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Help me understand minimum wage logic better

1050 sats \ 42 comments \ @stack_harder 4 Jan econ

So i havnt been a minimum wage worker since i was 14 working in a cafe, cleaning trays so I don't usually pay a huge amount of attention to the various debates on it.

But for reference, I'm currently in Bulgaria and recently they announced another hike in the minimum wage and it made me pay attention because it seems to go up every year. So I had a look.

Here are the numbers since 2021 (to find the Euro amount, just half the number, so 1077 lev is basically 500 euro etc )

2021 – 650 BGN (Bulgarian Lev) 2022 – 710 BGN 2023 – 780 BGN 2024 – 933 BGN 2025 – 1077 BGN

And I can't help but wonder, is this just the government demanding the wages go up? Is that how it works? I mean, the workers haven't doubled their productivity and it's not like business here is booming out of control.

What do you guys make of this? It seems a bit much. I mean, sure, I could say that it's better for people to have some normal minimum, but a business that doesn't increase its profits, will just cut the shift hours.

I imagine the government's underlying slug class will benefit as they just print more money anyway. As an example, we have gov-employed people working outside the municipality and basically all they do is sweep up, there's like 5 of them and all they do is sweep up and sit on their asses. Quite honestly, even 500 euros is too much to be paying 5 people for pretending to be busy all day, buy a sweeper robot using an EU subsidy or something, I don't know.

I asked chtgpt for some reasons for the increase and it said:

But honestly, to point 4, these still aren't competitive wages, and the average person in a village or outside the capital still dreams of going to Germany and making their fortune there because they think the streets are lined with gold.

As for point 5, nothing they can do to stop the real wage eroding because it really feels like we are in a euro/fiat endgame anyway, fucking inflation and shrinkflation absolutely off the scales right now.

So I'm keen to hear some thoughts by the hardcore Austrians stackers on this issue

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534 sats \ 13 replies \ @SimpleStacker 4 Jan

Is that really all ChatGPT said? If so, that's a real travesty, because the basic theory of minimum wage is well understood in economics and is taught in introductory level classes, and it doesn't look like ChatGPT mentioned any it.

The logic of minimum wage is really quite simple:

Without a minimum wage, the wage gets bid up or down depending on how much excess demand or excess supply of labor there is.¹ The wage settles down at a point where the labor demand just equals the labor supply. We call this the "equilibrium point".
If a minimum wage higher than the equilibrium wage is enacted, this reduces the amount of labor demand and increases the amount of labor that's willing to be supplied. But the amount actually supplied can't exceed the amount demanded. So employment is reduced.
Minimum wage reduces economic surplus because it creates an artificially high price of labor. There are people willing to work for lower wages and companies willing to hire them, but the government is refusing to allow these people to engage in free economic activity.

Given that the economic theory is so straightforward, why aren't more economists openly critical of minimum wage?

The answer is that a pair of famous economists once wrote a paper showing that an increase in minimum wage in New Jersey actually increased fast food employment in NJ relative to neighboring PA.² It's outside my specific area of expertise to give a full critique of this paper, or a rundown of the subsequent debate about minimum wage, but this is definitely paper #1 when it comes to arguing that minimum wage is actually good for employment, not bad for it. @Undisciplined, a labor economist, might have a deeper perspective here.

Is there any theory to support why minimum wage might actually not reduce employment?

One possibility is that employers are colluding to keep wages low. If this is what's happening, then the market wage is not actually an equilibrium, and there's actually excess demand at the market wage. A government imposed minimum wage could force the companies to stop colluding and pay the actual equilibrium wage.
- To me, it seems unlikely that fast food restaurants, who are all independent franchisees, could sustain that kind of cooperation. Their profit margins also do not suggest that they are engaged in collusive behavior.
- Even if there's a little collusion, it's highly unlikely that the government is going to set the "correct" wage anyway. And much more likely that the minimum wage becomes a political football, totally devoid of market forces, which is indeed what it has become.

All that being said, how best to communicate a skeptical stance towards minimum wage to someone without an economics education? Here is what I usually say:

I don't support the minimum wage generally because it's putting an artificially set price in the market. If someone is willing to work at a certain hourly rate and a company is willing to pay them, who are we to say they cannot engage in that relationship? If you think the problem is people are willing to work for too-low wages, then instead of putting in an artificial wage, why not ask why they're willing to work for such low wages in the first place, and what can be done about that?
- Usually, this line of communication is convincing to people and makes them think harder about underlying economic conditions.

