Robert Reich on the Minimum Wage: How Would He Draw the Demand and Supply Curves?

Simply a continuation on the “War on Profits.”

It certainly seems like Reich wants to cherry pick aspects of the perfect competition model to try to support his point while also having to use supply-and-demand curves from monopolistic competition that, in his mind, would allow them to choose to take the hit out of profits. But, problematically for Reich, monopolistic competition is the model that would most likely allow the producer to raise prices and avoid the hit on their bottom line.

It is beyond me to try to fully understand Reich’s thinking. He fails to see that the mandated minimum wage affects the firm’s supply curve in much the same way that a tax does, effectively getting passed onto consumers in the higher price. I would give him a failing grade.

@Ben Bursae,
He fails to see that the mandated minimum wage affects the firm’s supply curve in much the same way that a tax does, effectively getting passed onto consumers in the higher price. I would give him a failing grade.
That part of your argument is correct.

There’s one additional aspect to the minimum wage debate that I’d like to throw into the conversation. A raise of the minimum wage will almost certainly (1) raise the price level of goods that have an input of minimum wage labor, and will also (2) increase unemployment. However, what is to my knowledge not discussed is how it affects those making slightly above the minimum wage.

Let’s say I work in a company and am being paid a wage of $13. This company also employs people at the minimum wage. I make a greater wage because the company views me as more productive. Increased minimum wage legislation comes into effect. In essence, they have been forced to give minimum wage employees a raise. In addition to letting some people go and charging higher rates to customers, my company will most likely forgo giving me the raise that they were intending. I will instead be left with an increased workload and decreased pay. (Should I say, “thank you minimum wage“?)

BTW, this is basically happening to me right now, as my lovely state of Minnesota just passed new minimum wage legislation.

Any errors in my thinking?

I’d suspect that some of the more choice on who to employ might come from the supervisors moving down unless you also give them a raise that makes it worthwhile for them to stay as supervisors.

I keep reading newspaper articles about how many workers are paid “the minimum wage or less” as though even the larger “or less” bunch will somehow get a raise if the minimum goes up.

Reich presumably assumes that another 40% rise in the minimum wage would be 100% binding, so lots of people would get raises and that would stimulate demand and thus create more jobs than it loses. His fallback position always involves “stimulating demand” by taking money from rich savers and giving it to big spenders who will also vote correctly in gratitude. There is no logic or evidence involved in such musings, of course, but lawyers just try to win not to make sense.

The supply curve for an individual seeking work is drawn exactly the same way the supply curve for a firm is drawn: the fixed costs distributed over the quantity delivered plus the variable costs, plus any return on invested capital and potentially the profit from monopoly or oligopoly power.

What I find odd about “conservatives” et al on jobs and wages is that they consider a person like a machine. If the machine is not employed, then it sits in the warehouse at no cost, other that the depreciation of aging and obsolescence.

But viewing a person like a machine requires that it be liquidated by being ground up and recycled – for humans, the ones who can’t be put to work need to be tossed into a wood chipper along with other carbon waste and composted.

If GM should have been liquidated in bankruptcy, with its parts sold off or scraped, then the unemployed GM workers who ran out of savings should have also been liquidated, body parts sold off for transplants or dropped in a wood chipper to be composted.

The Americas are no longer the way Locke wrote of them with unlimited common land that anyone without means could live off of by hunter gatherers or by carving out private plots by investing labor in building shelter and gardens and such. The final push during the 20s to redistribute land to the individuals in the last gasp of Locke’s idealism of America ended in disaster with the Dust Bowl. Land redistribution ended in the lower 48 in the 30s because there was no land to support those without jobs (or who wanted to give up their job to someone else for free land). Thus the Federal government needed a new way to help the landless and jobless: Social Security which included unemployment, old age, welfare for orphans and widows, etc.

What big employers do to block real hikes in wages one way or the other is to lobby for welfare.

If the WalMarts and McDs can get its workers food stamps to live on, plus heating oil subsidies, housing vouchers, Medicaid, while getting its taxes cut or forgiven so middle class workers pay 30-50% of their worker costs in exchange for lower prices, then the big corporation can redistribute the wage income from the middle class worker customers to the low wage workers by taxes and welfare, then they can charge the middle class lower prices and make the middle class think they are getting bargains. Counting on the middle class being too stupid to understand they are paying taxes to subsidize the low prices by all sorts of welfare, low wage welfare, corporate welfare of forgiven property taxes, and exemption from paying for the low wage welfare taxes.

