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Tuesday, December 6, 2016

Seattle minimum wage update

Invictus - Seattle minimum wage update. Long story short, raising the minimum wage doesn't cause unemployment, because

1. there are feedback effects that mean the higher-paid plebs can now spend more, and

2. employers pay their employees far, far less than their marginal product of labour.

Greg Mankiw would admit this stuff if he was an economist, instead of a rentawhore grifter for the Republican party.


  1. I was under the impression that the real argument against increasing the minimum wage was not that it led to a noticeable increase in unemployment (not right away anyways) but that is actually harmed the very people who a minimum wage increase was supposed to help.

    1. Yes, it harms them, by giving them more money so they can afford food.

      The basic 1st-year economics argument is that raising the minimum wage causes unemployment. It's utterly false but it's still in all the textbooks, because all the textbooks have to get past the Republican-state censors. It's basically Republican grifter propaganda disguised as economics.

  2. Hmm, not sure where you go to school, I assume you don;t cross the border, but most of the economics text books I saw in Canada were pretty left leaning. "Yea, there was this guy named Milton Friendman who sucked and knew nothing....but Keynes". Then again, from the few electives in economics I did take it seemed mostly like mysticism to me.

    Anyways, it may not cause unemployment but I don't see it creating more jobs and it will be interesting to see where the jobs move to. As you say, some employers do pay their employees far less than their marginal product of labor that they could afford to pay their employees more, but not all.

    Its the people who grew up in slums who had a poor level of education, or didn't complete education, who may not be able to further their education because of child rearing obligations, or an immigrant who grasp of english is poor, who will end up suffering the most. I mean, if your a business owner and you had to fill an entry level position with someone who graduated from a decent high school and comes from a decent neighborhood vs someone who does not who would you likely hire? (Assuming your not one of the guys from a NBC Tonight segment who is trying to make the world a better place by hiring ex con and crack heads to keep your business as a going concern). If the minimum wage is lower, its easier to justify hiring someone who may appear less qualified or capable

    I'm not against the minimum wage increase but I have been wondering if the people who most require an increase in the minimum wage will be disproportionately out competed for jobs, further retarding their ability to develop skills and experience to hopefully move past the minimum wage mark.

    1. When did you go to school? Undergraduate economics has been right-wing for over a decade. They don't teach Keynes anymore at all, except for a week in 2nd year when we're quickly shown IS-LM. We literally get more time listening to professors rubbishing Keynesian economics than we get learning Keynesian economics. (A funny thing is that they know so little Keynes themselves that often they end up proving him right by trying to rubbish him.)

      I'd have to think they must teach Keynes at the graduate level, at least in policy schools, since if you don't know Keynes you're never going to be able to do fiscal or monetary policy. But my hopes aren't high.

      Increasing the minimum wage increases jobs by increasing income at the bottom end, which goes 100% to consumption, thus increasing domestic demand.

      Employers don't hire less in response, because a smaller workforce means less production (because Y=f(K,L), i.e. production is partially constrained by labour), and reducing your production reduces your output, which businesses just don't do. This all relates to elasticity of labour supply and demand: if both sides are inelastic then there's not much "unemployment" generated by a minimum wage increase. And labour supply is very inelastic at low income levels (in fact the curve is forward-falling at the low end), and labour demand at low wages is also inelastic because output needs to be maintained.

      There's even evidence that minimum-wage workers tend to spend most of their increased earnings on things provided by other minimum-wage employers. So it has a positive feedback effect on minimum-wage employer profitability in the general equilibrium solution.

      Also, the intersection point of the labour curves isn't the equilibrium anyway, since there are job search costs which combine with the employer's labour market oligopsony to make the "equilibrium" far below the intersection point of two curves. Read the section on search epsilon from Stiglitz's Nobel Prize speech for an elegant explanation of this. So if the empirical (i.e. what people are actually being paid) "equilibrium wage" right now is $7, upping minimum wage to $10 might not even move the equilibrium above the labour supply-demand curve intersection, because there's no reason to assume the empirical equilibrium is at the intersection given oligopsony and Stiglitz's argument.

      The argument against minimum wage really boils down to the economics field's decades of generation of propaganda and misinformation to justify confiscating more and more of a country's earnings for the rich. The disingenuousness of the movement is obvious when you realize that right-wing paid hacks like Mankiw (and Gunderson at UofT) can only ever argue against it using simplistic 1st-year intro micro models that everyone knows are completely wrong: they never mention labour market elasticity, employer oligopsony, search epsilon, a forward-falling supply curve, general equilibrium, or marginal propensity to consume at low incomes.

