Minimum Wage destroys jobs--again!

[shanek]

Productivity is steadily increasing. Prices are steadily increasing.

And wages increase along with them. So that's already being compensated for.

Where will the money come from?

 

[Earthborn]

Oh, yes, that worked out so well for Brazil...

Please explain what problems you are refering to. Have the same problems occured in other countries that compensate minimum wage for inflation?

You wouldn't have corporations in a totally free market.

Why not?

 

[shanek]

Please explain what problems you are refering to. Have the same problems occured in other countries that compensate minimum wage for inflation?

Yep. It was called "Indexing," and it caused Brazil to spiral into hyperinflation. People were making millions or even billions of dollars a month...with almost nothing to show for it.

Why not?

Because corporations are a creation of government. Without government, they'd just be businesses.

 

[Earthborn]

Where will the money come from?

Some people, including me, have already presented suggestions where it might come from. So the question that needs to be asked is: where do you think the money will come from?

 

[Totovader]

Jeez, Totovader - I know label-making is the primary cottage industry of the Politics forum but I thought this kind of thing went out with the hanging chad debates. (Oooh, you don't agree with me and I'm a conservative, so you must be a commie. WTF, well I'm a liberal so you must be a fascist if you don't support my ideas.)

I'm not in manufacturing, nor am I a Chinese Socialist. Does everyone who proposes any standardized program or balance in the approach get tagged a socialist?

The model I mentioned in costing is from a study, not from my work. I'm in supply chain logistics, and I would never cite figures from my own client base; I'd soon be out of a job and I like what I do. Further, we're about the most typical lower-case-C capitalists you can find - we earn our money in the middle by buying wholesale, selling retail, and putting value-add in between the two.

Having stated that, let me clarify my nit-picking on the report, because a lot of it still seems to be being missed. (I have no hope after reading the thread that it'll ever be accepted, but I have a wont to be understood.)

First, the EPI is an "institute" set up by a company that sets up many such, and is chiefly a lobbying organization for restaurant and fast-food corporations. Secondly, from what I can see, they intentionally focused (sponsored) the study on the 16-24 y.o. group, I feel (yes... my opinion) because if they studied the impact on the ENTIRE minimum wage earning population, they would not find the total statistics proved their case.

As I stated, that ignores about a million people on MW, and frankly, the group that should be under consideration! The 16-24 bloc is made up of a lot of students and non-primary wage earners. But that other million at >25 y.o. is much more likely to be PWE.

Further, the study, for the group being examined, comes to much more complicated conclusions that the total impact of EITC, Federal MW, and State MW all have to be brought to bare in any discussion of the topic. If I read the text correctly (the math is beyond me), the conclusion seems to be that further study is needed.

The salient factor in all of this is that MW earners are going down as a percentage of the workforce. This ought to be viewed as a positive, I'd say. This does not mean that the 8% of the minority workforce who may lose their jobs should be ignored, though.

I actually support the concept of 'at will' employment. If I had actually stated my opinion on MW and adjustments of same, it would be:
As long as the government has already stuck their noses in and created the damned thing, then there ought to at least be adjustments for inflation or a pegging to the CPI or some other sort of mechanism, rather than every ten years trotting out the old warhorses and rallying cries.

(I don't have a solution to it, though. I do not think that you can go totally "free market" with labor in a world that has seen such overwhelming consolidation of corporations. If RoadToad is listening, maybe he'd comment on what de-regulation did to the owner-operator in the trucking industry.)

There's nothing much for me to respond to, here. You've just repeated your earlier claims- claims which I addressed.

 

[Earthborn]

Yep. It was called "Indexing," and it caused Brazil to spiral into hyperinflation. People were making millions or even billions of dollars a month...with almost nothing to show for it.

Shanek, one of these days you are going to have to learn to support your argumentation, and not just make claims. Please provide us with a link that shows us when this all happened and how it relates to the indexing of minimum wage.

Also, you didn't answer my second question: "Have the same problems occured in other countries that compensate minimum wage for inflation?"

 

[shanek]

Some people, including me, have already presented suggestions where it might come from. So the question that needs to be asked is: where do you think the money will come from?

That's just the point--it won't come from anywhere! The jobs will be destroyed.

 

[shanek]

Shanek, one of these days you are going to have to learn to support your argumentation, and not just make claims. Please provide us with a link that shows us when this all happened and how it relates to the indexing of minimum wage.

Indexing of wages directly led to the hyperinflation. The effect would be less pronounced if only MW was indexed, but still there. The old Macroeconomics thread (which I have archived) covered it. Here's the relevant part:

The question is whether unemployment could be brought down permanently at the expense of higher inflation. So part of the reason this tradeoff between inflation and unemployment was interesting is that it promised a way for policy makers to think about how significant unemployment problems could be resolved. Perhaps nowhere in recent times was this balancing act more keenly challenged than in the wildly dramatic economic history of Brazil. In the 1980s, inflation turned the richest country in Latin America into an economic wreck. The inflation rate hit hundreds or even thousands of percent per year. Prices, wages, and interest rates were rising by up to 2% every day.

