Businesses in a free market have to compete for labor because labor is needed for every business and is thus the pre-eminently scarce good. Therefore, the business will have to outbid other businesses for their labor. This is the lower limit on wages. In addition, the wage must outweigh the disutility of labor which is present in every human being.
My friend argued this;
"There are not unlimited businesses. They are tied directly to labor and are therefor just as scarce. The labor will have to outbid each other to be employed by the business (continuing to receive a wage/continue to live), undercutting each other. "
Well he’s halfway right, but also businesses will have to outbid eacher in order to attract workers… So there are two competitions going on there…
But if you are implying that he used this as a justification for minimum wage, than that is wrong. When you have min wage (price floor) labor can no longer compete for certain jobs.
Any businesses that would offer jobs where the output (dollar value/hr) is less than the minimum wage are eliminated.
That must be why new employees give business owners signing bonuses, so that the work relationship can be established quickly. Tongue firmly in cheek. If you ever sat at the other end of the table during an interview, you’d know just how time is money for a business. All the rent on the capital has to be paid even if the worker is not found yet.
That’s not only a great point, but it even clarifies the parallel between this argument (which I sometimes waver before) and “predatory pricing.” In both cases, the “big guy” is supposedly willing to eat losses in order to defeat the “little guy,” expecting to recoup those losses in the future. Before reading your post, I didn’t clearly appreciate that the same objection applies to both cases: the future is too uncertain to play that game.
Walter Block has a favorite joke that sums it up well. Three convicts in a cell fall to talking about their convictions. The first says, “I was charging more than my competitors, and they accused me of gouging.” The second says, “I was charging less than my competitors, and they accused me of predatory pricing.” The third says, “I was charging exactly the same as my competitors, and they accused me of price fixing.”
ok, here’s another question I’ve been wondering about. Obviously, businesses will not pay a wage higher than the marginal productiviy of the workers, so if a minimum wage is higher than the marginal productivity of a worker than that worker sill become unemployed. However, how do we know if there are workers out there whose marginal productivity is less than the minimum wage?
To a first-order approximation, you know by checking whether anyone makes less than the proposed wage. (Of course that’s only an approximation, b/c wages at a given moment only approximate the worker’s marginal revenue product.)
But workers aren’t paid their MP, businesses pay them however much they need to in order to take workers away from other industries. This could be no greater than the MP, but if it were equal to the MP, then the business wouldn’t make a profit on that worker.
You’re absolutely right. The profit margin on an individual employee is often unknowable–much as employers would wish otherwise. Wages are still about the best estimate of MP available, though. If there’s a dramatic disparity between wages and MP, it will be bid away shortly after its discovery.
It seems wrong because it is wrong - there most certainly are unlimited businesses. The number of businesses are limited only by the imagination. Ever have an idea for a business opportunity, but lacked the capital and labor to make it anything more than a pipe dream?
If businesses are tied directly to labor, what happens when that business begins utilizing a labor saving process? Does that business become smaller? of course not - the business actually grows, because the labor that was saved can be allocated to other areas.
A business exists regardless if there is labor to operate the business or not. The labor allows the possibility of profit. Without labor, you have non-operating businesses which generate zero profit and zero loss.
Something that most people don’t realize is that a wage is literally the price for labor. Laborers offer their service for sale (or rather rent), and the ones who charge the least are the more likely to be hired. When they are forbidden to charge below a certain rate, all those who don’t have the ability to compete at the higher price will simply go out of business, that is, become unemployed.
The fact is that not every laborer sells the same quality service. Some of it is downright crappy. And there are those who simply do not have the ability to do better - the uneducated, the retarded and otherwise disabled, immigrants who can’t speak the language of the land well, etc. A minimum wage GUARANTEES that most of those people will be unemployed.
But if people are able to rent their labor at a rate befitting the quality of service offered, there is no reason why they won’t be employed, even if they have to accept a lower rate of profit in return (i.e,. a lower wage).
And once full employment is reached, labor becomes scarce, and the price of labor (wages) will rise naturally. Sure, full employment isn’t guaranteed in a non-minimum wage economy, but when there is a minimum wage, unemployment IS guaranteed. And that ensures that labor is perpetually in surplus, which hampers the natural raising of wages that would occur otherwise.
Be careful, businesses can and do pay their workers more than their MP. They would simply be incurring a loss. The law that wages are eqaul to their MP only applies to the hypothetical construct of the evenly rotating economy or long run equilibrium. Since the long run is never attained workers wages will never equal their MP but rather tend towards a perpetually changing MP in accordance with consumer demand.
So wages can be greater than or less than their MP; in fact, they must be, otherwise there would be no incentive for entreneurship and all activity would cease. Remember, if one company is raking in the profits, then another company(s) is incurring a loss, or, at a minimum, a drop in profits. This probably means that part of that loss is a result of paying their workers more than their MP.
Right. Also, we should bear in mind that a business can carry an overpaid worker indefinitely, as long as the company continues to show a net profit. The fact that workers are fired proves that, previous to their firing, they weren’t producing value at least equal to their wages. Some underproducers are never caught–they’re just carried by their more-productive coworkers. The success of Dilbert attests to that.
Not necessarily. The economy isn’t a zero-sum game, so it’s theoretically possible for everyone to profit. Environmentalists convert this to a zero-sum game by arguing that man’s profit is nature’s loss. [:P]
I think I’d have to disagree to a certain extent, atleast with regard to the capitalists.
I’m not saying that exchange involves a zero-sum game, otherwise it wouldn’t occur!
But in a monetary economy I don’t think it’s possible for every producer to simultaneously make a monetary profit. The cash receipts producers take in, by definition, can only come from what they pay out. It makes no sense for all producers to simultaneously receive more than they paid out, where would the extra come from!
Now, technically speaking, almost all producers never make a loss, as their next best oppurtunity besides selling their product is simply using it, and in a specialized economy, direct-use value for products of producers is near 0. Consequently, the oppurtunity cost of selling will almost never be less than its marginal utility, so that sellers will almost never incur a loss, at the time of sale.
But in monetary terms, firms can certainly incur a loss and in fact, it’s nonsensical to say that all could simultaneously make a monetary profit. It’s wrong to use zero-sum game in most aspects of economcs. But when talking about money, for the sake of simplicity, we often assume there’s a set amount, and accordingly, there is a zero-sum game in that regard.