      In fact *NO* right-wing economist ever mentions things like general equilibrium solutions, income-differential of MPC, or oligopsony. They *NEVER* do. Because they are only trying to hoodwink the voter who's only ever taken 1st year intro econ and has never seen any advanced economics.

      At that point I could go on about how all of 1st year econ is really just right-wing propaganda and it should be cut from university education entirely (except as historical reading) because Say and Ricardo and Smith are hilariously wrong and only ever used to justify kleptocrat propaganda. But I've got some calculus to study.

    2. So, if poor people spend their extra few dollars on consumption the businesses that benefit from this increased consumption have more money to create jobs? I can see that happening, but just to play devils advocate, why wouldn't they keep the same amount of people employed and use the extra earnings to lower prices in an effort to become more competitive?

      As you said, even though many employers could hire more, or that output would not be hurt by the addition of a few more employees, why would they decide to do it now that they have to pay their existing employees more? I mean, they didn't do it before.

      I played with the numbers a bit and it really seems to depend how much more they would make from increased consumption after wage increases rather then before.

      Another trend I am seeing in large employers, like WallMart, McDonalds, large grocery stores is the advent of self serve. Certainly creates jobs for skilled people but not for unskilled workers. At one point does it become effective to implement new technologies instead of on the ground employees?

    3. Not really addressing anything you brought up, but:

      Para 1: If demand goes up, price does not go down: it goes up. That's one downfall of hiking minimum wage: consumer necessities prices go up, which means other groups like pensioners who've seen no wage increase end up being hurt.

      P3: Yup, it all depends on empirics. And every major grocery manufacturer and retailer has economists who work the data to determine exactly where the new prices have to be. Problem is, empirics is yet another thing that right-wing hacks purposefully ignore.

      P2: they have been hiring. Unemployment has gone down since 2009. The point of hiking the minimum wage is ensuring that the people being hired are able to make enough money to survive and live decently without government assistance.

      P4: well, tangentially, Walmart's been cutting staffing for years already: now it's at the point where it has to start hiring because the customer experience has gotten so fucking horrible that they're losing business.

      As for the McDonald's, yes I've seen they now have self-serve, but that's an efficiency addition, not a labour saver: orders can get assembled faster and earlier with the self-serve kiosk. They still have cashiers and cooks: the lines just move faster.

    4. As an aside, btw: an employer indeed can cut their labour costs sustainably (i.e. not Walmartly) by replacing labour with capital.

      Funny thing about that, when you do this you raise the marginal product of labour, which then has *some* positive effect on wages. There's even a theory (High-wage Economy Hypothesis) that raising MPL thru capital investment is the secret of growth *and* worker prosperity, because it quickly becomes a virtuous positive feedback cycle.

      Problem #1 is, empirically, companies haven't been spending on labour-saving capital, even given the real interest rate being essentially zero: they've been instead substituting expensive US labour with cheap offshore labour, where human capital allows it, and eating the extra transport & logistics costs from doing this. So if companies aren't already substituting capital for labour, there's no natural drive for wages to go up.

      Problem #2 is the Ford problem: you can't grow output through automation faster than the growth rate of wages, or else you end up having to cut output. That's the 80s leftist-version-of-RBC-theory explanation for the Great Depression: introducing the assembly line made output skyrocket, but it also decreased aggregate worker earnings, causing a general glut that it took a worldwide war with 20 million dead to cure it.

      In any case, my own general argument ignores this and just asserts that (from Stiglitz and the monopsony labour model) the EMPIRICAL "equilibrium wage" is far below the supply-demand curve intersection, and drawing a minimum wage line of $10 or $12 on that graph still leaves you below the supply-demand curve intersection. And the empirical "equilibrium wage" produces earnings far below the amount needed to survive on 40 hrs/wk (per the forward-falling labour supply curve model), so a raise in the minimum wage can actually make labour supply decrease as families would be able to survive on fewer hours worked.

    5. Oh and re problem #1 above: one possible reason companies aren't substituting capital for labour is because labour is cheap. But it's cheap not just because Mexico and China, but also because domestic labour is paid so little that it costs too much to replace it with capital.

      And there's a funny thing with capital: as a broad economy replaces labour with capital, capital-intensive industries (i.e. manufacturing) shrink (in GDP share) and labour intensive industry (services) grow. That's just one of those problems that you can't get around. But a corollary is that if services is where the minimum-wage workers are, you don't have to worry about employment dropping, because it's so much harder to replace those jobs with capital OR with foreign labour.