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Minimum Wage Debate A Failure Of Common Sense

JoeTheEconomist

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Increasing the minimum wage is a mind numbingly stupid idea, but no one in the debate gets to the point. This idea is a clear manifestation of Ronald Reagan quip : the nine most frightening words in the English language are: I'm from the government, I am here to help.

In theory, supporters generally say that the change is necessary to lift people out of poverty. Opponents generally oppose the idea because it might drive inflation into the system, and push some under skilled workers into the poverty that the change was suppose to prevent.

These theoretical discussions miss the point entirely. Most people who work at minimum wage jobs are not in poverty nor are even poor. Many are college students working part-time while living comfortably at home. Many are the secondary bread winner in the house. Some are people like me who work part-time to get out of the house. Changing the minimum wage law will not lift these people out of poverty because they never were in poverty in the first place.

Even if working minimum wage work was connected to poverty, increasing the baseline will not cure poverty. It is a subsidy which transfers income from producers and consumers to under skilled workers. It does nothing more than make a lack of skills more pleasant. This subsidy does not fix the problem. This solution subsidizes the problem.

If the objective of increasing the minimum wage is to reduce poverty, it makes more sense to deal with this issue through more targeted welfare programs. And, we do. This is where increasing the minimum wage crystallizes the statement of Reagan. As we increase the minimum wage, which doesn't deal with poverty, the additional income triggers reductions in the support provided by programs that do provide resources to those in poverty.

Even if the minimum wage were connected to poverty, the concept of a minimum wage ignores the disease and subsidizes the problem. The problem for these workers isn't the wage. The problem is a level of productivity that fails to command a higher wage. The visible outcome of unskilled workers is poverty. The minimum wage deals with the outcome rather than the cause of the problem.

Supporters put forward a disingenuous response to this criticism of increasing the minimum wage. They argue that wages are not tied to productivity, saying that minimum wage hasn't kept pace with productivity. For example, “If the minimum wage had kept pace with productivity growth [since the late 60's] it would be $16.54 in 2012 dollars.” ~ Dean Baker.

The problem is of course the critic fails to distinguish between productivity of capital and productivity of labor. If GE upgrades a plant to increase productivity 20%, the company is highly unlikely to give the janitor a 20% raise. Capital created the gain, and the economic rents flow to the shareholders rather than the worker.

The contrast between labor and capital productivity are clearly seen in the agriculture market. Since 1940, farmer’s role in the workforce has dropped by more than 80%. That reduced work force covers nearly three times the number of the irrigated acres. While productivity has increased substantially, the National Citizens Council for Migrant Labor says that wages fell by 16% in real terms - and that is seasonal work. Productivity in this case comes from the tractor and not the worker. The rents on the tractor flow to the owner, not the employee.

In the simplistic world of the supporters, if we increase the minimum wage employers will increase the wages of existing workers. The flaw in this view is that as we increase the minimum wage, employers will have a larger pool of workers from which to draw. Overtime, lesser skilled workers may not capture any higher returns. If we increase wages for the clerks of McDonalds' to $15/hr, McDonalds will redesign its positions to $15/hr - and fire much of its existing staff.

If we increase the minimum wage from $7.25/hr to $9/hr, employers will have the option to hire from all of the people willing to work for 7.26/hr to 9/hr. It is unlikely that employers will ignore the more talented workers. Yes, they will pay more, but they will require more. The low wage worker who is worth $7.25/hr isn't magically going to be worth $9/hr.

As is frequently the case, our government is willing to do really foolish things in the name of votes. My guess is that this change will not garner favor with those who actually work for minimum wage, but rather the latte sipping elite who feel compelled to throw other people's money at other people's problems.
 

KevinKohler

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Increasing the minimum wage is a mind numbingly stupid idea, but no one in the debate gets to the point. This idea is a clear manifestation of Ronald Reagan quip : the nine most frightening words in the English language are: I'm from the government, I am here to help.

