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 -
" 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!
Xevec, this response is not specific and is not intended for your debating friend.
I dont see the need for special economics knowledge to answer this minimum wage question. It's very difficult to succeed in business. The cost of doing business is increased for many, many employers when the minimum wage is raised. Of those many employers, some will likely choose to reduce this new cost by laying off some marginally productive employees. Whys that a complicated idea? Just because someone wishes to convolute it with economic terminology, charts, graphs and tortured thinking, this simple FACT OF LIFE is not changed!
It's difficult to successfully run a business (based on the failure rate)Add to this difficulty, an increase in the cost of doing business (a coercive increase)Businesses consider many options when getting closer to failureOne of the biggest costs for most employers is personnel costCosts will be examined to avoid a loss, especially large category costs, e.g., wagesOut of the extremely large number number of businesses affected by min. wage laws, it's basically guaranteed some will reduce personnel costs via a layoff
Economics involves trying to get things from this world at the lowest cost possible. Man can do this by sifting thru a vast array of tools that'll allow him to ascertain these things, things worth more than the cost of the tools themselves. One of these tools would include his fellow-man. How can raising the cost of that tool, in a way that has no real relation to it's true cost, help man to ascertain these things from the world? Why would adding to the burden of extracting goodness from this Earth be beneficial? It'd be like arguing for funeral homes because people are living longer. Should man have the burden of dying sooner to benefit the mortician? Leave us alone!!!
Xevec:Prices are determined partly on cost and partly on marketability
Well, he said scarcity is not a factor. Simply distribution is for products. But doesn't speaking of distribution assume scarcity?
Xevec: Well, he said scarcity is not a factor. Simply distribution is for products. But doesn't speaking of distribution assume scarcity?
Well, couldn't he use the examples of air pumped into tires...as well as canned air(the stuff used to clean keyboards?) I gave him the benefit of the doubt with those products, but it still demonstrates scarcity, because of the material used to create such products.
Xevec: Well, couldn't he use the examples of air pumped into tires...as well as canned air(the stuff used to clean keyboards?) I gave him the benefit of the doubt with those products, but it still demonstrates scarcity, because of the material used to create such products.
Well, yes, those are more exceptions. The point is, air for breathing, for healthy people on land, is not scarce in the economic sense: for all practical purposes, the amount of immediately breathable air is infinite, and thus it is absurd to distribute it.
Oxygen tanks for use by divers, astronauts and people with respiratory problems are scarce, because they require production to be converted into a usable form; the same with compressed air for tires, keyboards, etc. When production is required to transform a good into usable form, the resulting usable good is scarce by definition.
To use another example: For a normal person at a beach or in a (sandy) desert, sand is not scarce. One wouldn't distribute sand to people in those situations. Sand, however, is scarce in other places, because of transportation; likewise, even at our beach or our desert, glass is scarce, as production is needed to transform it into glass.
Whats the purpose of prices? Why is a piece of bubble gum 5 cents and the stuff Russia sales to Iraq to fuel their nukes virtually priceless? (forgot what its called. some version of uranium, right?)
Also, my time is scarce. If I'm lucky, I might live 80 yrs. Compare 80 yrs of existence to that of the universe's yrs in existence. Since my time on earth is limited, I would say my particular human capital is scrace. Every second of my life is priceless, in my mind. But objectively, others will value it a little less than I do. To say scarcity does not exist or is not a problem, is to say we are gods, omnipotent ones in case you're wondering.
To him, prices serve two purposes.
"Prices are determined partly on cost and partly on marketability. The notion of marginal productivity demands that the cost (wage) is determined by product price. This is a cause/effect reversal that is quite the norm in conventional economics.""
This is what he believes how prices are determined.
Prices are determined on the one hand by consumer valuation and on the other by sellers judging the case to be one in which it is worth their while to provide a good (keep in mind: costs are opportunity costs, i.e. they're expressed in terms of alternative possible ventures foregone.) Prices are formed where the two meet. Neoclassical theory does not differ on this, much anyway. Dr Reisman has argued that cost plays a part in price formation, but not in a way incompatible with the marginal-utility and subjective theories of value.
A factor receives its marginal product as a reward in competitive factor markets, because any employer under-paying will simply chase away prospective job-seekers; likewise, any factor overpricing itself (or being overpriced) will dissuade potential employers from utilizing it.
Nobody except the small business owner seems to have any problem with raising the minimum wage. The minimum wage recently increased from $5.15 per hour to $6.50 per hour in the state of Missouri by a 72% majority vote! It seems that very few understand the negative repercussions of artificially inflating wages. It is truly no surprise that it is easy to get minimum wage increase passed because the benefits are very easy to understand and the damages are very complex and difficult to see. It goes right back to our national tendency to look at the near-term effects and blissfully ignore the long-term effects of what we do.
People vote to increase the minimum wage because the political realm tells of all the poor men and women that are unable to provide for their families because they are working at a fast food restaurant that doesn't pay them enough. They say it takes more money from the rich and gives it to the poor, like that is a good thing. And I'm poor, so I have no private motivation for making such a statement.
