because then there will be a spike in inflation. I don't think Imran is advocating an increase in inflation just to get nearly 100% employement. (Which isn't possible btw in a free market)

Only when these conditions are met, the liberal theory becomes consistent. Sadly, they cannot be met in the real world

Not quite. Even if some of these conditions are not fulfilled, the "liberal theory" is still quite accurate. Of course as less and less of these conditions are met, there is no longer any perfect competition. Of course, I don't see what this has to do with the minimum wage.

As it was pointed out, there was unemployment before the minimal wage,

As was pointed out, you can never have full employement because people are in between jobs, or work only in certain seasons, etc.

[Spiffor]

I completely support a minimal wage, for social and economic reasons.

Social reasons : it's obvious, minimal wages are the only way to hinder people to work while being under the poverty line. I think that a rich country must reward at least a bit those who work, by offering them dignity through wage. This way, working people can feed their children and live correctly alone, without needing a permanent charity (although a minimal wage still isn't enough to live correctly with several children)

Economic reasons : I tend towards keynesian economics, even if I'm defiant against every "pure" theory. I stupidly think that you won't produce if you don't think you'll sell your product. I stupidly think that you'll sell your products only if the people out there are rich enough to buy them, after having bought what's more necessary. I stupidly think that the poorer are first concerned by their survival (having a home, having some food etc.), and only those who have a correct income can buy the extreme variety of not-vital porducts who make our consumer society. So, I believe it's a necessity to avoid people being impoverished, by the institution of a minimal wage.
I believe the price is only partly affected by the wage, since the other parts of the price are : 1) the costs of what's needed in the production (for example, the cost of steel when you're producing a car). 2) the profit of the company. Huge companies can afford minimal wages, while some small companies cannot. As a vicious commie, I think the State should help these small businesses rather than creating an underclass among the minimal wages.

[Spiffor]

I think that the points which you are stating come from the Perfect Competition Theory. In fact, we can never have a perfect competition

Exactly Lawrence. Thanks for teaching me how it's called in English. This theory is the root of the whole liberal economic theory (neoclassical for that matter). I'm not saying everything they say is bullsit, but sure their certitude in the future is. The most obvious reaon is that people are not completely rational, they obey to whims and to their hearts like they obey to their heads.

With the 0% unemployment idea, I was pointing how silly it was to blindly repeat what he learned at the university (I aimed at Imran because he's the only one I've seen on this Forum doing this, but he sure isn't the only one in the world).

Liberal theory and the minimum wage : to the liberals, every equilibrium comes from the price : there is an "equilibrium price" where demand equals supply, because supply rises with the price and demand diminishes.
Wage is the price of labour. A minimal wage has to do with liberal economics, because it hinders the price mechanism : hen the price has to lower to reach a new equilibrium, the minimal wage doesn't let it so. This is in the purely theoretical model of the liberals. I've yet to see a theory which explains why the wage rises or diminishes.

[Lawrence of Arabia]

I was going to reply in a long tirade about your last two posts, but I decided it was a bit over my head and I was getting confused . I've learned about command economies and such, but I don't think I know enough to argue with you.

Sorry

[Imran Siddiqui]

I believe the price is only partly affected by the wage, since the other parts of the price are : 1) the costs of what's needed in the production (for example, the cost of steel when you're producing a car). 2) the profit of the company. Huge companies can afford minimal wages, while some small companies cannot.

Of course price is only partly affected by wage... labor costs are part of the issue, because there is also the cost of capital.

The most obvious reaon is that people are not completely rational, they obey to whims and to their hearts like they obey to their heads.

I have to disagree totally. Every person is a rational actor, whether we are talking economics or international relations (which also has the rational actor model). People evaluate costs and benefits and pick based on them. People don't pick things that have greater costs than benefits to them. That makes them rational.

Wage is the price of labour. A minimal wage has to do with liberal economics, because it hinders the price mechanism : hen the price has to lower to reach a new equilibrium, the minimal wage doesn't let it so. This is in the purely theoretical model of the liberals.

And the theortical works in real life. The min wage prevents the equalibrium (which is seen as too low) from being reached.

I've yet to see a theory which explains why the wage rises or diminishes.

Supply and Demand doesn't do it for you? If supply of labors increases, then demand, staying constant would lead to a less wage price being paid on average. There is your theory explaining why wage falls (though wages are sticky downwards, so that must be accounted).

--

Oh, and btw, Keynesianism has been mostly discredited by Freedman, von Hayek, and other neo-liberal theorists . Basic Keynes isn't held up anymore, though there are neo-Keynesians that are basically liberals in a new garb.

Liberal economic theory is the best one I've seen. Keynes is discredited, and the neo-Keynesians have moved toward the liberal policies after the works by Freedman showed the error in Keynes' work.

[Al B. Sure!]

sometimes I wish my public high school education included economics...