Alex Castro, Brazilian National: I used to go to grovery stores, and I could never knew what I was going to find there. The cost of bread one day was not going to be the same the second day. Lots of times, people get change in coins and just throw them away, because it's not worth carrying a lot of change in your pocket when it is worth nothing.

Connolly: By the mid-80s, inflation was built into Brazil's economic system. A policy called "indexation" pegged wages to the rate of inflation.

Jose de la Torre, DBA, former Senior Policy Analyst, US Department of Commerce: All you had to do was calculate the rate of inflation for the last month, and then everything that was paid out would be indexes accordingly the next month. Which, of course, had a tendency to build into the system a continuation of the forces of inflation.

Castro: I remember once my salary was over one million and a half a month. That's pretty good, eh?

Connolly: As the inflation rate soared, Brazil's economy continued to grow. Middle-class workers with indexed wages faced inflation of up to 80% a month. Bank interest rates kept pace with inflation, sometimes paying 70% interest a month. But the poor and unemployed were in a desperate situation. By 1990, one-fifth of Brazil's 150 million people were malnourished. Brazil's inflation-ravaged industries couldn't compete in international markets. By 1994, the Brazilian people were so frustrated with the economy, they elected Fernando Cardoso. Cardoso was committed to tackling inflation at its source, and his first move was to abolish indexation. He also announced massive cuts in government spending. Unemployment soared.

Marta Ribiero, Brazilian National: Nobody believed it was going to work. We'd been with inflation for over 20 years and got used to it, so we said it's not going to happen, but it worked.

Connolly: Adapting to the new reality of an economy with normal levels of inflation wasn't easy. But the stability benefitted the majority of Brazilians...Brazil's battle with inflation provides important lessons for the future. Think about what happens in the labor market. As AD is increasing and firms want more capital goods and consumers want more consumer goods, businesses, of course, try to meet that demand. To meet that demand, they need to run longer hours and hire more people and buy more materials. The idea is that as AD increases, the demand for individual inputs increases, including the demand for labor. This directly reduces unemployment. As we get farther and farther along in the business cycle, moving towards the peak, what we notice is that employment goes up, unemployment of course goes down, and labor markets begin to tighten.

Again, this isn't anything controversial in economics.

(Or heck, you can just ask Luciana. She knows what I'm talking about.)

Also, you didn't answer my second question: "Have the same problems occured in other countries that compensate minimum wage for inflation?"

Why don't you present some examples of other countries that have established indexing and we'll see?

 

[Merko]

See, it's things like this that show you Just Don't Get It. 20 times what they pay??? Man, that's a niche that's ripe for some competition! Even if such an absurd condition were to exist, it wouldn't for long. And she'd have plenty of offers from other companies knowing that they can have her work for them at greater pay. If her work is that valuable, it's all but inevitable.

No, this is completely wrong. Just because someone makes 20 times her pay in profit from her work, does not mean someone else would be willing to pay her more, not even in the very long run. On a completely market-driven labour market, wages have absolutely no connection to the values produced (or to the profits made).

Assume, for example, that she is picking oranges. Orange-pickers' wages would typically make up a very small part of the costs involved in orange growing. It would dwindle compared to land rent, caring for the trees, fertiliser, pesticides and transportation of the fruit. It is not at all improbable that the profit from selling one extra orange amounts to twenty times the wage an orange picker gets from picking that one orange. And still, orange growing does not have to be exceedingly profitable. There's absolutely no reason to assume that investors would scramble to get into the orange-growing business. Wages can remain low forever. But raised wages still would not make a dent in the overall profit.

 

[Merko]

However, taking the risk of economic liability is really what constitutes the value of the entrepeneur in many instances. Providing capital to run a business doesn't necessarily take skill, but it takes risk.

Under ideal circumstances, the competition for investment is very strong, and so the premium for the risk will approach zero (of course it will never quite reach zero, but it can get arbitrarily close).
Compare this with the risk the employee is taking. He or she will frequently have to relocate in order to take up a job, for example. There is frequently no compensation at all for this risk. This is because the competition in the labour market is cut-throat, while there is everywhere a shortage of investment, leading to low competitivity in that sector.

As Adam Smith put it:
"In a country which had acquired its full complement of riches, where, in every particular branch of business, there was the greatest quantity of stock that could be employed in it, as the ordinary rate of clear profit would be very small, so the usual market rate of interest which could be afforded out of it would be so low as to render it impossible for any but the very wealthiest people to live upon the interest of their money."

