Minimum Wage Vicious Cycle

[Xerographica]

The Nobel Prize liberal economist Paul Krugman recently argued that we need more government because people tend to make poor education/career decisions.  Shortly after reading Krugman's case for bigger government, I read an article in the LA Times about how some people in the Philippines were lured to America with the false promise of high wages.

Somewhat inspired by this very popular blog entry... A Week of Shorter Rod Drehers... I patched together some relevant snippets from Paul Krugman...

Krugman: The world economy is a system -- a complex web of feedback relationships -- not a simple chain of one-way effects
Krugman: Wages, prices, trade, and investment flows are outcomes, not givens
Krugman: Wages are a market price--determined by supply and demand
Krugman: Money still talks â€" indeed, thanks in part to the Roberts court, it talks louder than ever
Krugman: Raise minimum wages by a substantial amount
Krugman: The price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects
Krugman: Your decision to stay in school or go out and work will shape your lifetime career
Krugman: Now, the fact is that people make decisions like these badly
Krugman: Bad choices in education are the norm where choice is free
Krugman: He and his unwary readers imagine that his conclusions simply emerge from the facts, unaware that they are driven by implicit assumptions that could not survive the light of day

If you'd like the context, just click the links.  As you can see... Krugman used to be an opponent of minimum wages... but now he's a proponent.

From my perspective, a minimum wage is a problem because it doesn't accurately communicate the demand for unskilled labor in any given area.  This increases the chances that people will make really bad career/education decisions.  Here's how I've illustrated this...



And here's another attempt...



My drawing skills aren't that great... but hopefully you should get the idea that, in this drawing, the US has more than enough people pushing brooms (unskilled labor).  In economics... "more than enough" means that there's a surplus.  Usually when there's a surplus of something the price will accurately communicate this information to the entire world.  A low price says "hey, we have more than enough!".  This important information helps people make informed decisions.  When this important information changes, people's decisions will change accordingly.  So in order for the US to have ended up with such a massive surplus of unskilled labor... something must have gone wrong with the price system.  And that something is the minimum wage.  A minimum wage says, "hey, we don't have enough unskilled labor!".

A minimum wage creates a vicious cycle.  When wages falsely signal that the US has a shortage of unskilled labor... this increases the chances that people will make big mistakes.  Students are more likely to make the big mistake of dropping out of school and unskilled immigrants are more likely to make the big mistake of risking their lives to move here.  The logical consequence of so many people making big mistakes is an increase in poverty... which is then used to justify an increase in the minimum wage.



So what would happen if we eliminated minimum wages?  I'm guessing that wages for unskilled labor will decrease.  And I'm sure that proponents of a minimum wage would guess the same thing.  Right?  Because if we eliminated the minimum wage... and wages didn't decrease... then there wouldn't be a need for a minimum wage.

If proponents of a minimum wage want to guess that eliminating the minimum wage would result in a huge decrease in wages... then, assuming that they are correct, this huge decrease would reveal that there is indeed a huge surplus of unskilled labor in the US.  This would conclusively confirm the problem with lying to people about the demand for unskilled labor (aka "a minimum wage").

Would chaos ensue if we learned that there actually was a huge surplus of unskilled labor in the US?   Well... no.  Take China for example.  They used to have a huge surplus of cheap labor... but now they don't...

Costs are soaring, starting in the coastal provinces where factories have historically clustered (see map). Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labour. - The Economist, The end of cheap China

Wages in China really didn't skyrocket because of a minimum wage... they skyrocketed because of the massive demand for cheap labor...

While corporations may look elsewhere for still cheaper labor, there are no more Chinas out there.  Other countries that establish themselves as low-wage havens will soon be overwhelmed by the inflow of capital from the United States, Europe, Japan, and now China. They cannot possibly have the same dampening effect on wages in the United States over the next three decades as did China and other developing countries in the last three decades. - Dean Baker, Living in the Short-Run: Comment on Capital in the 21st Century

In case you didn't actually dig through all those Krugman articles that I shared earlier, I'll point out that he vociferously argued against the idea that the massive increase in the global supply of cheap labor had anything to do with wages stagnating in the US.  Eventually he acknowledged that perhaps there were some issues with his "implicit assumptions". 

