Wednesday, September 22, 2004

What would the effect of this be?

When the worlds 5th largest economy starts doing things like this what is the effect of it going to be for the rest of us?

"A bill to raise California's minimum wage to $7.75 an hour over the next two years is headed to Gov. Arnold Schwarzenegger, providing a major test of his pledge to reject bills that "harm the state's business climate."

Is it going to drive businesses out of California to near by states? Will national businesses keep prices the same in California, but raise them slightly elsewhere? Will national businesses raise prices in California and leave them the same else where? Could a change like that increase inflation?

unfortunately, we will never have the chance to find out because Schwarzenegger terminated that bill.

Cube

update: parallel posting

From what I can deduce, if you raise minimum wage locally these things happen.



  1. poor people will get paid more (for the same job).
  2. Productivity could rise (but what are the incentives for it to rise).
  3. the people who got the raise will spend it locally, but will also be paying more also, though the gains will outweigh the losses (I think, though if it were a national thing I don't think it gains would out weight the losses).
  4. prices will rise for local businesses, because they absorb the cost locally.
  5. prices could rise for national businesses, but will be smaller than what the local businesses have to do because they spread the cost nationally.
  6. raising the min wage will change the way a business does business. It could increase productivity, or it could make it cheaper to out source to another state. Those in favor concentrate on the good points, those against concentrate on the bad points. Neither is right. Only the market decides what the outcome will be. You can predict all day long, but you will seldom be right.
  7. Money will flow in to a area with a high min wage and stay there longer, possibly generating growth. Though it could just get caught up in the high wage cycle of the area and not be released for growth.

I think the two things about economics were forgotten along the way: incentives matter and there is no free lunch.


Andrew,

"And lastly--productivity worth less than minimum wage?!?!"
This could infact happen. If you raised min wage to grocery stores, it could become cheaper to hire one tech savvy person to manage several automated checking machines. Will this happen on a massive scale? I have no idea, but it will happen to some people. Will that be the net affect? I have no idea.


"I thought "adjusted for inflation" does take into the increase in buying power for necessary goods. Inflation adjustment is based on an index measuring the cost of basic goods like food, housing and transportation."

Actually, I thought inflation was set by the base interest rate. See when you save money and receive interest, and create money out of then air. The sum effect is your dollar is worth less.

For example, ten men on an island with eleven men all get 10 dollars. The poor guy is the bank and pays 10 percent interest. All put their money in the bank. At the end of one year the all have eleven dollars (the banker creates the money out of thin air, or invests it overseas what every you prefer). So one dollar is less of the total amount of money in circulation after one year, with compound interest the effect could be great.

I have not looked up the definition, but I have a feeling that both things play a part. Though ask yourself the question: Why do prices rise, and I think you will come around to this definition of inflation. :)

Just thought that I would bring that up.

Summary
So far I am against the min wage, mainly because the government is doing it. Every single statement predicting the next step in the money trail, also has a contrasting next step. So I end up not being against the min wage for economic reasons, but morefor philosophical ones..

16 comments:

Andrew said...

The minimum wage in CA is worth 22% less than it was thirty years ago when adjusted for inflation, and is nowhere near a living wage (around $10/hr).

Two important things:

1) look at the data from municipalities and counties that have enacted 'living wage' requirements for government-contract bidders. In all cases, it has helped the regional economy by reducing turnover, increasing productivity, and opening up more money for local consumer spending.

2) Who gets minimum wage in CA? Food service and retail workers. Food service and retail outlets don't comptete nationally or internationally; they compete locally--that's where their customers are. But a statewide minimum wage revision insulates them from uneven competition with other vendors. So when you kick up the minimum wage, you can expect that a $4 burger will bump up to $4.50 and a $18 shirt to $20. But you can expect this to happen among all local vendors at the same time, so it doesn't really create an unfair market pressure. It does mean that your server won't be quite as flippant or snotty. It does mean that some of these people may be able to afford the training needed for better jobs. It does mean that these people may be able to increase competition for already low-cost goods by having more expendable income.