[Goingonit]

Originally posted by madmario
Having worked in a number of "non-skilled labour" jobs, I find the idea to be totally classist. They require you to know a lot -- a lot! In practice, there's no such thing as non-skilled labour. Flipping burgers requires a lot more than standing there and turning over meat. Being waitstaff requires a lot more than carrying trays. And cleaning toilets requires a lot more than knowledge of a brush and a bowl. And not like a little a lot -- a lot a lot. OSHA and health inspectors and all kinds of stuff. And often people still treat you like dirt, and if that is part of the job, many people are quite incapable of that requirement.

But anybody can learn those skills in a relatively short amount of time (i.e. less than a year) whereas management jobs can require an MBA or something similar. And there are some people whom, given an infinite amount of time and money, you couldn't make into a successful manager.

Now, I will agree that there are certain "gateway" requirements to certain jobs. But I think its ludicrous that a CEO's job is worth literally a thousand times a grunt worker's. That is inane, but it does keep the paradigm in place. These "gateway" requirements have much more to do with class than merit.

But I know people who paid their way into college to become CEOs. How far you go depends much more on luck, intelligence, and skill than on class.

I mean, why the general lack of equality among women and minorities in management? Are they inately more stupid? No, its "good ol' boysmanship," which is how most things work.

There are predjudiced hiring practices, but this is very different than there being a class system.

----

All of my grandparents are children of immigrants. Each and every single one of them had come from a poor Jewish family, and despite university quotas and prejudice, 3 of them (both grandfathers and a grandmother) went to college and all of them found decent jobs.

[Spiffor]

Imran wrote :
Every person is a rational actor

Thank you for showing your faith. You really must have a strong belief to say this so boldly. Ah, maybe you don't know about the works of Gary Becker (it's more sociological) but he applies the rationality to everything in the social life : if you want a girlfriend or a child, it's rational ! What a wonderful world

Of course price is only partly affected by wage... labor costs are part of the issue, because there is also the cost of capital.

You seem to forget that companies earn a profit from their activity... Except in a Perfect Competition system, where profit = 0. But... Did you already talked to a businessman ? Talk him about zero-profit and watch him laugh.

Supply and Demand doesn't do it for you? If supply of labors increases, then demand, staying constant would lead to a less wage price being paid on average. There is your theory explaining why wage falls (though wages are sticky downwards, so that must be accounted).

That's utterly simplistic. Nothing except demographics, which is external, explains why supply raises in this model. There is nothing explaining the relationship between companies, to explain why the changes on one market can deeply affect other markets etc. It sure is as coherent as mathematics, but it's much more abstract and disconnected from the real world.

About Keynes : he made mistakes, but please don't throw V. Hayek in : V. Hayek's ideas are responsible for the Hoover's catastrophe, while Keynes' ideas saved the day.
Friedman is just another Guru saying that people are rational (at least he didn't say they're perfectly rational, and anticipate perfectly what wil happen, contrary to his followers)

[Spiffor]

Goingonit :
What you'll become in the future depends MUCH of the class you're from, even if it is pretty possible to be higher than your birthclass decided.
For instance, if you're from an educated class (parents are teachers, lawyers...), your parents will probably push you dearly to go to college. For an educated person, college is an absolute necessity for the children. At the contrary, if you're from the working class, where your parents got their situation without going higher than highschool, they'll consider the very fact you go to college as a success. Plus, many lower-classes go to public schools because they have no money, and public schools, esp. in the USA, suxor big time.

In my superior school (something very French, dunno how to translate it), an immense majority of students are children of teachers or alike. The very few who don't come from the educated class needed an extreme motivation to come in. Not that it is impossible, just that it is much harder. If it's much harder to follow the studies when you're from a lower-class, people who have only a normal motivation will fail, while upper-classes who have only a normal motivation will probably succeed.

[Tingkai]

Originally posted by Imran Siddiqui

If you say that eliminating minimum wage leads to full employment (or 0% unemployment + natural employment) then how does that work with Hong Kong which has no minimum wage law, but has seen unemployment increase from less than 2 per cent in 1997 to 7 per cent in 2002.

During economic downturns, people get fired, layoffs, etc. But, the important number to look at is the 'less than 2 percent'... this would be the natural rate during regular economic times. You'd expect busts once in a while, and yes that would increase the unemployment rolls from time to time.

Hey Imran: What's the flaw in the following theory? (I'm drawing on theory that I learned 12 years ago and haven't used much since.)

I think what we are seeing in Hong Kong is the following:

Following an outside external change, the demand curve for labour shifted left creating an increase in unemployment. Employers responded by reducing the number of workers and by cutting salaries. Both of these factors led to a decrease in consumption which then leads to deflationary pressure which in turn shifts the demand curve for labour further left. That sets up a new round for of layoffs and wage cuts and the cycle begins again.

Equilibrium is never reached.

This is particularly true in Hong Kong where there is no minimum wage and unions cannot prevent wages from falling (they exist in name only, but have no effective power over wages).

The end result is a downward spiral that never ends on its own.

IIRC, this is the situation that Keynes was discussing in his general theory.

EDIT: and this situation would show that your initial statement that eliminating the minimum wage leads to full employment is not true all of the time.