Sunday, April 29, 2012

Marshall Auerback — Why Low Minimum Wages Kill Jobs and Crush Living Standards for Everyone

The point is: wages are a source of demand, as well as a cost input. Reduce wages and demand plummets, which more than overrides any cost savings derived from paying less to workers (especially given today's paltry minimum wage, which is hardly a living wage for any American).

Let's be clear; Americans have never embraced welfare. For better or worse, our nation has always preferred a more libertarian path: self-help, personal responsibility, individual initiative. As a result, our welfare programs have always been stingy, temporary and purposely demeaning. But maintaining the minimum wage at today’s ridiculously depressed level does not enhance anybody’s employment prospects. In fact, it makes it worse, because it sucks demand out of the economy and minimizes the chances of those now receiving unemployment benefits or other assistance to quickly get back into the workforce, to "pull themselves up by their own bootstraps," as conservatives like to say. They cannot do that when our work force continues to focus on policies which merely enhance the incomes of the top 1 percent.
Read it at AlterNet
Why Low Minimum Wages Kill Jobs and Crush Living Standards for Everyone
by Marshall Auerback
(h/t Kevin Fathi via email)

27 comments:

Pete said...

"The point is: wages are a source of demand, as well as a cost input. Reduce wages and demand plummets, which more than overrides any cost savings derived from paying less to workers (especially given today's paltry minimum wage, which is hardly a living wage for any American)."

Nonsense. Even if workers spent 100% of their additional wages, it wouldn't produce a single penny of additional profits in the economy, since every penny of additional wage is another penny in costs.

Going the other way, reducing wages reduces business costs dollar for dollar, so any drop in demand that results from the fall in wages, is accompanied dollar for dollar by a fall in costs and thus no change in profitability.

This is mathematical. The claim "Reduce wages and demand plummets, which more than overrides any cost savings" violated basic mathematics.

Wow. Auerbach is a fool.

Ralph Musgrave said...

I agree with Pete. There is actually a reason for thinking that a CUT in minimum wages would RAISE employment, which is thus.

Given rising demand and falling unemployment, each succeeding person hired becomes progressively less suited to vacancies. That is for a simple statistical reason: the fewer people available for each vacancy, the less the likelihood of finding a suitable applicant.

When “unsuitability” becomes bad enough, the price of SUITABLE labour starts to get bid upwards too fast and inflation kicks in. However, if employers can compensate for unsuitability with a very low wage, then inflation kicks in at a higher aggregate employment level.

However a country with generous in-work benefits needs to be wary of applying the latter point: if employers can pay miserable wages knowing full well that taxpayers make up the wage to a socially acceptable level, then employers will exploit the situation. As will employees: they’ll be happy doing easy going, unproductive jobs, again knowing full well that taxpayers will make up for the lack of productivity.

JK said...

@Pete's comments

If you expand your argument to the aggregate economy, It seems your suggesting that wealth distribution has no affect on aggregate consumer demand. Really? You think spending throughout the economy would be no different with a few VERY rich people, and a majority of VERY poor people ..compared to.. there being much fewer billionairs and multimillionaires in combination with a thriving and growing "middle class" ? Surely the spending habits (as well as the ability to save or "hoard" money) of billionairs and multimillionaires is very different from that of the middle class. You really think both situations are equal in their effect on aggregate demand?

Also, to Auerback's post… I think it depends what type of businesses hire the most minimum wage employees…

If most minimum wage employees are employed by small businesses with tight margins, then raising the minimum wage could have very damaging immediate effects. Whereas if most minimum wage employees are employed by big multi-national corporations, that are otherwise making very large profits, I think it seems the minimum wage increase would work as Auerback describes.

Any thoughts?

JK said...

Just another thought…

Maybe we could have tiered minimum wage scales that are indexed?

For example, part of the price a business must pay if it chooses to incorporate is a higher minimum wage that it must pay all employees?

GLH said...

I have to agree with Mr. Auerback. I see no reason to believe that if the minimum wage were reduced employers would hire more people to do the same amount of work. Ask yourself if you were an employer and you could pay your employees less would you hire a few more employees for the same work or increase your margins? I know what you would do because I know what I would do.