Labor demand is companies hiring workers. Labor supply is workers willing to work. ↩
Card and Krueger (1994) ↩

261 sats \ 11 replies \ @Undisciplined 4 Jan

The actual effects of minimum wage increases are fairly complicated. Here are just a few points about what happens:

The least skilled people have a harder time getting hired. This is the stronger channel than people actually being fired.
Hours are redistributed to the more productive employees.
Entry level positions are replaced with automated processes.
The minimum wage earning employees, who continue to be employed, earn slightly more than they did without the minimum wage law.
The minimum wage workers who lose their jobs earn significantly less.
The effects are distributed very unevenly along demographic lines.
Low-level manager pay increases. The minimum wage increase causes wage compression throughout the firms, so other wages have to be increased (to a lesser degree) to maintain the premium that incentivizes working towards promotion.

I have written on minimum wage, but I wouldn't say I'm particularly an expert on it.

71 sats \ 10 replies \ @SimpleStacker 4 Jan

And I'd be fine with a discussion of all these complex effects, but I think any discussion needs to start with the basic theory, which ChatGPT apparently failed to mention (unless @stack_harder didn't post the full response).

Also, you are as much an expert on it as anyone here, and I'd probably trust your opinion more than any so-called expert on TV

61 sats \ 9 replies \ @Undisciplined 4 Jan

any discussion needs to start with the basic theory

No disagreement here, but some of the answer to the OP's question has to do with the way these effects manifest.

Eventually, things settle out like you'd expect from theory. However, what people hear when the conventional case is made is something like "Everyone will get fired". Then, when relatively few people actually get fired, it looks like the economists just didn't know what they were talking about.

14 sats \ 8 replies \ @Solomonsatoshi 4 Jan

Truth is minimum wages stimulate the economy as minimum wage workers spend most of if not all of their wages within the domestic economy. Employers bleat about having to pay more for workers yet those same employers enjoy considerably increased demand via the expenditure of the increased minimum wage in the economy. The other major factor which Libertarians seem oblivious to is that minimum wage workers who are frequently living in or close to poverty often lack much negotiating power with wealthy employers. Employers naturally take advantage of this paying the least possible to workers. Minimum wages address this inherent imbalance in negotiating position between wealthy employers and low wage workers. Libertarians cannot point to any advanced and wealthy economy where there is no minimum wage because Libertarian dogma does not work in the real world.

21 sats \ 3 replies \ @Undisciplined 4 Jan

Libertarians cannot point to any advanced and wealthy economy where there is no minimum wage

Here you go: https://www.investopedia.com/articles/investing/080515/5-developed-countries-without-minimum-wages.asp

I guess you have to abandon that talking point now.

91 sats \ 1 reply \ @stack_harder OP 4 Jan

king daddy socialist utopia Sweden has entered the chat lol

0 sats \ 0 replies \ @Solomonsatoshi 4 Jan

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0 sats \ 0 replies \ @Solomonsatoshi 4 Jan

Did you read the link? All 5 of these exceptions to the rule ( Sweden, Denmark, Iceland, Norway and Switzerland) have STRONG UNIONS high and progressive taxes and strong welfare provisions so the usual disadvantage in negotiating power is not present removing the logical need for a minimum wage. These are not exemplar Libertarian nations these are the COMPLETE opposite and only because of their strong welfare and strong unions is the need for a minimum wage actually removed! Your link thus strengthens my argument overall especially regarding the general tendency for low wage workers to not have a strong negotiating position with employers.

0 sats \ 3 replies \ @stack_harder OP 4 Jan

interesting points, i think some countries dont have a min wage per se, but like unions that do the price negotiating, no?

14 sats \ 1 reply \ @Bell_curve 4 Jan

Singapore has no minimum wage or very low

Maybe Hong Kong also

0 sats \ 0 replies \ @Solomonsatoshi 4 Jan

Have you seen the living conditions in the immigrant worker camps in Singapore and their workplace conditions?

Would you want to be one of those workers?

They are tantamount to slave labour.

Is this the Libertarian dream?

Note - Singapore does technically have minimum wages but set at slave labour levels...designed to enable use of temporary foreign workers at very low cost poverty level incomes.

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10 sats \ 0 replies \ @Solomonsatoshi 4 Jan

Yes as the link provided by @Undisciplined states The Nordic nations and Switzerland who have strong welfare and unions do not have minimum wages as they could argue they don't need one as low wage workers have adequate negotiating power via unions and protections from unemployment via welfare and are thus not forced into working for poverty level wages. Interesting and hilariously ironic that Undisciplined cannot give any other example of a developed economy where the minimum wage is not in place...except where the very antithesis of Libertarian ideology is practiced!

