I understand that the minimum wage law bars entry to those with skills that are of little value to employers, but do minimum wage laws keep wages from falling? Could someone explain to me or point me to a book/article about how wages are determined without state intervention?
If there is a law, there is a law. So wages will not fall unless some clever way is found around the law, say by reducing benefits.
Of course wages can fall by eliminating the job altogether, as happened with elevator operators and gas station attendants. Or by closing down the entire business, as happened with the tuna canning industry in American Samoa when a minimum wage law was passed there.
Without state intervention, wages are determined just like every other price, by the law of supply and demand.
What do you think wages for McDonalds would be should the minimum wage be removed? Since unemployment is so high right now, meaning there’s a large supply of labor, wouldn’t they give like 3$/hour wages? Why do people in sweatshops in China get paid pennies per hour? Not moaning just curious.
Wages are kept high right now at all levels, there is not merely unemployment amongst lower class people but at all levels. I’m betting if more people were willing to take a minimum wage position or a lower wage position that is still allowed by the law in our day that unemployment would drop to at very least average levels.
So I don’t know what wages in lower paying jobs would look like without the minimum wage, they migh not change all that much and over time, if in conjunction with other free market policies real wage rates might well rise.
People in third world countries earn such low pay because first of all prices are often lower there, their labor isn’t worth very much, and there aren’t enough industries hiring at this point to compete the price of labor up to its true equilibrium price. People are also often in disadvantaged situations whic hinder long term readjustments. I should imagine that in certain areas regime uncertainty also decreases the value of their labor.
Minimum wage increases demand for higher skilled labor. This sounds good on the surface but the cost is that it outlaws employment of the very poorest and least-skilled people. An entire sector of the economy has been made illegal and these people become criminals (which costs victims and taxpayers) or go on welfare (again, costs taxpayers) and so on.
In addition, we can easily see that it is a net loss for the same good X that would have been produced through manual labor of low-skilled individuals, but for MW laws, to be now produced with capital equipment by high-skilled individuals. The reason for this is that if it had been more efficient for X to have been produced with capital equipment and high-skilled individuals, someone would probably have tried it at some point and would have been able to undercut the competition and wipe out manual labor-based production of X. This is basically the essence of the Industrial Revolution, right? But MW laws create an artificial sort of elimination of manual labor production specifically where the market has found that (given current technology etc.) manual labor production by low-skilled workers is more cost-effective than any other alternative.
In other words, the minimum wage is either redundant (the market would be producing X with capital equipment and high-skilled labor anyway) or destructive (it would be more cost-effective for X to have been produced with low-skilled, manual labor).
Household servants, drivers, cooks, etc. are commonplace in countries without minimum wage laws. These people are absolutely unskilled labor but they perform tasks that no machine has yet been invented to replace. In the “developed” world, these people who would have worked as servants and gophers are, instead, forced to choose between crime or going on the government dole. These are typically people of low intelligence, with little ambition in life. Far from helping them, MW laws are actually a kind of war on this class of people. MW laws are not humane. They are, in fact, inhumane.
Clayton -
It might be 3 bucks an hour, if people were willing to take so little. They would consider it better than their current situation, meaning, zero an hour.
That is the supply side of things, the supply of labor. Then there is the demand for labor. Meaning a potential employer asks himself, “How much money will I make if I hire him for nothing? What is the maximum I am willing to subtract from that to make sure he agrees to work?”
I found this article very enlightening about how wages are determined and why wages in China are low, especially the section “Fair” Trade :
What reason does an employer have to pay his employees anything but the least that person will work for? Which leads to, why wouldn’t low-end wages fall should minimum wage be repealed. It seems like the supply and demand of labor is such that the supply often far outweighs the demand, except with very skilled workers. If an unskilled worker doesn’t like his contract and leaves, another is there to fill his shoes, especially in todays job market. This is why I’m kind of confused when you say “there aren’t enough industries to compete the prices of labor up to its equilibrium price”. It seems that laborers need jobs much more than employers need employees, so how or why should wages ever rise? That is for any industry in which a specialty is not needed by the employer.
I understand that minimum wage hurts the jobless by disenfranchising those whose skills are worth less in market value than the enacted minimum wage. I feel that I have not articulated myself clearly. How or why, in unskilled labor markets where supply far outweighs demand, would wages be say $7 instead of say $3? Do you think that the cost (to the poor in aggregate) of unemployment outweighs the cost of lower wages? Is five people making ‘living wages’ worse than seven people making ‘dependent’ wages?
The market price is the point of indifference between supply and demand. That is, employees who can earn $20/hr. don’t need employers only willing to pay $19/hr. just as much as employers who can hire someone to work for $20/hr. don’t need employees who demand $21/hr.
To the extent that your intuition is correct, that there is a scarcity of employers and a glut of employees, we have to look at how government policy distorts the market to understand why this is the case. I employ a landscaper to maintain my lawn, does that make me more powerful than him? Do I really need him less than he needs me?
Well, it wouldn’t. Greater supply entails lower price. The more people who have a particular skill (say, digging a ditch), the lower the price that can be charged for the labor performed that requires that skill.
Yes, obviously. MW-$0 is always greater than MW-$X where X is the wage that would have obtained without the minimum wage.