Anonymous said...

@Pete: ever heard of a fiscal multiplier? These minimum wage workers will probably have an MPC greater than one.

paul said...

@Pete

"Reduce wages and demand plummets, which more than overrides any cost savings" violated basic mathematics."

Your claims violate basic mathematics too…

As wages approach zero, demand approaches zero, since demand comes mainly from workers ability to spend in excess of their "nut".

I don't see how your argument makes sense unless you are making some Lafffer-like claim that there is an optimum level of low wage. Even then it's flimsy.

Anyway, the problem is income distribution, not quantity.

Eliminate workers altogether and where does Capitalism fit in?

Matt Franko said...

Savings desires play a role here too I would think...

Resp,

Anonymous said...

Given imperfect competition, won't higher minimum wages eventually mean an overall adjustment of prices upwards, leaving people relatively no better off than before?

Ralph Musgrave said...

JK and Anonymous, Yes, I imagine the poor spend a higher proportion of any income increase than the rich. So a rise in the minimum wage at the expense of profits will increase demand all else equal.

But any government with a grasp of economics can raise demand ANY TIME IT WANTS, so the fact that raising the min wage raises demand is not a brilliant reason for raising the min wage.

But this is a complicated issue. To properly deal with all Auerback’s argument, I’d need about 3,000 words and I just ain’t got time!

paul said...

"…But any government with a grasp of economics can raise demand ANY TIME IT WANTS…"

This is a vanishingly small subset of governments.

Increasing demand by increased spending under the current distributional arrangement will only increase wealth inequality.

I don't see that as a superior solution either.

Profits must accrue to labor at a higher rate than they are currently.

Part of the problem is we are talking about business in general, when in fact most of the huge profit-taking occurs in a relatively concentrated area of business.

Small businesses in general can't afford higher wages.

Like Ralph says this is a complicated issue, but in general I think Marshall is right. The question is how to increase the effective wage.

Having the government provide a minimum level of basic services like food, healthcare, housing, education, and transportation would be one possibility.

I know, never gonna happen.

Tom Hickey said...

"Given imperfect competition, won't higher minimum wages eventually mean an overall adjustment of prices upwards, leaving people relatively no better off than before?"

Raise price, shrink demand, especially in price sensitive areas. As costs rise, companies generally compress margins somewhat and only raise prices when they think the industry will follow. So, yes, competition is involved, and the greater the monopoly or oligopoly power, the more pricing power firms have.

I prefer the MMT JG to raising the minimum wage. I would also penalize firms not pay a living wage, so the state has to pick up the difference, to force margin compression. Wal-Mart was advising its low paid employees how to get on Medicaid, so the company did not have to deal with health benefits. That' s taking advantage of economic rent.

But the real solution is in creating a system in which the factors of production are balanced. Presently capital (into which land is generally rolled) is considered the only factor of production and labor a commodity like other commodities. This is immoral, social unsound, politically repressive, and economically unjust. The result is that "profit" is largely collection of economic rent through worker exploitation by systematically undervaluing the real contribution of labor.

Anonymous said...

Pete has left out the key difference between the two scenarios or rising wages versus lowering wages.

Going the other way, reducing wages reduces business costs dollar for dollar, so any drop in demand that results from the fall in wages will result in the lay off of workers and further reduction in demand until demand reaches zero and bankruptcy ensues. That's a recession.

Wow. Pete is a fool.

Anonymous said...

"So, yes, competition is involved, and the greater the monopoly or oligopoly power, the more pricing power firms have."

This is the problem - the idea that inflation only occurs at or near full capacity is largely based on the idea of perfect competition, which is not how the economy actually functions.

Certain industries are more competitive than others, but on the whole the ability to raise prices (across the economy as a whole) is greater than the pressure created by competition to keep prices low, in the face of increased aggregate demand.

In an abstract model which assumes efficient market competition, businesses will expand output rather than raise prices in response to increased demand (or increased 'money supply').
In actuality, output may increase but only along with a rise in prices. The price rise may not outweigh the increase in output but the result is not as clear cut as output simply rising until capacity is reached. Inflation kicks way before capacity is reached, unfortunately.

