[rt]

Hi Dr. Herbener,
In the most recent Mises Daily Article, George Reisman argues that the minimum wage benefits high skilled workers at the expense of low skilled workers because employers will hire the former if the price for the two is the same.
http://www.mises.org/daily/6630/The-Minimum-Wage-Forces-LowSkill-Workers-to-Compete-with-HigherSkill-Workers
After I shared the article on Facebook, someone expressed some criticism but in all his presumptions low skilled workers are somehow employed at the new minimum wage (and will then spend it and boost the economy, at least in the short term, because poor people tend to spend a larger part of their wages than rich people).

If the minimum wage is increased, do employers automatically have to increase the salaries they pay or only when they hire new workers? If yes, could one argue that in the short term there’s a benefit for low-skilled people, who are already employed? And if inflation diminishes the negative effects of the minimum wage in the long term, could one argue that the negative effects in the long and short term are minimal?

He went on to say that higher skilled workers wouldn’t go for low skill jobs such as in Fast Food Restaurants etc. I suppose this is true for surgeons but workers at the margin might very well do just that. Finally even if high skilled workers wouldn’t go for low skill jobs; employers would still not hire low skilled people if their marginal revenue product is beneath the minimum wage. Do I see this correctly? Thanks a lot!

[jmherbener]

If the minimum wage is raised to $15, then it would be a criminal offense for an employer to pay less than $15 to any of his workers regardless of when they were hired. So, there is no benefit to low-skilled workers who cannot generate at least $15 an hour in DMRP. Low-skilled workers who remained employed must be able to generate at least $15 an hour in DMRP. Otherwise the law makes it a crime to employ them. So, an effective minimum wage destroys all legal jobs for workers with DMRP below the minimum wage and entrepreneurs will abandon businesses that rely on labor that produces DMRP below the minimum wage. Unless they can adapt by restructuring in such a way that their lowest skilled workers produce at least $15 in DMRP, restaurants will go out of business. The lowest paid jobs, which pay $15 under the minimum wage, can only be filled by workers who generate at least $15 in DMRP. Free labor market provide the opportunity for entrepreneurs to configure their businesses in such a way as to employ lower-skilled workers at wages commensurate with their DRMPs.

[rt]

Thank you, that makes a lot of sense and I told him this. But this didn’t bother him at all. In fact he said that since all the manual labor has been outsourced or replaced by machinery, there are now only service sector jobs, that can’t be outsourced. So when the minimum wage increases, labor costs increase but this wouldn’t hurt businesses, they would just have to raise prices and consumers would be willing to pay the higher prices (because they can’t import the service, I assume).
This was his reasoning. Is there any merit to this theory? And wouldn’t low skilled workers be hurt by the price increases as well? Thanks again!

[jmherbener]

It is false that all jobs have been out sourced or replaced by machinery. Just take a look at the distribution of employment in the different sectors of the economy.

http://www.bls.gov/emp/ep_table_201.htm

Prices of output are determined by consumer demands, not costs of production. Higher wages cannot be passed on to consumers by raising prices. If it were true that businesses could raise prices without any negative repercussions in lost sales, then businesses would have already raised prices before they had to pay higher wages. Businesses always ask the highest prices they can given consumer demand. If they ask prices high enough, the amount people buy will decline.

Consumers cannot pay ever higher prices for goods unless the money supply increases. With a given stock of money in society, if consumers pay more for some goods, they must pay less for other goods. Regardless of whether an entrepreneurs are producing in a market in which their output prices are rising or falling, their input prices will adjust accordingly. If their output prices are rising, then they will increase their demands for inputs and drive input prices up until no additional profit can be made. If their output prices are falling, then they will decrease their demands for inputs and drive input prices down until no losses are suffered.

[FRANKDEVILLE]

I hope this is the appropriate place for this but I am also severely confused about minimum wages. I was under the impression that the large majority of economists agreed that minimum wages are destructive and increase unemployment. It makes sense that the more labor costs, the less would be used. but debating with others I had bee under the impression that the consensus was on my side.It looks to me like it started changing 20 years ago and that there is currently no real consensus on minimum wages, or that the majority may support a minimum wage hike. Is it just keysians having more influence than they should? Cherry picked data? I saw something about 7 nobel winning economists supporting a minimum wage hike. I would say nobel schmobel but then I often refer to hayek and friedman as nobel winners who support my free market position. Pice controls can’t be good, can they? does a majority of economists really support them? What am I missing?

[jmherbener]

Most economists do agree that a minimum wage at a high enough level is destructive and would increase unemployment. What they disagree about is the answer to empirical questions such as “what is the magnitude of the unemployment generated by raising the minimum wage incrementally from $7.25 to $10.10 over the next two years” and policy trade-offs such as “would the gains in higher wages for some offset the losses in wages for others,”

This business week story is indicative of these issues:

http://www.businessweek.com/articles/2014-01-14/seven-nobel-economists-endorse-10-dot-10-minimum-wage

So, I don’t think you’re missing anything. I think the economics profession, having sowed the wind of model building, is reaping the whirlwind of politicalization.

[gpm2313]

Consider the following scenario: The quantity of money in circulation in an economy doubles and yet there is no increase in the price level. Would this empirical evidence make an economist doubt the fact that an increase in the money supply leads to a rise in prices? Certainly not; the economist would just point out that in obtaining the said evidence, all else has not been held equal. Thus, money demand might have risen along with this increase in money supply, or the quantity of goods produced might have risen as well. Taking all the effects together, one can explain the stable price level despite the rise in the money supply.

The case of empirical evidence regarding the minimum wage not reducing employment is similar in nature.

[gharvey]

I’ve heard many times that unions are almost always behind minimum wage hikes because their hourly rates are contractually tied to the minimum wage. I wonder if that is still true or never was. If it was true then it would betray enlightened self-interest, not compassion for the poor workers.

Greg

[jmherbener]

It wouldn’t matter whether or not union wages were tied to the minimum wage. Minimum wages raise union wages regardless of legal conditions. Minimum wages raises union wages by criminalizing the hiring of low-wage workers. With a minimum wage, businesses can no longer configure production with more low-wage labor, but must find a configuration with more high-wage labor and more productive capital. Walter Williams tells the story about how, when he was a youngster, businesses would hire a gang of teenagers to move boxes in a warehouse, but with the minimum wage it was cheaper to hire one union workers and a forklift to do the same job.

Take a look at Williams’s book, The State against Blacks.

http://fee.org/the_freeman/detail/a-reviewers-notebook-the-state-against-blacks

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