In theory, supporters generally say that the change is necessary to lift people out of poverty. Opponents generally oppose the idea because it might drive inflation into the system, and push some under skilled workers into the poverty that the change was suppose to prevent.

These theoretical discussions miss the point entirely. Most people who work at minimum wage jobs are not in poverty nor are even poor. Many are college students working part-time while living comfortably at home. Many are the secondary bread winner in the house. Some are people like me who work part-time to get out of the house. Changing the minimum wage law will not lift these people out of poverty because they never were in poverty in the first place.

Even if working minimum wage work was connected to poverty, increasing the baseline will not cure poverty. It is a subsidy which transfers income from producers and consumers to under skilled workers. It does nothing more than make a lack of skills more pleasant. This subsidy does not fix the problem. This solution subsidizes the problem.

If the objective of increasing the minimum wage is to reduce poverty, it makes more sense to deal with this issue through more targeted welfare programs. And, we do. This is where increasing the minimum wage crystallizes the statement of Reagan. As we increase the minimum wage, which doesn't deal with poverty, the additional income triggers reductions in the support provided by programs that do provide resources to those in poverty.

Even if the minimum wage were connected to poverty, the concept of a minimum wage ignores the disease and subsidizes the problem. The problem for these workers isn't the wage. The problem is a level of productivity that fails to command a higher wage. The visible outcome of unskilled workers is poverty. The minimum wage deals with the outcome rather than the cause of the problem.

Supporters put forward a disingenuous response to this criticism of increasing the minimum wage. They argue that wages are not tied to productivity, saying that minimum wage hasn't kept pace with productivity. For example, “If the minimum wage had kept pace with productivity growth [since the late 60's] it would be $16.54 in 2012 dollars.” ~ Dean Baker.

The problem is of course the critic fails to distinguish between productivity of capital and productivity of labor. If GE upgrades a plant to increase productivity 20%, the company is highly unlikely to give the janitor a 20% raise. Capital created the gain, and the economic rents flow to the shareholders rather than the worker.

The contrast between labor and capital productivity are clearly seen in the agriculture market. Since 1940, farmer’s role in the workforce has dropped by more than 80%. That reduced work force covers nearly three times the number of the irrigated acres. While productivity has increased substantially, the National Citizens Council for Migrant Labor says that wages fell by 16% in real terms - and that is seasonal work. Productivity in this case comes from the tractor and not the worker. The rents on the tractor flow to the owner, not the employee.

In the simplistic world of the supporters, if we increase the minimum wage employers will increase the wages of existing workers. The flaw in this view is that as we increase the minimum wage, employers will have a larger pool of workers from which to draw. Overtime, lesser skilled workers may not capture any higher returns. If we increase wages for the clerks of McDonalds' to $15/hr, McDonalds will redesign its positions to $15/hr - and fire much of its existing staff.

If we increase the minimum wage from $7.25/hr to $9/hr, employers will have the option to hire from all of the people willing to work for 7.26/hr to 9/hr. It is unlikely that employers will ignore the more talented workers. Yes, they will pay more, but they will require more. The low wage worker who is worth $7.25/hr isn't magically going to be worth $9/hr.

As is frequently the case, our government is willing to do really foolish things in the name of votes. My guess is that this change will not garner favor with those who actually work for minimum wage, but rather the latte sipping elite who feel compelled to throw other people's money at other people's problems.
So abolish the minimum wage, then.
 

ttwtt78640

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The historic high for the federal minimum wage (adjusted for inflation) was in 1968 - in today's dollars that would be $10.56/hour. The problem, as you say, is not what the lowest possible pay/hour is - it is that the social "safety net" programs now provide more than twice what that "semi-skilled" labor can provide. If the effort to double your labor's productivity (that is no small feat) makes ZERO difference in your standard of living then the economic incentive to do so is totally fictional.
 

sawdust

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The solution to low wages is full employment. When employers are forced to compete for employees the market causes wages to increase.
 

