Minimum Wage Fantasy

In Russell Nelson's blog entitled, "A Living Wage," he jokes that George Gonos' opinion that the minimum wage should be changed from $5.15/hr to $10.00/hr is not Economic Sociology but rather Economic Fantasy. I agree with him.

Some of the points that Nelson makes in his blog are, first of all, that no employer can be forced to employ anybody. So, since a raise in minimum wage would cause the employer to loose money on the same amount of employees doing the same amount of work, something would have to be done to decrease the cost to the employer. This could be one of two things: a raise in prices or a cut in the amount of employees.

Since a raise in prices would decrease the demand for the product and, thus, decrease sales, the only other possible option would be that of cutting down on the amount of employees. Of course, from what I've learned in economics, a cutting down in the amount of employees will lead to a decrease in the production of goods which will also lead to a raise in price and a decrease in sales. To me, it looks like a lose lose situation.

Ok, as a struggling college student, I agree that a raise in minimum wages would be nice but not if the products that I have to buy in order to live are fewer and higher priced. I'll be in the same "poor" situation that I was before, possible even worse.


Dr. Tufte said...

Note that "A Living Wage" is the name of the post, the blog is entitled "The Angry Economist. Check that spelling too!

The economic thinking in this post is pretty good. There are two dimensions to an increase in the minimum wage that I would add. First, an employer could pay the higher wage and remain profitable by being harder on the workers - one advantage of low wage jobs is that many of them don't have much oversight. In fact, many jobs are theorized to pay "efficiency wages", that is, wages that are artificially high but come with a low threshold for (say) getting fired. Secondly, the employer could remain profitable by reducing the quality of other aspects of the good produced. A restaurant could afford to pay its workers a lot more if they stopped cleaning the dishes.

In general, living wages (that's the generic name given to proposal for a minimum wage substantially higher than what we have) are beneficial on the surface. But economics is partly about learning to dig deeper to figure out what the costs associated with those benefits actually are. Personally, I'm against living wage proposals (because they are a form of price floor), but I'm intrigued enough to keep listening to the debate.

Lizzie said...

I have heard of this, but until this blog/article I wasn't sure what this debate was all about. Here is an idea, why don't we just put more energy/money into educating and training people. The only people who will really benefit from the increase are the unskilled workers (until they try to buy a gallon of milk for $10)...and it seems that everybody else will be hurt by it. I would love a pay increase now, however, I would rather wait a couple of years and see a bigger pay increase (i.e. graduation).

kamm said...

I can't believe that people are inclined to think that raising the minumun wage for "unskilled" workers will better their situation. I think this is one of the many ways that we could become too dependent on our Government making regulations to "save us" from that tough world world out there.

The more laws and intervention our Government makes to "please everyone", the more individual freedom we will lose by having those new laws. The more dependent we become on Government help in such matters, the less innovative and self sufficient we will be.

Dr. Tufte said...

It's always refreshing when students see things the way the textbook does.

I think it was George Orwell who said (something like) "that is an idea that is so bad only an intellectual could believe it". Living wage proposals fall into that category.

This is more macroeconomic, but Lizzie is right - wages are very tightly related to productivity. Raising productivity will increase people's wages. It isn't clear though that training programs and education are cost effective ways to do that.