Minimum wage regulations may be unintuitive to "free markets rock!" capitalists, but they generally have a positive effect on the economy.

Non-destitute workers are happy workers, and happy workers do work more productively. It's a principle that many businesses employ without the aid of regulation, but one that the majority of business-owners are too short-sighted to apply.

Dave Justus said...

Minimum wage effects a lot more than food service and retail employees.

Agricultural workers theoretically get minimum wage too (although many are illegals and getting less than minimum wage) which would effect one of California's largest industries. It would raise the price of California's products and make them less competitive.

There are other industries that compete nationally that are minimum wage jobs as well. Phone banks are one, either for telemarketing or customer service. These companies can relocate anywhere in the world and will do so if they need to in order to compete.

The real problem with raising the minimum wage is that it creates unemployment. Anyone whose production is not worth the new minimum wage amount becomes unemployable. Inflation can compensate for this by making the new ammount lower in reletive terms, but if that happens then the minimum wage raising simply just caused inflation, it didn't do the people earning minimum wage jobs any good. Meanwhile, it tends to hurt those who were slightly over minimum wage but now, with the minimum wage having been raised, are making minimum again.

Cubicle said...

"opening up more money for local consumer spending."

Where is that money coming from? Does all the money that is paid out in additional wages generated locally? Or is some it it brought in from out side sources?

"Food service and retail outlets don't comptete nationally"

That is ture, but profits are looked at on a national level. A national chain could move its prices a small amount nationwide to reflect the money it was losing, where as a local chain would have to pass all of the cost on the the consumer.

How is that fair to the local guy?

"So when you kick up the minimum wage, you can expect that a $4 burger will bump up to $4.50 and a $18 shirt to $20. But you can expect this to happen among all local vendors at the same time, so it doesn't really create an unfair market pressure."

national chains would not have to move the same amount as local ones as said before

What would the increase in the percentage of goods be? How much of the benfits of making more will be wiped out by the increase of goods? In my mind that is one thing to consider when thinking about min wage.


Also the people slightly above the line are getting screwed, because prices rise but they are not getting paid more.

"The minimum wage in CA is worth 22% less than it was thirty years ago when adjusted for inflation, and is nowhere near a living wage (around $10/hr)."

That agrument does not take into the increase of buying power. For example, in 1994 dollars you could buy a computer. In the same amount of dollars in 2004 (adjusted for inflation) you can buy a much better computer. In other words your buying power has increased. Has the same a happened for other goods in the market place?

Not saying the argument is wrong, just over simplified.

"the majority of business-owners are too short-sighted to apply."

so the goverment must show them the light, huh. the old too-dumb-for-your-own-good arguement. Not quite buying that one either. I honestly don't know if a min wage is good or bad, but their are points on both sides to be considered.

Cubicle said...

"It does mean that your server won't be quite as flippant or snotty. "

what if you don't care about that. anytime someone is mean to me at a fast food place, i just assume it is because they have a crappy job and give them a free pass. In other words, i would rather have my food cheap than my cheap food workers happy.

"Non-destitute workers are happy workers, and happy workers do work more productively. "

see that is the main difference between socialist and captialist. For socialist it is important to be happy in life and work, and for captialist you were put on earth by god to work and then die, happiness comes after death.

cube

Andrew said...

Dave,

I encourage you to find significant telephone banks in the U.S., let alone in California. I've never talked to anyone here unless they were an actual employee with other duties. Those jobs are already gone.

And the agriculture industry isn't going to up and leave because the minimum wage becomes something that these people (who make even that much) can feed another one of their kids with.

And lastly--productivity worth less than minimum wage?!?! Are you kidding? If that's not the fantasy of some "ivory lexus" libertarian, I don't know what is. This isn't an pure economic model, where productivity exists on some zero-bounded scale with a formulaic distribution. This is a social application with actual people. So you can't just say "there are people who have lower productivity than the minimum wage and these people will be displaced."