JoeTheEconomist

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The historic high for the federal minimum wage (adjusted for inflation) was in 1968 - in today's dollars that would be $10.56/hour. The problem, as you say, is not what the lowest possible pay/hour is - it is that the social "safety net" programs now provide more than twice what that "semi-skilled" labor can provide. If the effort to double your labor's productivity (that is no small feat) makes ZERO difference in your standard of living then the economic incentive to do so is totally fictional.
Do you have a source on the average safety net program now provides?

Thanks,
 

Diogenes

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Increasing the minimum wage is a mind numbingly stupid idea, but no one in the debate gets to the point. This idea is a clear manifestation of Ronald Reagan quip : the nine most frightening words in the English language are: I'm from the government, I am here to help.
True. If raising the minimum wage would help, why not raise it $100,000 per hour? That way we could all work half a day and take the rest of the year off in comfort. Or (entering conspiracy theory territory now) is it possible that there is a point beyond which raising the minimum wage is counterproductive?
 

Deuce

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Dear Joe The Alleged Economist:

You are wildly incorrect about minimum wage worker demographics.
 

Deuce

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True. If raising the minimum wage would help, why not raise it $100,000 per hour? That way we could all work half a day and take the rest of the year off in comfort. Or (entering conspiracy theory territory now) is it possible that there is a point beyond which raising the minimum wage is counterproductive?
If lowering taxes is good for the economy, why not 0% taxes for all?

Or (entering conspiracy theory territory now) is it downright stupid to extrapolate every argument to such absurd extremes?
 

ttwtt78640

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Do you have a source on the average safety net program now provides?

Thanks,
Here are some links on the subject:

Work or Welfare: What Pays More? - Real Time Economics - WSJ

Good work if you can get it: $26,837 average welfare benefits in MO « Watchdog.org

Total Number of U.S. States where Welfare pays more than an $8 per hour job 40
Number of U.S. States where Welfare pays more than a $12 per hour job 7
Number of U.S. States where Welfare pays more than the average salary of a U.S. Teacher 9
Welfare Statistics | Statistic Brain
 

Diogenes

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If lowering taxes is good for the economy, why not 0% taxes for all?

Or (entering conspiracy theory territory now) is it downright stupid to extrapolate every argument to such absurd extremes?
You should check out the work of Art Laffer for the answer to your question about taxes. His theories proved out quite well during the Reagan years. What is really downright stupid is the insistence that "if some is good, more is better" for every situation.
 

Deuce

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Oh god not that Cato Institute bull**** again. (did you notice that was the source for all three of your links?)They grossly exaggerate the "typical welfare family's" assistance and completely ignore the fact that most families receiving these various benefits do actually have income from work. What they've given you is a hypothetical maximum benefit that in practice never happens.


One of the major Libertarian logical flaws is always readily apparent in minimum wage discussions. They have this inherent assumption that if you are being paid minimum wage, it's because you are "worth" minimum wage. In the real world, the employer-employee relationship is not an equal one. No, actually, people can't always just go get a better job or better education, or start their own business. Education and business startups cost money, and someone working minimum wage can barely feed themselves. And where do these hypothetical higher paying jobs come from? If you filled every single job opening in this country right this instant, there would still be millions of unemployed people. They can't even get a minimum wage job, much less a better one.

The idea that McDonald's would or could "fire much of its existing staff" if forced to pay $15/hour is laughable. Until they make a robot that can cook food and serve it, there's only so many people you can cut there. When they do make that robot, those people are getting cut no matter what their pay is, because McDonald's does not and never will give a **** about the well-being of its employees.
 

Deuce

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You should check out the work of Art Laffer for the answer to your question about taxes. His theories proved out quite well during the Reagan years. What is really downright stupid is the insistence that "if some is good, more is better" for every situation.
You should check out the definition of a straw man. Nobody in this thread has suggested anything remotely resembling this "more is better for every situation" idiocy. But you went and pulled this $100,000 nonsense out of your ass anyway. Why? I think raising the minimum wage is good, therefore I must agree that $100,000/hour is a good minimum wage? Well then you support 0% taxes. Because you started this straw man nonsense, not me.