As a result of this, W. Vickrey suggested introducing new tools to control inflation directly.

Monetarists seem to think that the only way to control inflation is to keep output permanently below capacity, basically by handing subsidies (interest payments) to capitalists whilst maintaining a permanent level of working class unemployment.

They consider this to be the the 'natural' state of affairs, as far as I can tell.

Anonymous said...

Perhaps the JG is more of a sticking plaster than a solution to the problem. Higher JG wages and benefits might entail a larger JG buffer stock than an otherwise unemployed buffer stock.

With a larger employed buffer we can claim that unemployment has been solved, but at the same time we end up with a lower growth rate as the result of less people being employed outside of the buffer.

This is based upon the assumption that the inflationary impact of the JG (i.e. higher JG wage + benefits, necessitating a larger buffer overall) might outweigh the hysteresis effect of an unemployed buffer (which is highly controversial and according to many, unproven).

DustinM said...

I agree with Marshall Auerback's proposal but for slightly different reasons.

I agree with Pete and Ralph about raising minimum wage is, in theory, zero sum. If we assume that no one is laid off as a result of increasing the minimum wage, that can only be achieved by taking money away from the business or by taking away from the owners by having less profit.

I also agree with JK however. It's all about the distribution of wealth. Since businesses are already sitting on a lot of un-invested money, we can assume that any labor savings will also be pocketed. Additionally, even if the savings is passed onto the owners via dividends, that income is likely to go to the wealthy who have a higher propensity to save.

So, raising the minimum wage will not help people by raising income overall(as Auerback claims), but it will increase demand by putting the income into the hands of people who are more likely to spent it.

Adam2 said...

If minimum wages don't match inflation then there is no loss in real profits.

Anonymous said...

I think the one problem with Marshall's argument is that it conflates a normative issue with an economic issue. The economic issue is exceedingly complex. How a minimum wage impacts all industries and businesses is difficult to predict and model.

The normative justification for raising the minimum wage is easier to defend: paying people a living wage provides dignity. People on either side of the economic issue can be "right" based on their own criteria. Convincing people that their economic analysis is wrong does not necessarily help change their normative disposition

jeg3 said...

Believing that a cut in Minimum wage will raise employment is not believable, and there is no empirical evidence for it. Especially considering that there is a demand problem that is and will continue to be exacerbated by technology (robotics, artificial general intelligence, nanotech) and income inequality. What does research say:
"Minimum Wage Issue Guide"
http://epi.3cdn.net/9f5a60cec02393cbe4_a4m6b5t1v.pdf

"Raise the Minimum Wage"
http://www.irle.berkeley.edu/press/20120416_bloomberg.html

To sum up:
"Why Low Minimum Wages Kill Jobs and Crush Living Standards for Everyone"
http://www.alternet.org/economy/155132/why_low_minimum_wages_kill_jobs_and_crush_living_standards_for_everyone/

Calgacus said...

Anonymous April 30, 2012 10:48 AM : the inflationary impact of the JG (i.e. higher JG wage + benefits, necessitating a larger buffer overall) might outweigh the hysteresis effect of an unemployed buffer. (which is highly controversial and according to many, unproven).

The inflationary impact of a JG is more than controversial & unproven - it's absolutely preposterous. Our heroic MMT economists tend to underrate the strength of their arguments. To say that the JG would be inflationary is to say that full employment, paying people to do productive work, is more inflationary than preventing them from doing productive work. I'd wager my life that the JG would be less inflationary than unemployment, that the buffer stock of a decently designed JG would be smaller than the unemployed buffer stock. Might look bigger at first - but only because it demonstrates the mendacity of official unemployment figures.

Historically, full employment countries have higher growth and lower inflation than ones relying on unemployment. The JG is a win-win, a free lunch, a positive sum game.

Dustin M: If we assume that no one is laid off as a result of increasing the minimum wage, that can only be achieved by taking money away from the business or by taking away from the owners by having less profit.

