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Understanding the Minimum Wage III

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PostPosted: Sun Sep 13, 2009 1:16 pm    Post subject: Understanding the Minimum Wage III Reply with quote

Economist John Cochrane said:

"...government control of markets, especially asset markets, has always been much worse."

PeakTrader said:

I disagree, there are good, bad, and roughly neutral policies. For example, using monetary and fiscal policies to smooth out business cycles (both short-term and long-wave) is a good policy.

Also, I may add, regarding the minimum wage. There are many mechanisms, rather than underemployment, to offset a higher minimum wage.

Excess U.S. capital (from a record 20 consecutive quarters of U.S. corporate double-digit earnings growth and massive foreign capital inflows) shifted to U.S. borrowers who weren't credit worthy, to clear the market, and now the excess capital is being destroyed by inefficient government policies (e.g. spending $250,000 for a $50,000 job). It would have been better to give U.S. workers higher wages, under those conditions.

To take the baseball analogy, every player has a role. You're not going to tell the shortstop he can work only six innings because his minimum wage is too high. You're either going to make him more productive, to meet the higher wage standard, or hire a better player, at the higher wage. I know from experience, you can make most existing workers substantially more productive with the right management.

Or, you can slow the wage increases of superstar players, or more productive players, lower your profit, lower cost, or increase price.

Six Ounces said...
To take the baseball analogy

Bad analogy. Baseball players have skills which are not shared by millions of people, they generate tens or hundreds of millions of dollars in marginal revenue, are not paid by the hour, they make a minimum of six-figures, and they are unionized labor.

It would have been better to give U.S. workers higher wages, under those conditions.

You're clueless. When banks make a loan they are creating money. The loan becomes an asset. If the loan becomes delinquent, the asset's value diminishes. As that happens, money is destroyed. No one stole it, it simply vanishes!

Loans are pledged with two things: ability to repay and collateral. The problem is that lenders, earnestly trying to earn fee income, generated loans based more on collateral value than ability to repay.

This money cannot be created without capital to fund it, a buyer's promise to pay, a seller/builder's desire to provide a property, and an actual property to serve as collateral. Without all those things, the money doesn't exist. If it doesn't exist, it cannot be transferred to anyone else.

Banks don't create money out of thin air just to give it to workers whose profession bears no relevance whatever to the purpose of banking.

Your suggestion that this capital could have gone elsewhere is an utter absurdity. Why the hell should banks just start giving away money to minimum wage workers (who don't even work for them)?

The bank's workers got paid handsomely from the business. Bank employment and wages were high. Now most of those people are out of work. Financial activities took the largest hit behind Construction, Business Services, and Manufacturing. And Financial Activities got hit before Manufacturing and Business Services.

Wages are low for low-skilled people because they do not and CAN NOT produce more than their marginal revenue product. There is no way to squeeze that turnip and get blood. The Efficiency Wage Theory is complete garbage.

Fast-food restaurants are extremely sensitive to market conditions and have 60 years of experience. If they could get more productivity and raise profits simply by paying workers more, they would do so. In fact, many DO pay more than the minimum wage, not because of Efficiency Wages but because of labor supply and demand.

Most restaurants (fast food and otherwise) employ illegal aliens. For those who are not at or below minimum wage, they work "off the books" so there is no workers compensation, social security, or medicare taxes paid on them. Their labor is nearly worthless and interchangeable with every other unemployed person.

Paying a low-skilled person above their marginal revenue product only insures 4 things:

1. Lower profits
2. Higher prices
3. Lower employment
4. Lower incentive to gain human capital and rise above the level of their current job.

BTW, there is an entity which DOES create money and gives it to low-wage workers. It's called "government". The bottom 40% of income earners pay negative taxes net of transfer payments. Your blessed low-wage workers are already beneficiaries of money they didn't earn and other people have to pay for.

PeakTrader said...
Six Ounces, to give you an analogy you can relate to:

The janitor from Hondurus will still clean the toilet six or seven days a week after his $6.55 to $7.25 an hour raise. The firm isn't going to have the toilet cleaned four days a week, because the janitor got a raise. If the current janitor can't improve his productivity to make up for the raise, the lady from Guatemala, who's a better worker, may be willing to work for $7.25 an hour.

Giving money to people who can't pay it back is not a good policy (see financial crisis).
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