Let's review!  Here are two possibilities of eliminating the minimum wage here in the US...

1. Wages don't plummet.  Then there's really no point in having a minimum wage.
2. Wages do plummet.  Then the US "will soon be overwhelmed by the inflow of capital from the United States, Europe, Japan, and now China".

We really don't help anybody by giving people bad directions.  If you truly want to help poor people... then start a business.  Give poor people a better option (builderism).  Especially if you have a strong theory that some existing business is making a stupid mistake.  Put your strong theory to the test by starting a business that doesn't make the same stupid mistake.  Maybe you want to argue that starting a business is too difficult?  Well there you go.  You've successfully identified a huge problem.  It's a huge problem when it's too difficult to give poor people better options.  Please figure out how to make it easier for somebody as intelligent as yourself to start a business.  And if you can't figure it out... then please have some respect for anybody who does manage to successfully start and run a business that employs/serves any amount of people.

[SGOS]

Who knows?  Economics is not an exact science.  It's possible that it could be, but it is highly ideological with both conservative and liberal economists using it to support political ideologies.  I know Krugman is renowned with his Noble prize and all, but in recent years, he seems to favor ideology over science.  Having said that, I support the minimum wage (but for purely ideological reasons).  I can't even tell from your post whether Krugman is for or against it.  It doesn't matter.  He has lost credibility with me as a scientist.

[doorknob]

So screw the people who work the hardest and may not have the same opportunities (college and other resources) as the rich. We should just fucking let the rich pay slave wages (which they already do) and get away with it.

News flash immigrants are going to come here no matter what we do with wages they are under false impressions to begin with. You can't justify dropping minimum wage to stop immigration! That's like saying I'm gonna stop feeding my kids because the cats are hungry. If anything minimum wage should be increased. Then employers can be more picky about who they hire. We are already going that direction. And trust me there is no shortage of so called unskilled people around.

This guy's a lunatic pandering to the rich.

[PickelledEggs]

The fuck is this guy babbling about?

[stromboli]

I'm not going to try to make a point by point argument because I am not an economist. My viewpoint comes from a blue collar, lived through it perspective.

I like the idea of a minimum wage because when it was implemented it set a bottom level for employers to meet. I worked for 25 cents an hour as a teenager doing hard labor jobs like digging ditches and even some construction. Try that for a living wage. Then, up to a dollar an hour as a janitor in high school. The issues for me are not about a living wage but the loss of upward mobility in a society. If you start out at a certain level and then are given opportunities to improve, situations where education is encouraged and incentives provided for doing so, you have upward mobility and a dynamic economy.

And further, what you are proposing is what the Republican party wants. They want an economy built on a long disproved trickle down economy a la Reagan. It is not socialism to provide people a living wage. You may be right in the assumption that people seek a lowest common denominator in working, but given the incentive to improve their lives the smart ones will do so. The incentive to me is the issue, not the wage.

Nothing personal, but I'll believe Krugman before I believe you.

[doorknob]

If you really want to give people incentive to get an education we should take a page out of japan's book. Those kids live education and don't even think they have a choice. It's society that needs to change . If that's the main concern any how. No amount of messing with minimum wage is going to change our attitude. Especially for people who don't have the mental capacity for learning and there are plenty of people like that around. I don't think saying screw them they don't deserve a livable wage is a very good way to improve anything. It's not going to help the people who are just doing the best they can and those who can't get an breaks in life.

[Aroura33]

I think the fact that college costs between 5k and 15k per year, at a COMMUNITY COLLEGE might have a tad more to do with why poor people are opting out of higher education than a living minimum wage.