By limiting the labor-wage issue to just the interaction between the individual worker and the firm, the big picture of corporate welfare to support low wages is hidden from view.

And if government were taken out of the picture, the labor market would drive up the wages as all the low wage workers died off from hunger and exposure, just like all those small businesses have died and left empty store fronts and businesses decaying everywhere.

The notion that redistribution causes economic growth by transferring cash from savers to spenders seems like it carries a lot of water on so many of these issues. It seems suspect to me on several levels. Can anybody help me out? Is there legitimate empirical or theoretical backing for this idea that has withstood academic review?

Pajser,

That isn’t surprising. If only 3% of the labor force is at minimum wage, then a 10% increase in MW would only increase labor costs by 0.3%. I don’t think this has any bearing on if it is a useful policy.

Kevin Erdmann – maybe it is obvious to you, but many people believe in strong ‘ripple effect’, i.e. that minimum wage increase for 10% causes increase of all wages and prices for 10% or close.

From utilitarian point of view, redistribution is good because $1 on top is worth less than $1 on the bottom, generally. (Some people reject “intepersonal comparison of utility,” I do not.) For every redistribution, adverse consequences are possible, but burden of proof that such consequences exist is on opponents of redistribution.

It is not impossible that there is a portion of the price-demand curve which is horizontal. It is unlikely, though that we are currently at the low end, and that politicians can enact a minimum wage increase which will bring us exactly to the other end of the horizontal portion. If you disagree, then tell me what information the politicians would need and how they would get it in order to determine that 1) the curve is horizontal, 2) that we are currently on the low end, and 3) what new minimum wage would take us to the other and and no further.

But succinctly, objecting to minimum wage increases is like shooting fish in a barrel. There is nothing “economic” about them — it is entirely political, consisting of hopes, wishes, and dreams about how the world should work.

Pajser,
The burden of proof might be on opponents of the 1st dollar of redistribution, but not on the 4 trillion th dollar.
And minimum wage is a price floor. To categorize it as a redistribution is begging the question.

@Kevin Erdmann:
Pajser thinks that the money for an increase in the minimum wage comes from those evil profits so there is a redistribution.

@Pajser:
But you’ve said:

As long as capitalists have any profit, that profit can be reduced.

Why not conclude that the existence of profits is a reason for increasing minimum wages? Why stop while we still sound almost reasonable and not go to the logical conclusions?

@Daniel Kuehn:

it’s reasonable to think about the minimum wage as increasing the bargaining power of workers who then capture greater surplus.

Thanks God for the minimum wage since the employees never thought to ask for more money in order to increase their bargaining power. Imagine the bargaining power Ford would gain by charging Ferrari prices on their Ford Focus models!

Does he know the model? No, probably not. But the talking point definitely comes from people who do, and that this is more or less what they’re thinking of.

He doesn’t know the model, but since there are people who know, he must be correct. Some info about that model and who those people are would be nice.

I presume Reich has in mind industries that are NOT perfectly competitive and hence for which supply curves aren’t like the usual ones, if they exist at all.

But he’s still wrong:
1. If the industry is perfectly competitive, raising costs will cause exit, shifting the industry supply curve to the left and raising prices (unless, as one commenter above noted, the industry demand curve is horizontal, which seems implausible).
2. If the industry is monopolistically competitive, raising the firms’ costs will also induce exit by some firms. The most likely result again is that prices will rise (though other things might change in their non-price offer variations).
3. If the industry is oligopolistic or a monopoly AND the firms for some reason are earning zero economic profits, the higher costs will induce some exit, again raising prices.
4. If the industry is oligopolistic or a monopoly and according to a chalkboard graph earning excess profits, those profits will have been capitalized into the value of the firm. Raising costs will lower the stock price of the firm but not necessarily raise the price of the output of the firm.
So Reich appears to be assuming that only firms that have textbook “supranormal profits” would be affected by an increase in the minimum wage?? I really doubt it. Actually it tends to be firms in the most highly competitive industries that pay minimum wages.

