PeakTrader.com

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PeakTrader:

It’s foolish to believe anyone can micromanage a large, diversified, and dynamic economy. There are hundreds of major economic forces, in hundreds of dimensions, pushing and pulling a large macroeconomy, simultaneously, which no one has the capacity to understand.

However, mathematical models explain how economic variables interrelate and empirical models explain how those variables interact. A large macroeconomy can be directed, in a crude way, towards optimization.

For example, I’ve shown, related to other econ variables, in much detail, and with no contradictions, raising the minimum wage (a relatively small component) will have a net positive effect on the U.S. economy.

Without going into extensive economics, the positive income and multiplier effects may be stronger than the negative employment effect up to $15 an hour.

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A further explanation is raising the minimum wage will also reduce (other) production costs and raise productivity. Moreover, it’ll correct a “market failure” and reduce income inequality. Furthermore, the textbook model, of the minimum wage, is incomplete, because wages don’t equal prices. Wages are not only the price of labor, they’re also an input and income. The labor economics literature reveals a rise in the minimum wage has little or no effect on employment.

I stated before:

A rise in the minimum wage can increase real economic growth.

The higher wage attracts better workers, with higher reservation wages, to increase productivity.

Minimum wage workers have high marginal propensities to consume. So, a higher minimum wage increases consumption.

Only a portion of the higher minimum wage may be passed along in higher prices, because portions will be absorbed by “excess” wages of other workers (or overpaid workers) and “excess” profits (capital as a share of GDP is at an all-time high, while real wages declined).

Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand.

Real wages of low income workers will rise more than real real wages of high income workers will fall, through prices. So, income inequality will be reduced.

If the economy was able to absorb a $10 real minimum wage, in 1968 (which coincided with a 3.5% national unemployment rate and a much higher teen labor force participation rate), why can’t it absorb a higher real minimum wage with low-wage productivity 25% higher, and the real minimum wage 25% lower, particularly, since per capita real income doubled, profits are much higher as a percent of GDP, and the proportion of real income of the top 20% became much more concentrated, while real median income was stagnant, and then declined since 2000.

Here’s a real example (relatively few new workers were hired after raising the wage – existing workers rose to the higher standard):

There was a fast growing firm that was also very disorganized, because it was so busy. One of the recommendations was raising the starting wage from $11 to $13 an hour for all factory workers. However, management decided that was a bad idea. One reason was there were always plenty of applicants for $11 an hour, over the prior five year period, and of course, there was concern profits would fall, substantially.

However, roughly six months later, management raised the starting wage to $13 an hour and something miraculous happened.

Turnover rates dropped like a rock, overtime was almost completely eliminated, including six day weeks, injuries fell dramatically, hardly anyone called in sick, damage to equipment and products almost disappeared, including steep declines in reject rates, quality rocketed, morale was lifted, management no longer had to spend enormous time interviewing workers, with related paperwork and training, supervisors no longer had to cover for sick workers, to do their jobs, and had time to actually do their work, and profits soared.

Experienced workers who rejected the job when they learned it was $1 or $2 less than they were willing to work for took the jobs at the higher rate. Management had much more time to manage and supervisors had much more time to supervise. So, operations became much more organized and efficient.

Why raising the minimum wage is a good idea:

1. Stimulate economic growth.
2. Correct a market failure.
3. Lower production costs.
4. Raise productivity.
5. Raise teen labor force participation rate.
6. Expand better managed businesses.
7. Create less income inequality.
8. Correct the saving glut.
9. Correct weak demand.
10. Build morale and make work pay.
11. Reduce government support for low wage workers.
12. Reduce parental support for low wage workers.

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I suspect, states that raised the minimum wage (a pro-growth policy, because the national minimum wage is too low) were also more likely to create more regulations and raise taxes, fees, fares, fines, tolls, etc. (which are anti-growth policies when there’s too much regulation and taxes are too high or when the country is in depression).

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I think, there are at least two major forces on employment.

