Answering an Objection to Raising the Minimum Wage

[JRP1994]

One common objection I have heard to raising the minimum wage is that it solves nothing, and would lead to higher unemployment among lower-class and younger workers. The argument being that, if the minimum wage rises (thereby raising the cost of production), prices will rise, effectively nullifying the benefit of increasing the wage. Furthermore, the argument claims that having to increase the minimum wage will cause employers to cut back hiring (either by hiring fewer workers, or by replacing human workers with technology), thereby leading to an increase in unemployment.

My question is addressed to proponents of higher minimum wage. How do you address this objection?

[AggregateDemand]

They find a market with inflated prices where federal minimum wage is well below the poverty standard of living. They raise minimum wage, knowing that the local impact will be minimal. Then they argue for increasing federal minimum wage, though they know the negative impact of artificial wage floors in other markets will be more acute.

Ideology uber alles, you see.

[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".

[AggregateDemand]

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.

[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.

[Oakvale]

I'm not really sold on the idea of doubling the US minimum wage (at least not in one fell swoop) but simple criticisms of the idea like that tend to overly rely on Econ 101 classes where you learn something like this -



- and, floored by the simplicity of classical models, adopt the worldview that MINIMUM WAGES CREATE DISEQUILIBRIUMS AND RAISE UNEMPLOYMENT without really considering the scale of the effect.

There's obviously going to be some correlation between higher unemployment and a higher minimum wage, but the important question here should be whether the benefits of the higher wage outweigh the increase in unemployment. As far as I'm aware the empirical evidence indicates that it's probably not a 1:1 relationship. That's not to say that doubling the minimum wage overnight wouldn't cause a pretty nasty shock to the market but if we're just talking in general terms here...

[AggregateDemand]

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.

[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.

[Antonio the Sixth]

The simple answer is that a minor and temporary increase in unemployment is a perfectly acceptable inconvenience in light of the long-term economic and social benefits of guaranteeing a living wage to all workers.

[AggregateDemand]

The simple answer is that a minor and temporary increase in unemployment is a perfectly acceptable inconvenience in light of the long-term economic and social benefits of guaranteeing a living wage to all workers.

The government is not guaranteeing a living wage. They are forcing the private sector to pursue moralistic social policy. The market stops functioning properly, and lazy government bureaucrats dump their work on the private sector. It's the worst of both worlds.

[Antonio the Sixth]

The simple answer is that a minor and temporary increase in unemployment is a perfectly acceptable inconvenience in light of the long-term economic and social benefits of guaranteeing a living wage to all workers.

The government is not guaranteeing a living wage. They are forcing the private sector to pursue moralistic social policy. The market stops functioning properly, and lazy government bureaucrats dump their work on the private sector. It's the worst of both worlds.

"The market functioning properly" is not a desirable social outcome.

[AggregateDemand]

"The market functioning properly" is not a desirable social outcome.

I know right. Nothing is better than a world without transparent pricing.