how would competitive forces in the market set a new wage floor?
Just as prices are set for anything else, the price of labor would be set by supply and demand.
Could there be a situation where firms cooperate with each other to fix wages below a competitive equilibrium?
Is there any reason to assume that leaving firms to decide what their respective minimum wages would lead to a “race to the bottom”?
Firms have a very poor history of cooperating with each other. Whenever they try to form a cartel of any sort [not backed by laws to protect it], the desire to make a buck leads to competition pretty fast.
Now, even in the unlikely event that an entire industry manages to stick together and force wages below what people are willing to work for, something very simple will happen. That whole industry will collapse, as people look for jobs elsewhere. So you would need the entire country to collaborate on this. It’s just not gonna happen. The smart company will think “The few bucks I save paying my workers less are offset by the fact that I have so few workers. I could be swimming in money if I had more workers. [After all, the equlibrium wage is one that will maximize profits for the company] Why am I doing this?”
As for the race to the bottom, firms NEED workers. Somebody has to actually do the work, right? So why would they not pay whatever it takes to get the workers and make the maximum profit? Historically, this has always been the case.
cheers Dave
Sure, but it’s a self defeating strategy.
There would be downward and upward pressure on wages as there are downward and upward pressures on all prices. You seem to be looking at wages as if they are just a cost with no product, and that’s a mistake. Sure corporations would like to pay the lowest wages possible, but they have to deal with the fact that their workers are doing something productive. Productively employed workers don’t take from a company’s revenue stream, they add to it. Underpaying your workers relative to their productive addition to your company’s output opens up an opportunity for someone else to employ them at a higher rate. And that person will be paying workers at marginally higher rate but also he will have increased his productive output such that he’ll be bringing in more revenue. And that’s assuming both entrepreneurs want the same return. One might be willing to take a lower maginal return, in which case he can employ those workers at a higher rate even if it’s a wash revenuewise.
That’s a good point xahrx conerning what employers are obtaining in exchange for their wage.
Thanks for adding to the discussion.
Oh really? So how do you explain the fact that millions of people who don’t know each other actually do somehow cooperate together to make any single product?
Maybe you just phrased this response very badly.
I could argue the opposite. The desire to make a buck would lead to the formation of a cartel. Why else would they seek a cartel in the first place if they didn’t think it would increase their profits? And if that’s the case, what’s wrong with a cartel? Don’t high profits indicate better consumer satisfaction?
I just think your responses are rather unsatisfactory. They reveal more unanswered questions the answers.
You could indeed. I was speaking from historical experience, though.
I based my reply on this [from 24 minute mark] and the stuff here. Rothbard on the history of cartels
It’s often forgotton by people arguing for minimum wage laws.
Something else to consider about cartels is that workers/consumers aren’t the only ones with an interest in not seeing them form. If two companies selling finished goods to consumers form a cartel and agree to cut production and raise prices, it’s not just consumers who lose out, it’s their suppliers too. If it were manufacturers of pre fabricated wall units, you can bet that while they may enjoy high profits, the producers of gypsum and laminates etc., and whatever else they use to fabricate their products, are either going to want in on the cartel or be very upset with their falling sales as they get shunted through that narrow channel. It would be in their interest to find or form competition to bust the cartel.
The market coordinates different firms in trying to satisfy consumer demands. Cartels are an entirely different animal.
Naturally it depends on the industry but in general 1) Cartels function by increasing profit margins. The point of forming a cartel, obviously, is to increase overall profits but the only way a cartel can do this is by widening the profit margin which leads me to point, 2) the incentive to cartelize vanishes when overal profit is higher if output increases and thus margins become smaller. If a firm knows it can make more money going it alone and undercutting their “associates” by selling below the agreed upon price thus satisfying a wider consumer base they most likely assume said associates are aware of the same fact and, in a nutshell, game theory kicks in.
Because cartellization necessarily implies supply being restricted below the market clearing “equilibrium” there will almost always be the incentive to break ranks and produce in higher volumes with smaller margins in a market with relatively elastic demand. Furthermore, if elasticity of demand is sufficient that the quantity demanded will remain relatively constant regardless of price (ie: insulin) there is a VERY strong incentive for competitors outside the cartel to enter the market should the cartel’s practices force the price upwards.
Cartellization is checked by forces from wtihin and without.
That may be, but their instability in a free market is certainly not due to “poor history of cooperating with each other”. That’s just too broad and taken literally it says the opposite of what is really going on.
Yes well, the point of my criticism was to show that the answer to why cartels are unstable cannot simply be based on their desire to make profit, which was the original claim. Although he probably didn’t mean it in that way.
I don’t see why you think you must make such assumptions about if elasticity is this or that in order to make the case for newcomers out competing the Cartel or old-comers from breaking from the Cartel. If the Cartel does not always satisfy the consumers in the most optimal way, it will eventually be out competed by outside competiton or it will break up.
Who said it’s “due to”?
You surprise me DD5.
You did. That’s what you implied. And I didn’t say that it was the only thing you said.
To make my meaning clear to all, I will give an outline:
Original q: “Could there be a situation where firms cooperate with each other to fix wages below a competitive equilibrium?”
My reply, paragraph 1: Historically it hasn’t happened. Two sentences about that. First one states the fact of history, second one explains why [paraphrasing Rothbard in the links I posted].
My reply, paragraph 2: In the unlikely event it happens, despite the same reason [=desire to make a buck] still existing to make history repeat itself, it will not last for other reasons [=people will seek work elsewhere].
Hope that settles it.
There was no argument and therefore nothing to settle. You clarified your position later. I responded to what you wrote and not what you meant. Not all people are mind readers. If I assume nothing about your previous knowledge and inner thought process, the response as written was in my opinion, unsatisfactory. Many people with a Marxist flavor in their mouth can interpret that sentence much differently.
I thought that you may have meant something else which is why I said that “you may have phrased it badly”.