It is important to understand that, since the minimum wage cannot be justified in economic terms, it falls into the category of religious belief. True believers will continue to produce endless studies showing that, despite keeping a few young or unskilled out of the legal economy, at worst, the minimum wage isn’t all that bad. Nevertheless, it might be useful to make a convert (to logic) here and there. I don’t know how old Mr.Reich is, but he (or others of his minimum-wage persuasion) might benefit from considering how they would be affected if we did unto him as he would have us do unto others.
Even Mr. Reich is likely to concede that, as we move from our school years (during which, BTW, we work long hours at no pay – why?) into the work force, our earnings tend to rise with our age and experience. Therefore, why be content with a single minimum wage? Why, as our responsibilities and needs grow with age, shouldn’t there be a sliding-scale minimum wage, such that, the older we are, the higher our minimum wage? While we’re at it, why not throw in a multiplier for years spent in school, to help us catch up with less-schooled peers who have been working longer. How would this apply to Mr. Reich? It might (emphasis on the might, since religious conversion is always a challenge) cause him to consider whether, as he continues to age, he could find someone willing to pay him the appropriate (carefully-computed, government-approved) minimum for his age and education group for the value (I use the term loosely) that he offers.

Enial Cattesi: Why not conclude that the existence of profits is a reason for increasing minimum wages? Why stop while we still sound almost reasonable and not go to the logical conclusions?

Because “minimum wage should be increased until all profits disappear” is not logical conclusion of the claim that “as long as capitalists have any profit, that profit can be reduced.” It doesn’t follow.

And why I wrote “as long as capitalists have any profit, that profit can be reduced“? Because it is true, and logical conclusion is that Boudreaux‘s claim about ‘excess profit’ is wrong. It is all written in the first paragraph of my original post.

I think the point that all the commentators seem to be missing is that if, as Mr. Reich suggests, the minimum wage were increased, prices would rise modestly, the amount of disposable income would also rise. Individuals would have money to spend and everyone would profit.
In this situation the economy, which depends on personal consumption would do well.
Would some individuals lose, absolutely. But as the CBO has estimated an increase in the minimum wage would possibly cause unemployment of one half million workers but also provide higher income for sixteen million other workers.
Further as corporate profits have reached an all time high percentage of GDP, I suspect that there are indeed profit margins that can be reduced to avoid raising prices.
It seems unconscionable in this age of high corporate profits that any corporation does not provide a living wage for any of its workers. Particularly because it would be good for the country and for the individual corporations bottom line.
Michael Pettengil as a more descriptive and accurate post.

Are any of these people in violation of minimum wage laws? Is it inconscionable that corporations would pay them such low wages? Is $1/yr a “living wage”?…

http://en.m.wikipedia.org/wiki/One-dollar_salary

Really? Violence to your family?
Making sure that work pays a living wage is not violence.
As to redistribution we have been redistributing to the “investors” for thirty years. How is that working out for the country?
We need to maintain the minimum wage at the same level, which accounting for inflation would now be $16.30.
Again I point out that doing so would allow those who work for minimum wage to buy more than the bare minimum to survive and allow the country to prosper.

“Making sure that work pays a living wage is not violence.”

It is if violence is the means of “making sure”. If you advocate repealing all MW legislation and replacing it with private MW recommendations, then your view ceases to be malicious. But nearly any time a person advocates legislation, he is revealing his threshold for employing violence against others. Advocates of MW legislation are advocating the use of violence to compel peaceful cooperating citizens to act against their wills.

So again I ask you, what is so evil about my daughter wanting to earn a little extra spending money this summer at $3/hr that you think she deserves to have the power of the state brought down upon her and those who would help her? Indeed, what is it about anyone offering to perform simple tasks at any wage that you think merits the imposition of violence?

And what is so special about *wage* compensation that you insist on imposing a certain wage-to-nonwage compensation distribution on innocent employers and employees?

“all arguments that can be made against state control of the territory can be made against private property as well.”

Wrong. The communist and mutualist view of property is self contradictory at worst, and a non sequitur by shifting definition at best.

Individualized property is an inescapable fact of human existence. The libertarian explanation of homesteading and free trade are the only ways such (inevitable) property maintains consistency with the nonaggression principle. State property always violates the NAP.

@JRo,
I think your math is off.
First, I think you meant to refer not just to Social Security taxes but also to Medicare (HI) taxes. These add up to 7.65% (6.2% for FICA and 1.45% for HI) on employer and employee each. So the FICA + HI on the $15 are 15.3% times $15, which is $2.30. That’s half of your number.

Thank you, David Henderson.

Yes, it seemed surprisingly high after I doubled the rate to account for employer contribution, not realizing it was already included.

I think I answered all your arguments in previous discussion.
http://www.econlib.org/archives/2013/12/demuth_on_obama.html

In this post, you described behavior typical for landlords. Typically, tenants pay rent. If tenants dislike landlord’s rules, they must leave. The criticism you applied on state can be applied on individual landlords. Except if you know essential difference between state and individual landlord.

Do you?