Before we get too deep into this issue of minimum wage standards, it is important to establish an understanding of wages to begin with. Very simply, wages are the current price of labor. And price is decided by the simple but profound economic principles of supply and demand. In a free market, the higher the supply, the lower the price of the product or service, and vice versa; the higher the demand, the higher the price, and vice versa. Ultimately, these two principles combined make up the economic law of Scarcity, which states that the less there is of a good relative to the demand for that good, the more it will cost; in other words, the more scarce something is, the more it costs, and the less scarce it is, the cheaper it is. That means that if the market were allowed to set wages freely, wages would be very high or very low depending solely on the supply and demand of labor at any given time.
But the government is renowned for its practice of artificially making changes to the market, telling it what it ought to do, and therein lies the destructive flaw of minimum wage standards. The consequences of strong-arming the market are always bad in the long run and difficult, if not impossible, to avoid. The short-term consequences of minimum wage standards validate everyone's decision to vote in favor of it. Entry-level employees are now better able to feed and shelter themselves and their families and, theoretically at least, require less government welfare assistance.
The long-term effects of artificially setting a minimum wage standard are numerous and self-defeating. For one, businesses will have less profit, and therefore will be less able to expand their business; expansion of business increases labor demand, which would, in turn, increase the price of labor (aka wages). That is the market's natural way of increasing wages, but it doesn't happen all at once; it is a slow process, and the politicians need votes now, so they artificially amend the market in order to present the appearance of care, but with the ultimate selfish goal of garnering more votes (or they are just economically ignorant).
A corollary to this first negative long-term effect is that some businesses are unable to maintain a profit with the higher wages; this is particularly true during slow economic periods. Those businesses will fail, and everyone in the company will lose their jobs, increasing unemployment, which increases the supply of labor, which decrease the price of labor (aka wages). While I would characterize this as the least of all negative effects, it is still a problem.
The second long-term effect of establishing a minimum wage standard is that the price of goods will simply react by increasing. Every step of the production process of a good has a cost associated with it. If one of those steps has an increased cost, the final good will also have an increased cost in the market. The result is that minimum wage standards are purely inflationary; they increase the cost of a good or service without a corresponding increase in value, which is a core cause of inflation. Another way to say it is that they decrease the quantity able to be purchased with a unit of money without a corresponding increase in the value of that lesser quantity. In the end, minimum wage standards accomplish nothing positive because the absorptions of the increased cost of goods that is caused by minimum wage standards, whether it be through direct increases in the price of goods or through decreased profit by the producer, are proportionate to the increase in wages received by laborers; hence, the value of the money they receive is decreased exactly enough to balance the increase in money supply. Mark these words very clearly: The market will always balance itself back out; therefore, any attempt to artificially change her will come to naught or worse.
So, minimum wage standards slow the growth of businesses, increase unemployment rates, and create inflation, which ultimately renders it completely useless. Could it possibly do any more harm? You betcha.
Possibly the greatest harm that minimum wage standards do to an economy is that they nullify all of the benefits of allowing the market to freely set the price of labor. So, with that understanding, I will continue to list the consequences of allowing the market to freely set the price of labor, many of which are simply the contraries to the harms of artificially setting the minimum price of labor. Remember, all of the following benefits are nullified by minimum wage standards.
The first benefit of a free labor market is that the price of all labor would be directly proportionate to the productivity of that labor. So, if you are adding a great deal of value to the goods of a company, you will be compensated well, and if you do not add a great deal of value to the goods of a company, you will not be compensated well. There are a number of corollary benefits to this fact.
First, unskilled labor would no longer be protected. While that is construed as a bad thing by politicians because a large portion of constituents are unskilled, it is, in fact, a very positive thing. This would heavily motivate unskilled, less productive laborers to become more skilled and more productive because they would only get higher compensation by being more productive, and the only way they could become more productive is by becoming more educated and/or more skilled. So, a free labor market would heavily improve the quality of labor, thereby increasing the productivity of the market, thereby increasing the value of the economy's money supply.
Second, a free labor market would allow individuals to join the labor market earlier. While I am not in favor of forced child labor, I am in favor of giving youth the choice to join the labor market and start becoming educated and skilled on the job, which is, in most cases, the best way to become educated and skilled. In other words, I think we should protect children against the requirement to work at a young age, but I do not think we should make it impossible for the market to invite young aspiring laborers by setting a minimum wage standard above their value. If laborers started working at a younger age, they would learn to be more productive earlier, and so would not struggle with the ability to feed and shelter themselves and their families. I started working in my father's auto mechanic shop when I was six, and I didn't always like it, but I learned the discipline of work while there, and therein lies the benefit of allowing citizens to enter the labor market earlier. They won't get paid very much because they will start out being very unproductive, but they will learn and grow, and as they do so, they will be rewarded by increased income. Naturally, some employers will choose not to reward increased productivity, but according to the balancing law of the market, employees of those employers will transfer to other employers that reward justly. Once again, the market maintains balance as it always does.
A corollary of a younger workforce is that there will be greater productivity in this economy due to an increased number of laborers. Also, because laborers will begin to learn how to be more productive earlier, the total labor market will increase in quality, which will further increase productivity, which will further increase the value of our money supply, as productivity is the only true increa