51 sats \ 0 replies \ @stack_harder OP 4 Jan

that was a great response, thanks! i find this stuff quite fascinating.

as for chat, there was one bit that kenysianGPT added and it was:

'While these increases aim to improve living standards and economic conditions, they also present challenges. Employers express concerns about rising labor costs potentially affecting competitiveness and leading to workforce reductions or an expansion of the shadow economy.'

so a bit of counterbalance, but obvs not much

90 sats \ 2 replies \ @SimpleStacker 4 Jan

I imagine the government's underlying slug class will benefit as they just print more money anyway. As an example, we have gov-employed people working outside the municipality and basically all they do is sweep up, there's like 5 of them and all they do is sweep up and sit on their asses. Quite honestly, even 500 euros is too much to be paying 5 people for pretending to be busy all day, buy a sweeper robot using an EU subsidy or something, I don't know.

You are very astute to note this point. Indeed, the whole idea about the government "creating jobs" and "providing income" is a huge misunderstanding of economics.

For example, if the government paid 100 people to dig a hole and fill it up again, did that "create jobs"?

In economics, you must always ask, what could have been done with those resources instead? And thus, your comment about the sweeper robot is spot on.

And if someone says, "well those sweeper robots will put the people out of work!" You must say, "No it frees them up to do other, more useful, work!"

78 sats \ 1 reply \ @stack_harder OP 4 Jan

sounds like broken window theory a bit. i often wish I was dealing with a robot because honestly, it would be a much more smooth and efficient process.

the old people in the village are prone to lamenting how life was so great when the factories were still working etc , but those factories weren't even profitable, they were essentially taxpayer-subsidized jobs to keep people busy

Naturally they weren't happy when the inevitable axe fell

21 sats \ 0 replies \ @Undisciplined 4 Jan

Michael Malice has joked that he's pro-minimum wages because he prefers dealing with machines to entry-level employees.

71 sats \ 3 replies \ @denlillaapan 4 Jan

It's a political/ideological redistribution idea, not a sound economic one.

(Yes yes, monopsonistic competition blahblah...does anyone really believe that??)

35 sats \ 2 replies \ @stack_harder OP 4 Jan

what do you think about minimum wage in general? strictly against, or not against having an ideological buffer level?

35 sats \ 1 reply \ @denlillaapan 4 Jan

In general, pretty bad idea. Prices people out of the labor force, structurally making unemployment rate higher.

Public policy wise it's a tradeoff between low pay for some and having people live off the government dole permanently

0 sats \ 0 replies \ @Solomonsatoshi 4 Jan

You seriously dont believe that wealthy employers will not exploit to the last drop of blood a situation where they can pay the least wage possible to workers who have no welfare or union support?

Look at history- Victorian England where all this started in the context of the modern industrialised economy.

Look at the 'developing' world where this is still almost universally the case. Look at the 'developed' world where minimum wages are almost universally in place and where extreme poverty and labour exploitation is very limited via the combination of minimum wages and welfare.

As @Undisciplined as pointed out where both strong unions and strong welfare provision are in place a minimum wage may not be required...but otherwise where it is not present employers will universally and quite logically exploit their position of relative advantage and do so ruthlessly.

Where there are no minimum wages there are huge disparities between the wealthiest and the lowest income citizens. Thus has been shown to reduce the overall performance of the economy- why? Because people living in abject poverty seldom develop their innate human capital potential to the maximum. They cannot afford decent education, training or even to travel to somewhere with a fairer economic paradigm. Meanwhile the very wealthy control the political system and entrench their privilege with no regard for the wider harm to the economy and society. Many nations fit this description and do not need to be named.

46 sats \ 2 replies \ @Bell_curve 4 Jan

Minimum wage laws decrease employment or increase unemployment especially for the poorest or lowest class workers.

Unions often lobby government to increase minimum wage so low wage workers can't compete with higher paid union members. If employers hired low wage workers then they can layoff higher paid union workers.

@Undisciplined and @Rothbardian_fanatic can explain better

21 sats \ 0 replies \ @Rothbardian_fanatic 4 Jan

This is a pretty cogent answer to the minimum wage problem. The only other thing I would add is that no minimum wage allows anyone that wants to work to work.

53 sats \ 0 replies \ @Undisciplined 4 Jan

This is a good succinct place to start. I'm happy to elaborate if OP wants more detail.

31 sats \ 0 replies \ @AlCoHoLnAcEtOnE 4 Jan

At least in the U.S, I don't think the government likes to get involved in wages (other than taking them from us of course) because I think they consider it a problem we should deal with as a society. Which is funny cuz it just goes to prove they don't get involved in anything unless it benefits them.

21 sats \ 0 replies \ @galt 4 Jan

That GTP has been well trained by its woke masters, nothing it says makes economic sense and has been rebuked over and over again

35 sats \ 1 reply \ @SpaceHodler 4 Jan

One thing that never ceases to amaze me is how people conflate wages with minimum wages.

They will say a country is unattractive, because its minimum wage is low. Until not long ago Germany didn't have a minimum wage and somehow people from minimum waged countries migrated there for economic reasons. It surely wasn't for a zero wage, but for a market one, which was higher than in their minimum waged country.

