Apparently, the labor market responds to price interference in a way that basic economic models predict:
In terms of jobs lost, that means that 2,234,383 of the jobs lost in the U.S. economy since 2006 have been jobs that were directly impacted by the series of minimum wage increases that were mandated by the federal government in 2007, 2008 and 2009.
Interestingly, the average number of employed members of the civilian labor force in 2006 was 144,427,000. In 2010, the average number of employed members of the civilian labor force in the U.S. was 5,363,000 less, standing at 139,064,000.
When a recession occurs, my general recommendation is that the government cut taxes and spending, and go on “regulatory holidays.” I also recommend cutting the minimum wage requirement, for the last thing unemployed people need is fewer job opportunities. At any rate, I think this is as good a time as ever to explain why minimum wage leads to net job losses, everything else being equal.
Minimum wage, and the subsequent increases thereof, causes a net loss of jobs because it eliminates the marginal value of workers. Lots of politicians and their economist shills like to argue that “on average,” minimum wage hikes will be fine. This argument is specious, for economic decisions are made on the margin, not “on average.”
Thus, employers basically concern themselves with comparing the proposed price increase of current labor with the alternatives, of which there are three main types.
The first alternative to more expensive labor is to simply forego the increased costs. By this I mean that employers may be inclined to simply fire some workers and require that the remaining workers pick up the slack. This usually only happens when the demand for labor is significantly lower than its supply, which means that employers have more market power.
The second alternative is black market labor. This simply means that employers hire and pay people off the books. This certainly includes illegal immigrants, who have no legal recourse against employer “abuse,” and must thus offer a significantly lower price. I would argue that a good portion of the non-drug-related illegal immigration America has seen over the last couple of decades is a direct result of minimum wage law.
The third and final alternative to artificially increased labor prices is automation of production. Obviously, this sort of thing is more feasible in certain businesses, most notably manufacturing. This can be seen to a limited extent in the service industry, like call centers, where automatic voice-dialing systems have replaced some human operators.
The lesson, then, that can be taken away from all this is that minimum wage is remarkably destructive for low-price marginal workers, for employers are not (yet) forced to hire any specific person to do a job. In addition, minimum wage has been a market distortion of untold magnitude. Who knows how radically different the service and manufacturing industry would look right now if people could freely compete with machinery and illegal immigrants on labor prices. Thus, a lot of the misery that the unemployed are experiencing right now is due to clumsy, misguided government interference.
5 comments:
There is of course the issues of NAFTA and China. Raising the minimum wage may have moved jobs offshore. If America were a "protected" economy then perhaps there would have been no job losses.
I think you're looking at the problem through one parameter, wages. Full employment could probably be achieved by putting the minimum wage at 10cents an hour, but such employment would be equivalent to slavery.
A raise in wages is also a rise in aggregate demand and will make current investments profitable. Henry Ford recognised that if his employees had more money they could buy more of his product. The minimum wage/employment relationship is not linear, but parabolic. Once wages get too high investments then sour because of lack of return and in the long term the economy gradually chokes because there is not enough money for investment. There is a sweet spot where high wages make more investments profitable.
If we could, at a stroke of the pen, pay all the workers 10c and hour and eave all the rest for investment, initially employment would be 100% but many of the investments would fail as no one would have any money to buy anything but the most essential products. The economy would shrink.
That's why each worker is both a cost and potential market, the less each worker is paid the less each worker has to spend. This is a classic tragedy of the commons mistake in economics.
@The Social Pathologist- I'm not advocating "full employment," as it were. I'm simply pointing out that increases in minimum wage cut marginal laborers out of the market.
My focus is primarily on the effects of price floors. The effects of said floors in the labor market apply in all markets. Obviously, I don't think that eliminating minimum wage will solve every economic problem. Rather, I believe that eliminating minimum wage gives marginal workers more choices. What they ultimately choose to do is up to them.
Two other things: First, pay has noting to do with aggregate demand. Demand exists irrespective of purchasing power. Second, a decrease in pay does not necessarily mean a decrease in purchasing power. If prices fall faster than one's pay, than one is actually becoming richer.
Rather, I believe that eliminating minimum wage gives marginal workers more choices. What they ultimately choose to do is up to them.
It gives them more choices in choosing lower paying jobs which give them less purchasing power, if prices remain the same.
A silly example.
Consider a community of 100 members each one with 30000 dollars to spend, that's a total demand of 3 million dollars.
100 people with 30000 dollars will have a different purchasing pattern, than if 99 people earn 10000 dollars a year and one person earns 2.1 million.
Say that you need to be able to earn 20000 before you can purchase a car.
In the first instance there will be a demand for a 100 cars, in the second only 1-2. The car industry becomes decimated by the second type of income distribution even though aggregate demand is the same.
"It gives them more choices in choosing lower paying jobs which give them less purchasing power..."
Seeing as how the alternative is no purchasing power, I don't see how a decrease in purchasing power is the worse thing that can happen to them.
" ...if prices remain the same."
They rarely do, since the economy is rather fluid.
By the way, sales and demand are not the same thing. That only a few consumers are capable of purchasing (in full) a given good doesn't mean that only a couple of people demand it. Also, your model ignores credit. It is hypothetically possible that the extremely wealthy may see fit to loan money to the poor. It all depends on time preferences.
I kept it simple because it was a combox discussion. I appreciate that other factors like credit, investment, etc make up demand. I suppose that the important thing to realise is that while the concept of aggregate demand is important so to is the make up of that demand.
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