A quick lesson in Economics for those knee-jerk supporters and detractors. by Bill Gee
(centrist)
Tuesday, December 13, 2011
I write this article in response to both the news story of the minimum wage hike in San Francisco and to the overly reactionary column written by Van Bryant II on Nolan Chart. While that I agree with the overall conclusions of Mr. Bryant, I cannot agree with the logic he uses to get there because it flies in the face of both Microeconomic and Macroeconomic principles.
The Fallacy of Inflated Wages in the Long-Run
As we may remember from our Economics 101 classes, there is a big difference between short-run and long-run when it comes to the cost of doing business. In the short-run, you are dealing with a “fixed plant” and the business owner has only limited options when it comes to altering their cost inputs. In the long-run, business owners are able to make decisions with no limits to cost inputs.
A government-imposed minimum wage is a form of price-floor when it comes to the short-run labor market. In English, what this means is that if the market rate for an hour of labor at a particular job is $5 an hour and the minimum wage is $10 an hour, employers are paying double the prevailing wage rate to their employees. That may sound like an excellent case for opposing the minimum wage, but there’s a lot more to it than that.
Before we get all emotional about the plight of the poor minimum wage provider, we need to also examine the determinants of wage demand. That is, those factors that have a direct impact on wage demand over the long-run.
The Determinants of Wage Demand that are relevant here are as follows:
1) Changes in Product Demand – If there are fewer buyers for a product, then there is less of a need to hire the employees to produce that product.
2) Changes in Productivity – If employers are finding more efficient ways of producing their products, then they will require fewer employees to produce them.
3) Changes in the Price of Other Resources – If the price of raw materials is going up as well as the wages of employees, then business owners will have to cut back on wages in order to keep up with productive efficiency. (More on this below)
4) The number of sellers in the market – Each working person represents a “seller” of units of labor within the market. With higher unemployment, the greater number of sellers in the market.
Therefore, if our desire is to limit poverty among the working poor, then the role of the minimum wage is to counter some of the determinants of wage demand, and decelerate the widening gap between the extremely wealthy and the extremely poor. Unfortunately, raising the minimum wage a mere 32 cents an hour will hardly do that as this only represents a 3% raise in salary.
Short-Run Impact of Wage Increases
In the short-run, when businesses that are small or in highly competitive markets are faced with even a small increase in labor costs, they have difficult choices to make.
1) Eat the cost: Businesses that don’t make profit will not survive, so cutting into profits in order to absorb increased labor costs is not an option.
2) Lay off workers: Businesses that cannot deliver high-quality products without employees to do the work. If the business is already working at 100% efficiency, then laying off workers is not an option.
3) Pass the cost to customers: This is the option most employers will take in order to meet the new labor costs. Therefore, if wages go up 3%, then a price increase of 3% is in order. For most customers, they will barely notice the increase in cost.
Long-Run Impact of Wage Increases
In the long-run, increasing the minimum wage is a zero-sum-game. That is, for every increase in wages for the working poor, inflation is likely to either keep pace or out-pace any increase in compensation. According to the Bureau of Labor Statistics, the average Consumer Price Index (CPI) from 2001 to 2011 has been about 3%. (You can crunch the numbers yourself for your particualr area, but you should find the trend analysis to be about the same no matter where you are) What this means that, at best, the minimum wage increase will merely keep up with inflation. When we add the fact that hikes in the minimum wage only occur once every two to three years, we can see that the working poor are continually fighting an uphill battle where their wages cannot keep up with increases in the price of everyday goods.
Another problem is that when employers of basic services such as restaurants, movie theaters and others who employ large numbers of low-wage employees are faced with hikes in the minimum wage, their tendency is to immediately pass the cost over to consumers, which further increases the prices of all services. In fact, for some employers, if they anticipate an increase in wage costs in the near future, they increase prices right away, and then increase prices again once the new minimum wage takes effect, which effectively doubles the inflation rate on that particular good or service.
In the end, minimum wage earners are worse off than they were before the increase in their wages, while the employers themselves are able to keep up or surpass the current inflation trend, but not by much.
The Problem is Money
The real problem with the wage market is fiat money in general. When the banks can create money from whole cloth without providing anything of value to back it up, the cost of basic goods and services will constantly inflate at an accelerating rate over time. You would think that inflation would balance itself out with increases in population, but when the wealthiest Americans keep more and more of that money for themselves by keeping wages as low as possible and by seeking new ways to increase productive efficiency, less and less of that worthless money will go to the less-fortunate in our society.
Therefore, Van Byrant’s conclusion that an increase in the minimum wage in San Francisco will “help no one” is true, but I would not be so quick to jump to the defense of the employers in the Bay Area. The problem is MUCH bigger than that.
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The views expressed
in this article are those of Bill Gee only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Bill Gee is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