 

[ZirconBlue]

Well, because we're discussing MW earners and the impact of THEIR wages on costs. What I cited was the actual costs of the low-end labor in the finished product. If we want to examine the costs of the white collar coterie, we have to go get a whole 'nother set of figures, obviously.

Fair enough, but there are MW workers in other parts of the chain besides manufacturing: cashiers selling the product at stores, for example.

 

[Chaos]

And wages increase along with them. So that's already being compensated for.

Where will the money come from?

Wages are increasing more slowly than prices and productivity. So that´s NOT already being compensated for.

 

[shanek]

No, this is completely wrong. Just because someone makes 20 times her pay in profit from her work, does not mean someone else would be willing to pay her more, not even in the very long run.

Sure it would! Her work is that valuable--they'd be idiots not to!

On a completely market-driven labour market, wages have absolutely no connection to the values produced (or to the profits made).

Completely and utterly false. Value of production is one of the biggest factors driving wages. In fact, that's pretty much the whole demand side of the equation.

 

[shanek]

Under ideal circumstances, the competition for investment is very strong, and so the premium for the risk will approach zero (of course it will never quite reach zero, but it can get arbitrarily close).

Again, completely and utterly false. In fact, starting a business is one of the riskiest endeavors you can enter into. In terms of long-run ROI, you'd be an idiot to do it if your only motivation were making money.

 

[69dodge]

No, this is completely wrong. Just because someone makes 20 times her pay in profit from her work, does not mean someone else would be willing to pay her more, not even in the very long run. On a completely market-driven labour market, wages have absolutely no connection to the values produced (or to the profits made).

Assume, for example, that she is picking oranges. Orange-pickers' wages would typically make up a very small part of the costs involved in orange growing. It would dwindle compared to land rent, caring for the trees, fertiliser, pesticides and transportation of the fruit. It is not at all improbable that the profit from selling one extra orange amounts to twenty times the wage an orange picker gets from picking that one orange. And still, orange growing does not have to be exceedingly profitable. There's absolutely no reason to assume that investors would scramble to get into the orange-growing business. Wages can remain low forever. But raised wages still would not make a dent in the overall profit.

Something seems wrong with this analyis. Not quite sure what...

Maybe this?

Why are you only looking at the wage of the orange picker? What about all the other costs? Each of those costs get paid to people too. If you look at each person individually, it looks like he's getting paid much too little: his work is essential, after all; with it a large profit will be made, and without it no profit will be made. But they're all essential. The business owner has to pay all of them. And the profits aren't enough to pay all of them much more.

It's like, Bill Gates is really rich, he could certainly afford to give me a million dollars. So why doesn't he? Well, sure, but he couldn't afford to give everyone a million dollars each.

 

[69dodge]

Under ideal circumstances, the competition for investment is very strong, and so the premium for the risk will approach zero (of course it will never quite reach zero, but it can get arbitrarily close).
Compare this with the risk the employee is taking. He or she will frequently have to relocate in order to take up a job, for example. There is frequently no compensation at all for this risk. This is because the competition in the labour market is cut-throat, while there is everywhere a shortage of investment, leading to low competitivity in that sector.

As Adam Smith put it:
"In a country which had acquired its full complement of riches, where, in every particular branch of business, there was the greatest quantity of stock that could be employed in it, as the ordinary rate of clear profit would be very small, so the usual market rate of interest which could be afforded out of it would be so low as to render it impossible for any but the very wealthiest people to live upon the interest of their money."

I don't understand. Can you say this in different words, or something?

 

[Luciana]

Found this thread when looking for another. Well, I don't have a formed opinion on minimum wages. What I can say is that even in a middle-income country like Brazil, very few people earn it. They earn more. But in the poorest regions some people earn less, and they accept it, even though it's illegal. On a gut level, I favor MW, because I've seen people earning less than the minimum and that's very sad. We like to think that in the 21st c. we should be above little more than slavery. As for unemployment, I've also seen very creative ways of dealing it, informally. The informal sector cannot be underestimated. But it's not an issue I have strong positions on.

Indexing of wages directly led to the hyperinflation. The effect would be less pronounced if only MW was indexed, but still there. The old Macroeconomics thread (which I have archived) covered it. Here's the relevant part:

Indexing is indeed wildly considered to have been the culprit of the 1980s inflation in Brazil. It all started in the 1970s, under authoritarian regimes that curtailed the power of unions by indexing wages and impeding employer/employee negotiation. Also, the fast expansion of basic services in the country (and back then Brazil grew an average of 11% a year, we were the China of the decade) was based on the assumption that prices for those services would be guaranteed, as a means to boost investment.