42 sats \ 0 replies \ @stack_harder OP 4 Jan

this is a good point actually because it's usually used as a comparison metric or something, so the higher minimum wage countries are shown as superior and any further nuance is ignored.

i suppose median income is the most correct level, although in places like Bulgaria, almost all the economic activity and money is being made in the capital so statistics get skewed

0 sats \ 0 replies \ @Bell_curve 4 Jan

I did a search for "Milton Friedman on minimum wage"

from chatgpt:

One of Milton Friedman’s famous quotes about the minimum wage is:

"The minimum wage law is most properly described as a law that makes it illegal for an employer to hire a person for less than a certain wage. It is a law that has done the most harm to the most vulnerable members of society."

0 sats \ 0 replies \ @Solomonsatoshi 4 Jan

Such a patsy question! Austrian economics will trot out its usual nonsense that government intervention in the economy is always bad. They ignore the inconvenient reality that a nation states power projection is generally and demonstrably crucial to its overall prosperity. Point three as probably the most important - most employers within the domestic economy will enjoy a considerable increase in demand as the minimum wage workers tend to spend all or close to all of their income in the domestic economy. Also one point the AI ignored which is that low paid workers often close to or in poverty seldom enjoy much power in negotiation with employers resulting in employers taking full advantage of the power imbalance. Ask yourself how many wealthy nations do not have a minimum wage?

17 sats \ 11 replies \ @Coinsreporter 4 Jan

It's inflation that demands an increase in wages from government.

21 sats \ 9 replies \ @stack_harder OP 4 Jan

how often are other countries seeing an increase in min wage tho? pretty sure it hasn't gone up every single year in the Uk for 5 years

35 sats \ 8 replies \ @Skipper 4 Jan

i don't know about UK, but where i live it has gone up every year, and almost doubled in under 5 years. Only the middle class get rekt.

21 sats \ 6 replies \ @stack_harder OP 4 Jan

that's interesting, middle class getting rekt'd is definitely an over-arching theme sadly

0 sats \ 5 replies \ @Solomonsatoshi 4 Jan

No, where there are right wing neoliberal-libertarian governments in power they do not increase the minimum wage to account for inflation and thus the lowest paid get pushed further into poverty. My country New Zealand is an example of this right now where the current neoliberal government refuses to increase the minimum wage sufficiently to match inflation. This is causing a growing decline in economic output not seen in other developed economies. Domestic facing businesses suffer the most as demand from low income earners declines and causes a spiraling decline in the domestic economy. Classic example of the tragically flawed 'logic' of neoliberal-libertarian dogma.

10 sats \ 4 replies \ @Skipper 4 Jan

if you increase the minimum wage, companies will increase the prices, and the middle class are the ones getting rekt, because their wages will almost universally never increase at the same rate

the main issue here is money printing, that's why inflation exists. if we didn't had inflation the minimum wage didn't need to increase

this is economy 101 bro

33 sats \ 0 replies \ @stack_harder OP 5 Jan

i can tell you that as someone working freelance, I certainly have not been able to almost double my earnings since 2021, and my purchasing power keeps heading down the toilet (thankfully i never neglect my stacking as this is the only thing going in my favour), because of the endless minimum wage jackings the mandatory monthly contributions have also doubled (which doesn't benefit me as i you have to pay private if you want any level of service anyway).

Now you could just say fuck off and get better at marketing, fair enough, being self-employed is its own thing with its own pros and cons, but normal shop workers and people in the private sector aren't getting their wages doubled in 5 years either.

I think the Scandi model is better where unions do the negotiating and if you never bothered to learn or go to school, or train, you can have a rep fight your case as to why the state should be paying you 500 euros to push a broom around.

0 sats \ 2 replies \ @Solomonsatoshi 4 Jan

If companies could increase their prices, they would. What limits them is competition and demand level for what they offer. An increase in their costs such as an increase in the minimum wage does not automatically enable them to increase prices. This is Econ 101 bro.

32 sats \ 1 reply \ @Skipper 4 Jan

the number 1 goal for companies is: maximum profit

when you force them to pay higher minimum wages, do you honestly think they will absorb that extra spending and reduce their profits?

of course not, they will simply increase their prices, their % profit margins never change despite what minimum wage you force on them

the CEOs the self's say this exact thing publicly

the main issue is INFLATION (which is 100% related to Central Banks increasing the money supply by multiple % every year).

Edit: Corporate(human) greed is also a problem, but that's another topic

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0 sats \ 0 replies \ @Solomonsatoshi 4 Jan

Yes and where a minimum wage is not in place (and robustly increased to match inflation) this only increases the ability of governments and bankers to debase the currency. Minimum wages give some (not enough obviously!) opposing force to the theft by stealth mechanism of fiat debasement.

Footnotes

the CEOs the self's say this exact thing publicly