You need to provide evidence for that sort of claim, and I don't see where you'll be able to extract that sort of evidence without looking at other places with a higher minimum wage and similar industries. If you want to do that research, and can then demonstrate that unemployment goes up as a result of an increased minumimum wage, fine. But I have a feeling I know what you'll find and that it won't provide the substantiation you need.

Andrew said...

I fleshed out the 'stupid business owners' argument here:

http://www.caffeinedreams.blogspot.com/2004_09_01_caffeinedreams_archive.html#109579582176732334

It's not a socialist vs. capitalist thing at all. It's a human resources problem in that there aren't neceassarily enough good entrepreneurs in a specific region for a fully free market to work in the public interest.

At that point, a legislator (conservative or liberal) must decide how to address the problem or bear the wrath of a dissatisfied constituency. There may be other options than fixing a minimum wage, but no democratically elected politician would have the priveledge to be completely 'hands off'. Remember that the ultimate goal of the politician isn't to foster a free market, but to serve the public interest. Although we've learned that the prior is generally a good means to the former, there are occasional abberations, and politicians have no choice but to correct them.

Andrew said...

And lastly,

That agrument does not take into the increase of buying power. For example, in 1994 dollars you could buy a computer. In the same amount of dollars in 2004 (adjusted for inflation) you can buy a much better computer. In other words your buying power has increased. Has the same a happened for other goods in the market place?I thought "adjusted for inflation" does take into the increase in buying power for necessary goods. Inflation adjustment is based on an index measuring the cost of basic goods like food, housing and transportation.

While you're right, that you can buy more computer for your money in 2004 than in 1994, you can buy a lot less house, gas, and milk. And that's what the people on minimum wage are worried about. Whether or not the price of a BMW is half of what it used to be doesn't matter when all you can afford is a bike or a bus pass.

Brian said...

Andrew: Take a breath, bud. All this hysteria over minimum wage? let's not lose sight of a point you yourself make: "Who gets minimum wage in CA? Food service and retail workers." Now, think about the people who work in these industries. Who are they? Answer: they're mostly high school and college students. Which is to say, people who are:
1. Not attempting to earn a "living wage," but rather just picking up some walking-around money.

Brian said...

Andrew: Take a breath, bud. All this hysteria over minimum wage? let's not lose sight of a point you yourself make: "Who gets minimum wage in CA? Food service and retail workers." Now, think about the people who work in these industries. Who are they? Answer: they're mostly high school and college students. Which is to say, people who are:

1. Not attempting to earn a "living wage," but rather just picking up some walking-around money.
2. Really not worth much more than the current 5.75/hr minimum wage.

I, like most people, agree that the current minimum wage is not a living wage. But we shouldn't lose track of the fact that most people who work for it don't need a living wage. That's why the vast majority of minimum wagers are also part timers. Fact is, they consider the wage to be worth their time; otherwise they'd stay home.

Sorry about the double-post here; Blogger's been behaving strangely with my (LINUX) browser.

Andrew said...

There's no hysteria. I had a minute, so I was attempting to express my thoughts thoroughly and cogently.

What gives you the impression that it's mostly high school and college students that work in food service and retail? And furthermore, where did you hear that most part-timers have that schedule intentionally?

Less than 40% of low-wage workers (earning $9/hr or less) are 25 or younger, according to the Economic Policy Institute. How many of the 63% of low-wagers in their late twenties, thirties, or forties, are just trying to make some walking-around money?

And while they may only be worth $5.75/hr (maybe even less if it weren't for that darn law!) on a raw labor supply vs. employment demand analysis, there's more to it than that. Short-sighted employeers (most) don't account for the relationship between wage, living conditions, and long-term costs. Employee retention and increased productivity contribute a real cash value often ignored by the "I can always find a replacement" retailer. Too many would-be entrepreneurs have been snookered by your over-simplified, Economics 101 style of capitalism.

