reply on: Help me understand minimum wage logic better \ stacker news ~econ

pull down to refresh

534 sats \ 13 replies \ @SimpleStacker 4 Jan \ on: Help me understand minimum wage logic better econ

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

deleted by author

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.

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

Footnotes