Is someone somewhere seriously suggesting that paying people fairly is the cause of poverty?  Fuck. 
Like others, I can't tell weather he is for or against a minimum wage from the post, looks like he's got points on both side....

[AllPurposeAtheist]

Dreaming of your  libertarian  utopia once again  Xerox? You must have a notion that people quit school merely so they can look forward to the wonderful world of minimum wage.. You further think that companies will happily just pay higher wages because they can? Man, you really ought to get out of the house once in awhile and see just how rosey it is to work for almost nothing..  Eliminate minimum wage and guess what...not only will people starve, but you'll drive many more people to a life of crime. You have to remember that it's far easier to knock someone over the head for $10 a day than sweat your ass off for $10 a day.

[doorknob]

or sell drugs

just saying

[Jason78]

If they got rid of the minimum wage in the UK around 1386000 people would suddenly be very poor.  And probably hungry.

Sales of burglar alarms would probably go up though.

[AllPurposeAtheist]

In conservaspeak poverty is always the fault of the people trapped in it.. Xero must truly believe that lower wages is the cure for poverty..

[stromboli]

I think the fact that college costs between 5k and 15k per year, at a COMMUNITY COLLEGE might have a tad more to do with why poor people are opting out of higher education than a living minimum wage.

Is someone somewhere seriously suggesting that paying people fairly is the cause of poverty?  Fuck. 
Like others, I can't tell weather he is for or against a minimum wage from the post, looks like he's got points on both side....

Well said. Students going into debt for years after receiving an education and paying ridiculous interest rates on loans is no incentive, certainly. I got an education via veteran's benefits and working a full time job with a working spouse to get me through. Fortunately I owed nobody nothing after I got my degree, even though it took nearly 7 years.

[AllPurposeAtheist]

If they got rid of the minimum wage in the UK around 1386000 people would suddenly be very poor.  And probably hungry.

Sales of burglar alarms would probably go up though.

See? If you Brits would just let school children carry guns you wouldn't have that problem..

[Xerographica]

1. Robert, a business owner, either is, or isn't, making a mistake by paying his employees $X dollars.
2. If you truly believe that Robert is making a mistake... then it either is, or isn't, easy for you to start a business to exploit his mistake. 
3. The bigger Robert's mistake, the more profitable it will be for you to exploit it
4. If it isn't easy to start a business, then a minimum wage doesn't solve this problem
5. If it is easy to start a business, then a minimum wage isn't necessary

By arguing that a minimum wage is necessary... you're arguing that it's really not easy for liberals to start businesses to exploit mistakes made by Robert and all the other business owners. 

You can't have your cake and eat it too.  You want to argue that we need a minimum wage?  Great!  But please understand that you're arguing that it's really not easy to start a business.  And who are you going to blame for this fact?  Robert? 

Robert's guilty of...

1. making the mistake of not paying his employees enough money
2. making it difficult for liberals to start businesses that pay employees enough money

Seriously?  Robert's preventing you from starting a business that pays employees the optimal amount?  Robert's preventing you from profitably exploiting his big mistake?  Can you please elaborate?  Can you please explain in great detail how Robert prevented you from starting a business?  If not, then evidently you've never tried to start a business.  Yet, here you are so confident that Robert is making the big mistake of not paying his employees enough money.

I want to live in a world where atheists aren't incredibly incoherent.  Is that really too much to ask for? 

If you truly care about the poor... then think your position through.  Set aside your bias for a few seconds and figure out whether it was a minimum wage... or the demand for labor.... which lifted millions and millions of people in China out of poverty. 

[stromboli]

Thank you for a half page if......then statement. go back and read what you wrote.

if you truly believe Robert is making a mistake

if the bigger Robert's mistake....

If it isn't easy

If it is easy, then.........

Then you jump to whether it is easy or hard for liberals and another set of if then arguments.

First of all I'm not even sure what point you're trying to make, and second your entire argument is an unproven construct and nothing more.