PeakTrader.com

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PeakTrader:

“Findings in the CBO report (yesterday): Raising the minimum wage in three annual steps to $10.10 an hour would result in about 500,000 jobs being lost by late 2016…and bring 900,000 people above the poverty threshold of $24,100 a year for a family of four.”

I tend to generally agree. Raising the minimum wage is not a jobs program. However, it can move the economy towards optimization, e.g. raising economic growth, lowering other production costs, boosting productivity, reversing the collapsed teen labor force participation rate, reducing government and parental support for low-wage workers, etc..

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 (low-wage workers have high marginal propensities to consume).

If we really want to help the poor, raising the minimum wage isn’t enough. Regressive and excessive regulations should be removed and reduced, along with reducing taxes, fees, fines, fares, tolls, etc., to lower the cost of living, and prices, along with spurring economic growth and allowing higher wages.

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Also, it’s inappropriate to use only the standard textbook model of supply and demand to explain the labor market.

A wage is more than the price of labor. A wage is also an input and income.

Prices don’t equal wages, and widgets don’t equal workers (for example, inputs are more flexible than output, and workers respond to incentives).

So, it’s inappropriate to use a partial equilibrium model, i.e. supply & demand, to explain a general equilibrium model.

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I wonder if the CBO included this dimension in its report. I stated before:

A higher minimum wage shifts idle capital (earning enough for capital preservation), in the saving glut, into capital equipment (because labor becomes relatively more expensive).

So, better jobs are created, because workers are needed to create, build, ship, install, improve, maintain, operate, and manage those machines.

Currently, in the U.S., there’s an overabundance of capital and an education boom.

There are too many overeducated Americans working at low-skilled jobs, and too much (idle) capital kept in unproductive assets.

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Moreover, I may add, and stated before, raising the minimum wage will result in low income real wages rising more than high income real wages falling, through inflation, for a net gain in real wages, perhaps up to a $15 national minimum wage.

Higher real wages for low income workers mean they’ll buy more steaks at the Sizzler and fewer burgers at McDonalds. So, the Sizzler will gain jobs and McDonalds will lose jobs.

Jobs at the Sizzler, including related jobs, will likely be better jobs.

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The decline in the real minimum wage isn’t the only factor that caused the teen labor force participation rate to collapse. However, it’s likely a major factor.

Why should teens work for less than $8 an hour, when they can stay at home, live off their parents (e.g. in a nice house, thanks to the homebuilding boom from 1995-06), and play with electronic gadgets all day, which became increasingly cheaper over the past 30 years.

Or, they can go to college, collect lots of free money, e.g. grants and scholarships, or run-up lots of debt in easy to get student loans.

The opportunity cost of giving all that up for a low-paying job isn’t worth it to many teens.

When the real minimum wage was above $8 an hour, roughly between 1960 and 1980, the teen labor force participation rate rose from below 45% to about 60%.

However, a general decline took place when the real minimum wage fell and stayed below $8 an hour, after roughly 1980.

It’s likely, raising the minimum wage, e.g. to at least $10 an hour, will begin to raise the teen labor force participation rate.

Chart – Teen Labor Force Participation Rate

http://research.stlouisfed.org/fred2/series/LNS11300012?cid=32449

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Furthermore, I stated before:

If the economy was able to absorb a $10 real minimum wage (in 1968, 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, 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.

Also, I may add, the U.S. economy hasn’t been able to (fully) absorb regulations.

Federal regulations, not including state regulations, cost $2 trillion a year. Adding more costly regulations has depressed growth over the past few years. A real recovery or strong expansion cannot take place, until the economy can absorb those regulations.

And, when a stronger expansion takes place, tax revenue will rise, spending on idle labor will fall, and tax rates can be raised to slow the expansion to a sustainable rate.

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Denis says: “American labor…completely re-unionize.”

The danger there is labor will be overcompensated, e.g. resulting in higher prices and lower quality, or a slower improvement in living standards. It’s similar to a minimum wage that’s too high, e.g. $20 an hour, which will cause more harm than good.

If labor is partially unionized, then some workers will be overcompensated and some workers will be undercompensated.

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A Libertarian, with a Ph.D in Economics from George Mason University, which teaches the out-of-the-mainstream Austrian School of Economics, once stated:

What do you call a person whose labor is worth less than the ($7.25) minimum wage?:

“Permanently unemployed.”

My answer was: Under 16 or disabled.

And, I tried to explain to him labor is not just an expense, it’s also an investment.

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Steve:

PeakTrader, I note in the CBO report Table 1: $10.10 indexed would increase low-end incomes $19 billion and reduce high-end incomes $17 billion, for a $2 billion GDI increase. Pocket change, but still. I attribute the $2 billion to the last phrase in footnote F to that table? I don’t think the figure in the beneficial incidence and efficiency effect an increased min wage would have in combination with EITC.

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PeakTrader:

Steve, my statements have nothing to do with the CBO. I don’t know the exact number and don’t know how the CBO could possibly project an exact number.

I know if the minimum wage rises to $10 an hour, wages for low-income workers will rise more than the increase in prices, up to some level. So, low income real wages rise.

However, wages for high-income workers (e.g. lawyers earning $75 an hour) will be unchanged and high-income real wages will fall from the increase in prices.

This is an oversimplified example:

If the minimum wage increases 50%, the general price level may rise 10%. So, real income increases 40% for those who earned the minimum wage before the increase (or instead of roughly 1 1/2 hours of work at $10 to buy something worth $10, roughly 1 1/2 hours of work at $15 to buy the same item at $11) and increases less for those earning above the original minimum wage, up to some level. For someone earning $75 an hour, he only gets a higher price, i.e. a lower real wage.

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However, I don’t expect the price level to rise much after a 50% increase in the minimum wage, because other production costs will fall, productivity will rise, and there will be some shift from profits and management salaries to low-wage workers, to keep prices low.

Here’s a real example (also, I may add, after the increase in wages, few new workers were hired and 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.

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