An item "worth" largely depends on the seller (job-seeker) and buyer (employer) actually being informed about the short-,mid-, and long-termed value of the transcation to each of them. When one party is ill-informed, they may to agree to a price that is significantly under- or over-valued relative to the larger market. This necessarily entails correction, and if necessary correction doesn't come early from an external source (the government), it will assuredly come later from something like crime and poverty driving businesses out of the area.

Oh, and I probably should have hit this note, too:

"opening up more money for local consumer spending."

Where is that money coming from? Does all the money that is paid out in additional wages generated locally? Or is some it it brought in from out side sources?
Low-wage people are consumers, too, and for the large part they spend their money more locally than high-income people. Once you can actually cover the rent, you may even have a spare $10 to buy something from a local restaurant or store. Scenario: tourist A comes to town, buys a sandwich at the diner W works at. W get paid her higher wage, actually pays her bills, then buys an album at the local record store.

Think of it as trickle-in economics... :) Money trickles into local food and retail companies, then stays local as it gets passed around in small amounts, stimulating more incremental development and expansion, leading to more jobs and more spending.

Dave Justus said...

Actually Andrew I would have no difficult at all in finding significant phone banks in the United States. I work for a company that does mostly inbound (you call us) sales and customer service and employs about 30,000 people in the United States, although we do also have some phone banks in other countries. We do not have any sites in California, but there are in fact phone banks there as well.

As for productivity being worth the minimum wage being an 'ivory lexus' libertain fantasy that is obviously not the case. As a thought expiriment, imagine how many fast food places would exist if the minimum wage was $20 an hour. If, as you assume, nothing else would change and we would not have across the board inflation it is clear that fast food places would have to raise their prices to the point that few people would choose to eat fast food, hence less fast food places and less employment. This is obviously an extreme example, but the principle remains the same.

This post is good at explaining the basic economic laws of the minimum wage.

Andrew said...

I didn't think it was that great. In his 'follow the money' section, the guy refuses to keep following the money after it arrives in the hands of the minimum wage workers. Also, if he really wanted to have made the argument, he could have seen if the Beareau of Labor Statistics or Census has any breakdowns of the people that are unemployed. He seems to assume that primarily unskilled workers, worth less than the minimum wage applied to the whole market, make up the unemployed.

Again, I would bet that his assumption is wrong, and that the majority of unemployed people are skilled workers with specific training in an industry that constricted. These people are probably worth far more to a retail business than the minimum wage, but have little desire to bid against others for a dramatically sub-livable wage. The problem is with the employers, who don't note the relationship between what they pay to someone and how effectively that person works.

The money from an increased minimum wage needn't come from other workers losing their jobs. It comes from the workers themselves. First, it comes from heightened productivity and lower turnover, which results in a greater profit margin for the company. Second, it comes from the worker's new buying power.

Give 500 sandwich makers $5 each, and most of them are going to spend it on sandwiches and other items in the local market.

Give 1 rich guy $2500, and he might invest in stocks and subsidize the growth of a business. And the business might be local (or at least domestic). But Then again, he might just use it for a vacation to Paris on AirFrance. Oops.

Ultimately, its an optimization problem. As a politician on any level, you need to make sure that the region you represent is doing well. A minimum wage of the right amount, applied to the right kinds of industries, can help with that. It can help keep spending local, reduce poverty, crime, and even increase employment as the local economy grows.

In the specific case of California, this wage law would have been a good thing.

Andrew said...

Just noticed the update; thanks for the direct link. Anyway, I just had to make one more nitpick with your wrapup. You ask what incentive's involved that would make low-wage workers productivity when they were paid more. My direct and plain answer is that poverty acts as a disincentive for productivity. Below some "minumum wage" mark, and the precise mark depends on the cost of living and the market of available jobs, productivity starts to go down. Unstable finances and lack of security detract from an employee's ability to take pride in and concentrate on their work.
So when you raise wages to up to nearer that mark, you can expect the relief of poverty to act as additional incentive for increased productivity.

