This is a response I have been getting, when I argue that the minimum wage kills jobs. “Not true. Raising min wage can actually indirectly raise employment. More consumer spending leads to industry growth which leads to more jobs available.”
Here was my response - but I feel like I am on shaky intellectual ground -
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I think the fallacy here is that consumption is the driving force behind economic growth - in reality, it is savings which are channeled via investment into capital accumulation that is behind growth. But raising the minimum wage doesn’t raise the salaries of employees - it simply kills the jobs of the people that are on the margin. Ergo it actually lessens consumer spending, leading to industry contraction, which leads to even fewer jobs available."
Is there anything I am missing in my analysis? Thanks!
Looks about right to me. People think that if the minimum wage is increased, more money will be spent in the economy because the minimum wage workers will have more money. But they forget that the “extra money” has to come from somewhere else in the economy, and if money is shifted from savings and investment to consumption, then it’s a dead loss overall, and not merely a neutral transaction.
Like any other good/service, raising the price of it generally means a shifting of resources elsewhere, as companies budget for the increased wage. Raising the price of ground hamburger doesn’t mean that grocery stores are going to make more money if people buy less hamburger, or switch to ground turkey. Likewise, raising the minimum wage may help specific workers but at the cost of fewer minimum wage workers overall.
Capital (machines and equipment) and labor are in competition with each other.
By raising the cost of unskilled labor, companies have an incentive to substitute machines. (Pay at the pump, self-checkout at stores) This results in a permanent loss of jobs for unskilled labor. The minimum wage affects the inner cities and poor rural areas the most negatively. Some, such as Milton Friedman, have called the minimum wage “racist legislation”. The minimum wage also impacts a group of marginal workers - teenagers. Teenage unemployment closely correlates with the real minimum wage. See: http://www.ncpa.org/studies/s190/gif/s190c.gif A lack of employment history leads to a lack of job related skills acquired by those who are unemployed. Some older persons may even become “unemployable” if they have very little employment history. Any short-term “boost” a minimum wage might be argued to have will be offset by automation. Higher taxes may also be paid which will diminish the pay raise."
Labor cannot increase its share at the expense of capital." - Eugen von Bohm-Bawerk
I heard two of my uncles (by marriage) making typical, ignorant, pro-socialist remarks a few months ago concerning the minimum wage. They were talking about the rich folks (McDonalds) only paying people $6.00/hr when it takes a lot more than that to ‘get by’. Besides all the other bone-headed assumptions in that lament, I brought one to their attention/consternation. Normally I wouldn’t have addressed their comments, but they were so arrogantly, blissfully ignorant and I was so fed up and sleep deprived, I just couldn’t humbly submit to respecting my elders and biting my lip.
I asked them, “What do you pay per hour.” “Huh, what you mean, ‘What we payin’ per hour? We ain’t workin’ nobody.” So I respond, “Wait a minute, you’re paying zero people zero per hour and you’re upset that McDonald’s is paying thousands of people $6.00/hr?” “Yea, but we ain’t workin’ nobody.” “Well, why ain’t you workin’ nobody? I’m not working anyone either. You know why? Because I haven’t produced enough goods and services for people so that I can afford to work somebody. McDonald’s is paying out millions and millions of dollars per week in wages and I’m paying out zero. How can I judge them??? They’re doing a WHOLE lot more than we’re doing. They should be praised, not criticized.”
The minimum wage is argued for based primarily on pseudo-economic reasoning.
I think the best way to argue the point is to give them a basic education in economics: First, learn how to draw the supply and demand curves. Once you’ve got it, show the person the supply and demand curves for labor. Then show them what happens when there’s a price-floor.
Automation would be reversed if minimum wage decreases. Therefore, minimum wage is malinvestment
If automation is not reversed if minimum wage decreases, it is still wealth redistribution. For insatance, if automation makes businesses buy computers, the computer software companies would do research and invent faster computer software that would eventually produce labor that is cheaper than the human counterpart. However, it is still forcing businesses to subsidize automation companies for doing research. It is wasteful centralized planning. If an individual comes up with an general algorithm that outperforms all the other software, then all of these subsidized software would be residue. If socialists want more automation technologies, then they should directly fund them; not by tinkering with minimum wage legislation.
What on earth? Why should automation be “reversed” by minimum wage decreases?
Also, “But it’s wealth distribution!” is not a good argument because supporters of the minimum wage know that and want that wealth distribution. Socialists also do not care about technology: The Communist Manifesto seemed to suggest it’s better for men to produce goods with their bare hands.
I am skeptical of any positive or negative relationship between technological growth and employment. Marx claimed that machines replace men and thus make them lose their jobs. For you to say that machines replace men and then create even more jobs than what was lost seems absurd, because it’s not quite clear, then, how the firms are cutting costs.
In the short run, technological growth can create structural unemployment (“Man invents widget maker machine – widget artisans suddenly massively layed off”) but the economy as a whole benefits more from this, even in the short-run. In the long-run, unemployment remains largely constant, at the natural rate of unemployment.