To the two who are forced to make ‘starvation wages’ of $0, yes!
Clayton -
If there weren’t all the regulations, the phrase wouldn’t be “what wages for McDonalds would be”…it would be “what the wage for you would be”…as in, everyone would get the most they could command, and the employer would pay the least he could afford to and not lose business (due to a shitty, inefficient, unfriendly workforce).
I think determining an “average wage” would be incredibly difficult in that situation, as wages would probably vary quite a lot, and there’s really no way to tell just how much. There would be plenty of people who make the minimum wage now who would get paid more, and others who would get paid less. Right now they make the same because the money to compensate the first man for his higher productivity is being forced over to the second man. (And the second man doesn’t get fired possibly because, again with all the regulation, risk of lawsuit, and training costs, it would actually cost more to try to replace him…especially since anyone you hire would have to get at least as much as you’re paying him.)
The employer has to pay his workers as much as he can in order to attract them, and not a penny more. This results in competition between firms in order to attract workers. This will eventually bid wages up to the approximate productive power of their labor assuming that the jobs market is large enough. It seems as though supply of laborers is far greater than the number of jobs but first of all this misses the point in part. In our day in an advanced economy there might be one “unemployment” number, but there is no “labor” market and no aggregate “laborer”. Each laborer represents a different input, which forms a different labor market for different jobs including different skills.
In a case where a laborer doesn’t like his wage and he leaves and there are those who are there to fill his shoes then this shows that the laborer would cost the firm more than the equilibrium price and there are those who will take his job. Labor in the free market becomes just another commodity (a fact adored by marxists) so it is as if a ton of iron was demanding to be paid more than it is worth, this means that the firm will not use the iron.
When I said that there weren’t enough employers to bring wages up to equilibrium price I meant that in underdeveloped places there are often too few firms around to bid up the price of labor to its full price. You are right that if you have an instance with a few firms hiring that aren’t megoliths then labor will not be able to realize its full value. However we do not see this in America today, a large number of the people who are unemployed are higher skilled laborers, therefore not directly placing pressure upon minimum wage earners. There are pleanty of industries that would be willing to take advantage of labor at its real equilibrium price and therefore real wages would temporarily fall, but over time as the total production structure is allowed to expand real wages rise. Employers need employees and vice versa. Let’s even say that they refuse to raise wages, what will happen? The discrepency will come not in terms of raising wages but instead in lowering prices. This means that all around real wages eventually rise becuase wages are stagnant, but prices are lower.
Wages rise because the value of labor increases. In a stable society this inevitably comes from an increase in possible output through a buildup of capital or through more efficient techniques of providing for people, either through technological discovery or entrepreneurial discovery.
A good, although old, pamphlet you should read
http://mises.org/books/whywagesrise.pdf
As far as I’m concerned this is the simplest guide to wages that has ever been written.
A related question (didn’t think it needed a new thread), suppose that all border and immigration controls across the globe were abolished so that people could move freely from one region to another. What would be the implications for low skilled sectors such as shelf stackers or taxi drivers in first world countries? Would the wage of these industries drop so significantly until it levelled out with the wage of a taxi driver in Kenya? Would this not lead to a dramatic decline in living standards for a large proportion of people in first world economies?
No, because Kenyan taxi drivers are in Kenya and do not have the economics means to move. A taxi driver in Podunk, AR doesn’t earn what a taxi driver in NYC earns. There’s no law preventing the Podunk taxi driver from moving to NYC. Yet the world does not end.
Clayton -
It depends on what humans value. A lot more people could currently enter the United States than they could. For most people it’s a tough choice to leave your home country for somewhere else, and I feel its especially difficult when you are poor and you don’t know what exactly you’ll be facing and the readjustment is going to be very intense. So not everyone will choose to leave their home country for America. If they did then there would be a multitude of side effects
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The standard of living for higher skilled people would rise dramatically. The influx of immigrants would mean that real wages would fall and so the cost of many goods would drop dramatically.
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The production structure would become much large in terms of output. Labor is a productive force, you increase the productive force of your economy then this means increased output.
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Oppurtunities for skilled and semi-skilled workers would increase. Skilled and semiskilled laborers would increase along with the production structure. Increased production means more efficiency in producing all goods because now more can get done, labor and capital are both freed up from performing previous tasks and so on. Something that is essential to point out in this instance is that in this case “skilled” suddenly takes on a whole new meaning. Being billingual in a variety of languages becomes a very obvious skill, but because many of the immigrants would have few skills a highschool diploma would begin to qualify as semi-skilled.
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The oppurtunity cost of accumulating skills would go down. The increased demand and real wages for skilled workers would go up so any oppurtunity costs would fall. Especially if people had some savings then with the following price deflation that would correlate with a large immigration then they would be able to get an education. This might not be so true if the price of schooling rose, however I don’t believe it would that much because of the fact that online degrees are becoming increasingly viable and any increased demand could probably be met in fairly short order.
So as we can see most Americans, because of their education or their ability to become educated would be just fine, probably better off than they are now. Those with savings would also gain because of price deflation. There is no avoiding the fact that between 5-15% of the lower classes of American workers would be screwed over by this, however, if you compare this to the wreched conditions these immigrants would otherwise be living in then I’m sure you’ll agree that it’s hard to be very sympathetic.