The Problems with a Minimum Wage (Economics 101)

[Zkribbler]

Originally posted by Promethus
Answer this question. Why did the "Capitialist" Henry Ford start paying his workers building the Model-T $5 per day?

Because he wanted the best workers available.

Unfortunately, most business managers are as smart as ol' Henry. Remember the epidemic of "corporate anorexia" in the late '80's? There was a trend to get rid of older, experienced workers and replace them with inexperience, entry level people. The thought was that the lower salaries would mean hirer taxes. The reality was that the quality of the product or service collapsed and customers left in droves.

[Imran Siddiqui]

I would think being one month away from getting a Bachelor of the Arts in Economics would make me informed on the minimum wage .

--

And another guess is so they could be able to afford the cars that they made.

[Sarxis]

...problems caused by rampantly increasing minimum wages.

And where, exactly, are minimum wages running rampant?

[Imran Siddiqui]

In Speer's head?

[Promethus]

Imran

Quote:

I would think being one month away from getting a Bachelor of the Arts in Economics would make me informed on the minimum wage .

You would think? But you have to guess?

However your second guess is correct.

[faded glory]

Spear as a capitalist I totally disagree. Its not all about economic devolopment. So what if thousands are hired a day, what good is it to the economy if there being paid 5 cents an hour?

Point made...

I think M.Wage should be 7.00. Thats the highest. Any higher would spike prices for consumable things like Mcdonalds burgers and register purchases.

[Al B. Sure!]

I NEVER said to destroy the minimum wage. I said that it should be kept at a controlled level. There are dangers in eliminating it and dangers in rising it. As I've said for three years on this site... The gov't always got to be careful when they mess with the minimum wage.


thanks

[Sarxis]

Still, I don't see how minimum wage is out of control or running wild.

It seems a bit low in my opinion. At least when you compare it to guys who make BILLIONS OF DOLLARS A YEAR!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!!!!

[extra exclamations added to completely validate my argument]

[MrFun]

Originally posted by Imran Siddiqui
$350 a week? Divide that by 40 hours and that is $8.75 an hour.

In the US, the minimum wage is ~ $6 an hour.

$6.00 is the minimum allowed set by the federal government??

Then why is the minimum wage legally set at $5.15 per hour in the state of Iowa??

[Jon Miller]

Originally posted by Imran Siddiqui


Ahhh... you don't have to roll your eyes at me .

In the US most wages are paid bi-monthly or weekly.

not most I know

Jon Miller

[Tingkai]

Originally posted by Imran Siddiqui
Of course it does... You have a 5% unemployed number (abouts). You take away the minimum wage and you end up with about 0% unemployed.

I still don't see how you reached your conclusion. I'm not saying you're wrong. I just don't see the link.

Here's what I would expect, although I'm sure I've made a mistake here.

If the minimum wage is eliminated then the employers cut salaries. That temporarily increases the owners profit. Some of this increased profit goes into investment, and some goes into consumption. But at the same time, min. wage earners have lower salaries and therefore decreased consumption. So while the employers see a temporary increase in profits, due to reduced costs, eventually the decreased consumption eats into the profits.

I suppose the money that goes into investment could create new jobs, but these jobs will be temporary because consumption has decreased and the profit windfall to the employers is temporary.

It seems to me that we end up in pretty much the same place as before, wrt employment levels, while wages are lower for min. wage workers.


Or what have I missed?

[Jon Miller]

Originally posted by MrFun




$6.00 is the minimum allowed set by the federal government??

Then why is the minimum wage legally set at $5.15 per hour in the state of Iowa??

I think federally it is arround 5

in oregon it is almost 7

in minnesota it is 5.50, but durring the boom (I am not sure now) many minimum wage jobs were paying 8 and 9 because workers were not available (I should say in minneapolis)

Jon Miller

[Imran Siddiqui]

$6.00 is the minimum allowed set by the federal government??

Then why is the minimum wage legally set at $5.15 per hour in the state of Iowa??

About meaning an average of the states (As far as I know).

If the minimum wage is eliminated then the employers cut salaries. That temporarily increases the owners profit. Some of this increased profit goes into investment, and some goes into consumption. But at the same time, min. wage earners have lower salaries and therefore decreased consumption. So while the employers see a temporary increase in profits, due to reduced costs, eventually the decreased consumption eats into the profits.

I suppose the money that goes into investment could create new jobs, but these jobs will be temporary because consumption has decreased and the profit windfall to the employers is temporary.

It seems to me that we end up in pretty much the same place as before, wrt employment levels, while wages are lower for min. wage workers.


Or what have I missed?

Well, we agree that unemployment would fall? Well, assuming that we do, you'd have less consumption as you said for the minimum wage earners (which isn't as great as you would believe... mostly teenagers and elderly). However, because of their reduced cost, their marginal propensity to consume would rise, to the detriment of savings. The increased investment by industry would make up for the less savings by individuals.

In the short run, what you say is correct. However, in the long run, a newer equilibrium takes shape. There happens to be a lack of surplus labor. Those that change jobs are about 2% (IIRC), but they are usually going from high skilled jobs to another, and not between minimum wage jobs. The lack of surplus labor to the lower end service sector means that, in order to hold onto their workers or entire more (if, say, a new McDonald's opens up), they would have to pay their workers more. As you probably noticed, new stores pay their workers more. Wages have been observed to be sticky downwards, meaning that once they go up, it is hard for them to go back down. This competition among firms that hire the min wage workers would have to raise their wages to keep their workers or entice more when they need them.

This was seen in the 1990s boom, when firms that hired people at min wage, ended up paying their workers a whole lot more, because of the very, very low unemployment numbers. There was lack of supply in the labor market, pushing wages up higher. The best time to work in a low tech service sector job was in the late 90s, when no one would offer min wage, but more like $1-$2 above it. And, even in recessionary periods, the wages stuck. My local CVS (where I worked) still pays the wage it payed in the late 90s (which was above the min wage) because it can't reduce it (sticky downward wages).

[Imran Siddiqui]

in minnesota it is 5.50, but durring the boom (I am not sure now) many minimum wage jobs were paying 8 and 9 because workers were not available (I should say in minneapolis)

Ah... this is what I was talking about in my diatribe above... thanks Jon .

[Moral Hazard]

The Federal minimum wage is 5.15 still. The economic theory is pretty solid regarding minimum wage, meaning an increase in minimum wage will mean a decrease in employment ceteris paribus. The only study I've seen which contradicts this was done by Card/Krueger but they only sampled employment at fast food restuarants( I don't think marginal analysis really works here); which isn't an accurate sample of the employment market. Given that Mickey D's etc. always over schedule their shifts because 1 to 2 people call off every night, therefore an increase in minimum wage would correspond with a decrease in callouts.

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