The only exceptions I see are that growth may allow the government to take on a greater welfare state – increasing unemployment on the one hand – while on the other hand, technologies which help employers and employees connect, like the internet, may reduce the natural rate of unemployment.
Overall, though, it’s been demonstrated empirically that the minimum wage doesn’t fall to subsistence levels. For the past three decades, until the Dems recently had the minimum wage hike, most employers have been paying a wage higher than the minimum wage – and it has been a “living wage,” hasn’t it? You haven’t seen any Wal-Mart employees with emaciated bodies, out in the street begging for money.
You seem to have a complete misunderstanding on how wages work.
Wages are set by the supply and demand for labor.The minimum wage is just a price floor. It can’t force wages below the equilibrium wage determined by the market.
If you set a $1\hour minimum wage, companies will just ignore it.
Yes, they would. But they would not ignore the cost of labor relative to the cost of current capital and its maintenance and replacement cost, which is his point.
I don’t understand how unions should be regarded as tampering with the equilibrium-wage rather than being a reflection of the demand for a certain wage, which helps establish equilibrium.
Since you all acknowledge that unions are not necessarily “coercive,” but can be voluntary entities, provided that unions are voluntary they do not force wages up at the expense of capital – they simply help re-negotiate wages up to the actual “natural wage” (that term isn’t in use by any economists, but I’m sure you get what I mean by it).
It seems pretty inconsistent for Rothbard to put forth apologetics about trade associations’ engaged in collective bargaining, while treating labor associations (“unions”) engaged in collective bargaining as strictly non-freemarket when that’s not what they are.
Communists care about technology that can produce goods more efficienty. They don’t want technology to permantly replace humans, but they want technology to work for humans. Communists want to develop technologies, but they do not want the inventor to be selfish and claim all of the profits. Copyrights, patents and trademarks are socialist concepts. But they are effective in developing new technologies, and help create unemployment when new technology enters.
After reading through this thread, I had a thought. Is it possible to supplement the “increase the minimum wage” argument by adding the argument for the elimination the income tax and the implementation of a consumption-based tax, i.e.: the FairTax? If you want to stimulate the economy through spending, does it not also make sense to allow the worker to enjoy all of the wages? At the same time, does it not make sense to allow payers of that wage (the employers) to enjoy their profits without having to reduce the number of their employees because of a government-enforced wage coupled with a profit-crippling tax?
I may be wrong. Or maybe I’m not thinking it completely through, but to me it seems that the logical companion to a minimum wage is a consumption tax, not an income tax.
Hold on. Stop. Completely disregard the fact that unions are associated with Communists with certain motives.
Union bargaining by itself, if it is not coercive, is simply the combined wage preferences of individual workers. As such, it reflects the demand for a certain wage – not an arbitrary extraneous force impacting the equilibrium of wages.
Even if hypothetically, a long-run drop in wages would aid in production, that is simply not possible through setting an arbitrarily low minimum wage.
To demonstrate relevance and stay on topic:
Libertarian invoked Marxist ideas about the relation between wages and automation (hence the reason I mentioned unions), attempting to say the reverse is true: Marx suggested that automation depresses wages. Libertarian suggested automation increases wages:
This seems like a reactionary argument, which holds true in the long-run, but not necessarily in the short-run.
Assuming there is no minimum wage, in the short-run automation can create unemployment. As noted, if widget company creates widget-machine, it can temporarily put widget workers out of a job. His above statements seem to suggest that labor is always cheaper than automation which is absurd. If that were the case, why would there ever be any automation to begin with, if it didn’t help firms cut costs from labor?
In a libertarian society, people (workers) should have the right to organize by forming a voluntary association. This is free-market. They should not, however, be compelled by the government to organize as is the case of states not having right-to-work laws (union shops). It is inconsistent with liberty and private property to disallow companies, backed by the force of the government, from hiring replacement workers during a strike. That is not free-market.
Labor unions that support the minimum wage may be doing so in order to price their competition out of the market. In other words, by raising the cost of hiring unskilled non-union workers, the relative cost of skilled union workers is lowered thereby benefiting unions when more union members are hired.
Indeed it possibly could. So what? In the short run any and all supply/demand relationships are subject to shocks and not being in perfect equillibrium. There’s still no shortage of things to do in the world, all the minimum wage does is delay and even stop the reemployment of labor freed from former pursuits. Automation would not be employed if it didn’t offer an advantage over labor. Where it does, it frees labor up to be used for other ends which will arise, unless of course any and all wants are satisfied, and only so long as there’s no minimum price on labor slowing its reemployment. Why aren’t farmers who employ millions of illegal using automation? Seems like the market for labor is still there and still strong.
I am having an argument with one such person. He responds to this type of thinking that “the correlation that minimum wage hurts jobs does not exist. The evidence just isn’t there. There is no correlation.” He says this because he finds it impossible to find anyone who’s job was destroyed by minimum wage. He claims that with EVERY minimum wage increase..there has been an increase in employment. He even believes minimum wage cured the depression.