Brian said...

Andrew:

Two more points, and then I'm done here.

1. As is often the case with me, my language was too strong. So was yours, though, with that "no phone banks" stuff, so I'm hardly alone. While it's true that some people are trying to support themselves on minimum wage, it's also true that there are tens of millions of people in the US (students) who want to work but don't need a wage they can live on. The point I'm trying (crudely, because I'm outside my area of expertise here) to make here is that the law should acknowledge the existence of these people. Any minimum set to be a living wage fails to do that.

2. Have you ever, er, supervised minimum wagers? I have and, let me tell you, it was a treat. You claim that they'd be better employees if they were paid more, but my direct experience tells me otherwise. Almost all of them fall into three categories:

a. Part timers who want something to do and a little money. High school and college students are in this group, and so are (for instance) bored housewives.
b. Worthless layabouts.
c. People who made a few bad choices early on and are working their way back up the ladder.

Now, in my experience Groups A and B form the vast majority. There are people in Group C, and I understand they're the ones you're concerned about (although I suspect that liberals have some sympathies for Group B as well). However, experience teaches me that people in Group C don't stay in it for very long (usually not more than a year or so). They almost always either descend back to Group B or leave for better work within that time frame. Of the 8 Group Cers I supervised, 7 went on to better jobs quickly and one went back to jail. None stayed on as minimum wagers for more than a year. So concern about Group C is really misplaced. As for Group B; well, they're minimum wagers because they're worthless, not the other way around. Jack up the minimum wage if you want, but if you think it'll make these people produce more you're incorrect. I know, because I supervised a crew of 15 minimum-wagers from 1996--1998 when the minimum was ramped up from 4.25 to 5.75 in CA. That's a 35% pay increase, and I can assure you I saw absolutely no increase in work ethic and/or productivity from my guys.

Cubicle said...

"So when you raise wages to up to nearer that mark, you can expect the relief of poverty to act as additional incentive for increased productivity."

I thought being poor was incentive to work harder, heh heh.
No really.

My family was by no means rich, but not welfare either. I wanted to do better for my family, so i went to school, got a degree,student loans, and i am making more than my dad makes.

Do people get paid more because they are more productive or do they become more producitve when they get paid more?

Brian said...

The question you're asking is not quite the right one. The thing is, everybody knows there's a relationship between wages and productivity. Ideally, the relationship is symbiotic: productivity goes up, so wages go up, so workers are happier, so productivity goes up, so wages go up...and on into infinity. This has been happening for decades, and it's why standard of living and productivity make huge gains with every generation. However, it also means that your question (and my disagreement with Andrew) becomes a sort of chicken-and-egg thing. He thinks we should jack up wages to increas productivity; I think people should work harder to jack up their wages.

The question that's being lost is more subtle: is the relationship between wages and productivity a state function? That is to say, when predicting productivity gains does it only matter that wages increase, or does it matter why they increase? My position is unequivocal: the wage/productivity relationship is not a state function. It depends on a number of outside factors that make it path-dependent. That is, workers' productivity will improve by a certain amount if they earn a certain pay raise. By contrast, if that pay raise is not earned but handed down by legislative mandate, the workers' productivity will increase by much less, or not at all (and in some cases may even decrease).

Again: I developed this position as a minimum wager myself, and then as a supervisor of minimum wagers. When the minimum was 4.25, people were happy to get raised 5.50 and worked harder on account of it. When the minimum was jacked up to 5.75, though, workers considered it their due and nobody worked harder, despite the hefty pay raise many recieved. Jacking up the minimum again, to 7.00 or higher, will have the same result.

A pay raise earned gives an increase in productivity (spurred by the desire for more raises). A pay raise mandated by law gives no such increase.