One is raising the minimum wage increases productivity and lowers production costs. So, instead of 100 workers, for example, to produce a level of output, 95 workers, for example, are needed to produce the same level of output.

The higher wage creates incentives for workers to keep their jobs (e.g. working harder for the higher wage), attract more productive idle workers (e.g. with more education), and lowers production costs, e.g. a lower turnover rate.

The other force is when 100 workers get a $1 raise, one worker may lose his job and go on unemployment. So, 99 workers benefit and one worker doesn’t. 99 workers have $1 an hour more to spend or save. However, they’ll likely spend it, because they have high marginal propensities to consume

The freed-up labor, along with a rising labor force participation rate, can expand the economy at a faster rate.

It should be noted, the teen labor force participation rate collapsed after 1980 when the real minimum wage fell below $8 an hour.

Since the minimum wage was established, per capita real GDP has grown at a much faster rate.

Annual per capita real GDP growth:

1863-1937 (75 years): 1.33%
1938-2012 (75 years): 2.44%

Source: Census data and the BEA.

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Low costs, competition, and productivity are good for producers and consumers. We want “lean and mean” firms, and want lower prices.

Of course, a $15 minimum wage won’t stop firms from becoming “lean and mean,” and the higher wage will reduce other production costs, e.g. the extensive and enormous costs of turnover.

Moreover, real wages for low income workers will rise more than real wages for high income workers will fall, through higher prices (note, the Fed has been trying to inflate the economy, because raising nominal growth raises real growth).

A $15 minimum wage will not only give a raise to minimum wage workers, it’ll give a raise to all workers earning between the minimum wage and $15 an hour, and will likely raise wages for workers earning over $15 an hour, e.g. up to $25 an hour.

The (positive) income and multiplier effects may be stronger than the (negative) employment effect, up to a $15 national minimum wage, and the minimum wage can be higher in some parts of the country.

However, we also need to deregulate some of the $2 trillion a year in federal regulations, which are generally regressive, raise prices, lower real wages, and have yet to be absorbed in the economy, along with removing and reducing some state regulations. Furthermore, reducing tax rates for the “middle class” will boost consumption, output, and employment to raise tax revenue.

The higher minimum wage can allow all workers to pay some income taxes, to make fiscal policy more effective, i.e. raising tax rates when economic growth is strong and reducing tax rates when economic growth is weak, to more effectively achieve a more sustainable growth rate. Economic boom/bust cycles are inefficient both in the boom and bust phases, because of periods of strain and slack.

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Also, I may add, profit is the result of efficiencies in the (competitive) free market. Every firm should maximize profit. Well managed firms should win and poorly managed firms should lose.

Firms should maximize profits (legally, of course, and on a level playing field) whether the minimum wage is $7.25 or $15.

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When households cannot make their car payments, how will paving roads help?

Maybe, a large tax cut, to pay-down debt and reduce monthly bills (e.g. high-interest credit card debt), and therefore increase discretionary income, would be better than government hiring some people to pave roads.

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Jazzbumpa, there are lots of regressive taxes, fees, fines, fares, tolls, etc. and the $2 trillion a year of federal regulations are also regressive, along with state regulations (e.g. resulting in higher prices and lower wages for everyone).

A $5,000 tax cut for every worker in 2009, or $700 billion for the 140 million workers at the time, would’ve been in the form of tax credits too, for those who don’t pay income taxes.

Given the high level of household debt, a bold tax cut was needed, more than ever, to jolt the economy into a self-sustaining cycle fo consumption-employment.

It was necessary to take the slack out of demand, through increasing monthly discretionary income, rather than create new demand for other goods, e.g. “infrastructure,” which wouldn’t and hasn’t jolted the economy out of this depression.

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Jon, I explained how raising the minimum wage, perhaps up to a $15 an hour and higher in some parts of the country, will make the pie bigger.

Americans didn’t overconsume. It’s perfectly rational to spend, rather than save, when prices, and interest rates, are low or fall. Bargains induce demand.

Do you prefer less income (spending and saving), higher prices and higher borrowing costs?

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