Answering an Objection to Raising the Minimum Wage

[Person Man]

Some free-associated ideas-

Doesn't higher wages mean higher demand  and higher demand mean a return to enough inflation to help people deleverage and retire their debt?

Also, wouldn't a modest forced increase in labor prices simply close businesses that were already unsuccessful anyways?

The calculus might be much different if inflation was above 4 or 5%, but its more like 1%. The point really isn't we have to raise the minimal wage but rather that we can afford to.


I think the most honest and best argument against the minimal wage is  the moral argument that "their businesses are none of ours".

[Person Man]

Some free-associated ideas-

Doesn't higher wages mean higher demand  and higher demand mean a return to enough inflation to help people deleverage and retire their debt?

Also, wouldn't a modest forced increase in labor prices simply close businesses that were already unsuccessful anyways?

The calculus might be much different if inflation was above 4 or 5%, but its more like 1%. The point really isn't we have to raise the minimal wage but rather that we can afford to.


I think the most honest and best argument against the minimal wage is  the moral argument that "their businesses are none of ours".

Austrians figured out a long time ago that the oversimplified demand models are wrong, and that's part of the reason we suffered through stagflation.

It is reasonable to assume consumers will jettison their inflating dollars for income generating assets or durable goods, but if inflation becomes high and stable, what actually happens is that consumers hoard money in preparation for rising future prices. Businesses do the same with labor demand, though it makes little sense. The inverse is true for deflation.

People do not base their spending and consumptive habits on likely future outcomes. Instead, they base consumption and spending on subjective-value to the recent past. If gasoline dropped to $1 per gallon, you can almost guarantee that consumption per capita would be a hell of a lot higher than 1999. Why? Subjective value. This gasoline is a steal!! Buy buy buy buy!!!

We should be using subjective value theory in the labor market by reducing the cost of healthcare and creating an equitable payroll tax with no income threshold and lower rates for everyone.

Well, it seems as I suspected that the problem with increasing the minimum wage is not that it can't be afforded but simply that there are psychological barriers.

Also, it seems that as inflation hits a certain level, it seems reasonable that people will hoard what they have to get what little they can with their money but you can always adjust policy to higher inflation rates.

Subjective value seems to be a theory that is easily manipulated to give you the answers you want. The entire idea that there is rational irrationality i.e. A bank saves its money to be in the black by not lending and as a result, growth suffers. And as a result there is a reasonable role in regulation. That all being said, uncapping payroll taxes to better subsidize health care in exchange for some sort of marginal tax relief might make it seem that its cheaper to hire people though it wouldn't be.

The bottom line is still that raising the minimum wage could raise inflation to a more reasonable rate and still let more people pay off debt. Eventually when people feel compelled to save, inflation will start to decline again.

[Person Man]

Subjective value seems to be a theory that is easily manipulated to give you the answers you want.

That's what people said 100 years ago, now they accept the theory as a postulate, more or less. Economists of all stripes are interested in consumer sentiment and value-proposition, rather than nominal-value and the theoretical decisions of Homoeconimus.

Subjective value theory is not rational irrationality. It was developed to explain seemingly irrational behaviors of consumers, like their willingness to pay hundreds of dollars for a gallon of wine, but only a few dollars for a gallon of gasoline. However, the theory is not limited to consumptive paradox.

The purpose of payroll tax reform reform is subjective value, not absolute cost cutting. Under the current arrangement, boosting an employee from $60,000 to $80,000 will generate 15.3% marginal payroll tax. Raising salary from $120,000 to $140,000 generates just 2.9% payroll tax for Medicare. Wealthy people have higher income taxes, but income tax rates are individualistic and avoidable with non-income compensation. Virtually all pay growth occurs above the FICA tax threshold for this reason.

If payroll taxes were flat, rather than regressive, we'd have much better employment numbers. If all statutory tax rates were flat, and we had a system of transparent refundable tax credits, the labor market would be in much better condition. Look what income security and healthcare security have done for senior employment rates.

That could be an interesting idea. Then again, like I said, there's an infinite amount of ways to run an economy that will produce growth. But I had an hour long conversation with my brother last night who is a senior in economics who is taking the GRE. A big issue in economics is what kind of society we want to live in. Personally, I think that a society/government (I am open to both of these things being interchangeable, exclusive or even "society" simply being an artificial construct)  that doesn't protect all of its members from the state of nature(where it is a distinct possibility that you can die of a reasonably preventable cause) doesn't justify its existence(why live by certain rules if you get nothing in return?)...at least for the people it discards into the state of nature. Beyond that caveat, I have a very open mind.

I suppose in the mind of conservatives, the role of imprisonment or warfare/lethal force is to solve this paradox.