Capitalists get what they spend. Workers spend what they get. The capitalists would get their dough back. The workers would get higher wages & they would spend it all on stuff they're addicted to - like food & housing. Other workers could get new jobs based on this increased demand. As Marshall says "raising the minimum wage could increase employment. ... a higher wage, minimum or otherwise, would mean that you'd spend the additional dollars, creating jobs for other workers. "

xan said...

As to tiered minimums, strengthening labour laws would have that effect - a minimum wage for smaller business and a negotiated higher wage through union jobs at the bigger firms. Didn't we used to do this? In some countries in the past (maybe a few now), the strength of the labour law was such that a minimum wage was unnecessary.

Ralph Musgrave said...

Anonymous is quite right to say that the higher the JG wage, the larger overall buffer will need to be, all else equal. This is simply a re-statement of a law proposed by the Swedish economist Lars Calmfors. His “iron law of active labour market policy” states that if people are ATTRACTED to JG type schemes rather than being forced into them by workfare type sanctions, that reduces the RELATIVE ATTRACTIONS of regular work, all else equal. And that reduces aggregate labour supply to the regular jobs market. And that in turn necessitates a contraction in demand, i.e. a shrinkage in the regular economy.

Incidentally, I’m assuming the economy is at capacity: if the economy is not at capacity, then JG is not the best cure for unemployment. The best cure is a straight rise in demand.

Calagus claims the latter idea is “unproven” and “preposterous”. I don’t agree. The logic behind Calmfor’s iron law is impeccable. The $64k question is: which set of effects predominate? Is it the iron law effect, the hysteresis effect or the beneficial effect which Calagus points to, namely having people productively employed. Given a generous JG wage, it’s not obvious to me what the answer is.

Tom Hickey said...

Are we assuming that everyone in a modern economy needs to work, preferably in the private sector, or "should" work to receive transfers? What is the justification for such assumptions other than moral, when productivity increases result in an economy in which there are not enough jobs available at a living wage for people that want to work? Of course, one economic justification is that it is needed to make the existing system work. But what is the justification for retaining a status quo in a state of dysfunction rather than changing it?

paul said...

"Are we assuming that everyone in a modern economy needs to work…"

"needs" is a key word and I'm sure there is a positive psycological effect to "working". Does work have to be productive? I say no.

Reality is that as we produce more and more with fewer people there simply won't be much left for people to do.

Capitalism has a short shelf life.

Are we building a world for the few at the top of the food chain or for the rest of us?

To the 0.01% we are little more than bugs.

Anonymous said...

"if people are ATTRACTED to JG type schemes rather than being forced into them by workfare type sanctions."

Yeah I wouldn't recommend workfare sanctions. But even Bill Mitchell has stated somewhere that the JG shouldn't be too attractive.


What are you suggesting Tom? What could be an alternative?

Anonymous said...

"To the 0.01% we are little more than bugs."

To see just how small and crushable we are just check out the new Forbes real time billionaire wealth tracker. It lets you know how much the world's richest people are making, minute by minute. Apparently Buffet is up $425 Million since the opening of trade this morning.

http://www.forbes.com/real-time-billionaires/

Tom Hickey said...

"What are you suggesting Tom? What could be an alternative?"

Capitalism has to adapt (Schumpeter, Keynes) or socialism is the inevitable outcome (Marx, Schumpeter).

My conclusion is that capitalism as capital being the only important factor of production and labor as a commodity is a passing phase on the way to a more integrated system in which labor is no longer treated as a commodity and capital is no longer given privilege over all other factors. That means a more mixed economic system and one that is sustainable. The capitalistic unlimited growth model is crumbling and neoliberalism is its swan song. The Zeitgeist is shifting and only time will tell what the next step will be, either through evolution or revolution.

I wrote a master's thesis in social and political philosophy over the years 1970-1972. It began as a paper for a course in social and political philosophy and I decided to expand it to a master's thesis since the topic was timely, as you may recall. I was advised by the department against it and the faculty warned me that it would affect my future employability. But I did it anyway.

The title was "Toward a theory of social change: evolution or revolution." My conclusion was that the evolutionary process is resulting it rising collective consciousness that will provide an evolutionary solution instead of a Marxist-Leninist revolution.