The Laffer curve is a useless model because there's no way to actually apply it to the real world. You can't actually declare with any certainty where you are located on the curve currently, or even whether multiple peaks might exist.
 

Deuce

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The solution to low wages is full employment. When employers are forced to compete for employees the market causes wages to increase.
While we're at it, I'd like a unicorn.
 

TiredOfLife

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While we're at it, I'd like a unicorn.
Me too. And Jesus promised me a pony.

Just for the heck of it, in Capitalism what is considered "full employment", and why is extremely low unemployment not considered to be a good thing, by Capitalists that is?
 

phattonez

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If lowering taxes is good for the economy, why not 0% taxes for all?

Or (entering conspiracy theory territory now) is it downright stupid to extrapolate every argument to such absurd extremes?
0% taxes would be fantastic.
 

KevinKohler

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Is average worker earning minimum wage worth whatever that wage is?

No. Otherwise, no minimum wage would be required for that wage, companies would just altruistically pay more than the labor is worth.

Here's the thing, though.

How much is having extra currency being spent in the market worth? Pay people more, they spend more. Voila, economic stimulation.
 

phattonez

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Me too. And Jesus promised me a pony.

Just for the heck of it, in Capitalism what is considered "full employment", and why is extremely low unemployment not considered to be a good thing, by Capitalists that is?
Full employment - everyone who wants to work is working. Extremely low unemployment is a good thing. However, labor laws and minimum wage laws get in the way of full employment. Those things are not capitalist ideals.
 

ttwtt78640

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Oh god not that Cato Institute bull**** again. (did you notice that was the source for all three of your links?)They grossly exaggerate the "typical welfare family's" assistance and completely ignore the fact that most families receiving these various benefits do actually have income from work. What they've given you is a hypothetical maximum benefit that in practice never happens.


One of the major Libertarian logical flaws is always readily apparent in minimum wage discussions. They have this inherent assumption that if you are being paid minimum wage, it's because you are "worth" minimum wage. In the real world, the employer-employee relationship is not an equal one. No, actually, people can't always just go get a better job or better education, or start their own business. Education and business startups cost money, and someone working minimum wage can barely feed themselves. And where do these hypothetical higher paying jobs come from? If you filled every single job opening in this country right this instant, there would still be millions of unemployed people. They can't even get a minimum wage job, much less a better one.

The idea that McDonald's would or could "fire much of its existing staff" if forced to pay $15/hour is laughable. Until they make a robot that can cook food and serve it, there's only so many people you can cut there. When they do make that robot, those people are getting cut no matter what their pay is, because McDonald's does not and never will give a **** about the well-being of its employees.
Spin it any way that you wish to but federal spending on income based social programs (income redistribution) is a very large amount. In 2012 it was $411 billion or over $1,000 per U.S. citizen.

Policy Basics: Where Do Our Federal Tax Dollars Go? — Center on Budget and Policy Priorities
 

KevinKohler

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Full employment - everyone who wants to work is working. Extremely low unemployment is a good thing. However, labor laws and minimum wage laws get in the way of full employment. Those things are not capitalist ideals.
No labor laws, or safety nets, etc, sounds great until you're one of the green rats.
 

phattonez

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No labor laws, or safety nets, etc, sounds great until you're one of the green rats.
Labor laws and safety nets are a ruse. We didn't have mass starvation or scores of deaths in workplaces before these laws came into place. Funny how we still have the poor and workplace injuries, yet half of our paychecks are gone and high unemployment is now considered normal.
 

KevinKohler

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Labor laws and safety nets are a ruse. We didn't have mass starvation or scores of deaths in workplaces before these laws came into place. Funny how we still have the poor and workplace injuries, yet half of our paychecks are gone and high unemployment is now considered normal.
Mass starvation? No, not since the dust bowl. Scores of deaths at job sites? Yeah...yeah, we had those. What history are you looking at that you think life was harsher prior to OSHA than now?
 

JoeTheEconomist

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I appreciate the link. It adds clarity to the why the frick are we doing this.
 
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