Therefore, the government set prices for electricity, gas, water services, etc. Wages started to be negotiated yearly, that is, every profession had a month when the wage for the next year would be decided. And that's when the rollercoaster started - past inflation became embedded in wages, and its expectation was perpetuated as more inflation. By the 1980s, growth was only kept by the general lowering of wages, which led to many of the social problems we face today in the big countries.

Let's say last month's inflation was 30%. Therefore you calculate wages for next year on that basis, all the twelve months. So in the first month you were a "wealthy" person, your salary is "pumped up". By month 6, you have reached the average, because inflation has eaten a significant part of it. From then on, your wages are declining, proportionately, until you reach the bottom, now time for a new negotiation. Consequences: if inflation ran faster, you could only compensate months from now. If it ran slower... but it never did. You could not plan to buy a car, because Ed only knew if your salary would cover it months from now. That in itself depressed the whole economy.

Next came food. If some prices were indexed, why not those for the basics? People started to demand artificial prices for wheat, milk, meat. Which, if you think about it, it's only fair, considering the government controls wages. Then the madness was complete.

To make a long story short, after at least 6 economic "plans", dozens of ministers of Economics, and an inflation that reached 80% a month in late 1989 (I remember that), the only thing that halted inflation was the desindexation of prices. Little by little government allowed prices and wages to go free. They did that by creating a parallel currency, fictional for 3 months, that provided an "index" and was adjusted for inflation daily. What happened is that people started to convert everything in the new currency, and by doing so they regained the idea of prices in relation to each other. If you earned X cruzeiros, that meant you earned Y reais. The value of real changed daily, therefore there was not reason to demand a raise in reais, you see? One day the government pulled the blanket off everybody's feet - and prices kept standing. Desindexation had happened and the new currency was the strongest we had in decades, even more valuable than the dollars for a short time.

No good memories of hyperinflation. By the age of 13 I earned a debit card from my parents, even though they were seriously broke. More than once, at school, I shared two meals between three friends, because the price had increased overnight and we didn't have enough for us all. Having the debit card meant I could have lunch no matter what.

It got so bad that new bills had to be printed every two years, or every six months, and they were running out of people to put their faces on the bill. Many descendants of prominent people wouldn't hear of the "distinction". That's when they started to put crocodiles and parrots in our bills.

 

[Merko]

Why are you only looking at the wage of the orange picker? What about all the other costs? Each of those costs get paid to people too. If you look at each person individually, it looks like he's getting paid much too little: his work is essential, after all; with it a large profit will be made, and without it no profit will be made. But they're all essential.

We can easily find an example where there is only one worker to be paid.

Consider someone investing in a small but well-visited museum. There is only one employee who guards the place, charges visitors and keeps the place clean. The costs of investment in the priceless objects at display, and of insurance, far outweighs the salary of the single employee. The overall profit, though twenty times the employee's salary, is not exceptional.

You may say that the insurance company has some employees and that we should factor these in. No, we should not. They are neither directly or indirectly a part of this company. The insurance company makes their own profits. The insurance company may pay their employees well or poorly, or they may be run by computers and robots only and have no employees at all, for all we know and care about.

So, what is going on? Well, as I think you know, what is considered a good profit depends on the profit compared to the overall investment, not just salaries. If salaries are a very low part of the investment - perhaps because workers are being paid extremely poorly - then the rate of salaries may have no significant impact on profitability.

 

[Merko]

I don't understand. Can you say this in different words, or something?

I already offered two versions, mine and Adam Smiths. But ok, I'll try a third time.

What is considered a good profit on an investment? As everything on the market, this is dependant on supply and demand. If supply is high (there are many investors), their price (required profit on investments) will go down.

In times of plenty, many people are able to save some money. Thus, the number of investors will increase. After a long time of economic improvement, there will thus be a multitude of investors, unless by some intervention of government, the wealth is kept to a few hands only.

Basically, there is no such thing as a 'fair profit'. If everybody had a lot of capital to invest, nobody could live off the profit of capital alone. You might say that in such a situation, inflation would make everybody poor. That would be wrong: the wealth does not have to be in money. Consider the situation where the farmer has plenty of seed, plenty of lands, and plenty of cattle. The manufacturer has plenty of materials, and owns some power plants too. The cook owns a restaurant, fully stocked with food, and so on. In other words, everyone has plenty of capital - and during current conditions, they could perhaps live off the capital alone, hiring someone else to do the work. But in this condition of general affluence, no one can.

For a somewhat longer explanation, why don't you read the chapter 'On the profits of stock' in the link I provided. It is only five pages, and Smith explains it very well.

 

[Tony]

Sure it would! Her work is that valuable--they'd be idiots not to!



Completely and utterly false. Value of production is one of the biggest factors driving wages. In fact, that's pretty much the whole demand side of the equation.

More dogma. No reality.