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The guessing game

from David Ruccio

12wage

Until recently, we were certainty what would happen with an increase in the minimum wage—and that would be the reason to oppose any and all such attempts. Now, it’s a guessing game—and that uncertainty about its possible effects has become reason enough to oppose increasing the minimum wage.

What the hell is going on?

minimum_wage

First, the certainty: neoclassical economists confidently asserted that the minimum wage caused unemployment (because it meant, at a wage above the equilibrium wage, the quantity supplied of labor would be created than the quantity demanded). Therefore, any increase in the minimum wage would cause more unemployment and, despite the best intentions of people who wanted to raise the minimum wage, it would actually hurt the poor, since many would lose their jobs.

But, of course, theoretically, the neoclassical labor-market model was missing all kinds of other effects, from wage efficiencies (e.g., higher wages might reduce labor turnover and increase productivity) to market spillovers (e.g., higher wages might lead to more spending, which would in turn increase the demand for labor). If you take those into account, the effects of increasing the minimum wage became more uncertain: it might or might not lead to some workers losing their jobs but those same workers might get jobs elsewhere as economic activity picked up precisely because workers who kept their jobs might be more productive and spend more of their higher earnings.

And that’s precisely what the new empirical studies have concluded: some have find a little less employment, others a bit more employment.

But that’s mostly for small increases in the minimum wage. What if the increase were larger—say, from $7.25 to $10, $12, or $15 an hour?

Well, we just don’t know. All we can do is guess what the effects might be at the local, state, or national level. But conservatives (like David Brooks, big surprise!) are seizing on that uncertainty to oppose increasing the minimum wage.

And that’s what I find interesting: uncertainty, which was at one time (e.g., for conservatives like economist Frank Knight) the spur to action, is now taken to be the reason for inaction. And those who oppose increasing the minimum wage are now choosing the certainty of further misery for minimum-wage workers over the uncertainty of attempting to improve their lot.

Addendum

They want less of a guessing game?

Then, let’s make the effects of raising the minimum wage more certain. Why not increase government expenditures in areas where raising the minimum wage represents a dramatic increase for workers? Or mandate that employers can’t fire any of the low-wage workers once the minimum wage is increased? Or, if an employer chooses to close an enterprise rather than pay workers more, hand the enterprise over to the workers themselves? Any or all of those measures would increase the certainty of seeing positive effects for the working poor of raising the minimum wage.

But then we’re talking about a different game—of capital versus labor, of profits versus wages. And we know, with a high degree of certainty, the choices neoclassical economists and conservative pundits make in that game.

 

  1. July 27, 2015 at 10:45 pm

    I earned a minimum wage of $1.00/hr as a young boy. At that time I could buy a candy bar for 5¢, 20 candy bars per hour. I was rich!

    Those were the days before corporatistas took over the US government and turned into a corporatist military state with a fake democracy (most totalitarian dictatorships claim to be a democracy, the US simply rotates talking figureheads).

  2. July 28, 2015 at 12:05 pm

    Stop guessing, start thinking
    Comment on ‘The guessing game’

    The guessing about the effects of minimum wages makes it clear to everyone that economists lack the correct labor market theory or, even worse, the correct theory of the interaction of markets.

    The acceptance of the supply-demand-equilibrium depiction by the majority of students can be taken as a proof that you can sell whatever green cheese assumption you may dream up to substandard thinkers.

    The first task of Heterodoxy is to discard nonentities like utility or equilibrium and to fully replace the supply-demand-cross as the representation of a market (2015b).

    The second task is to determine the systemic interaction between the product and the labor market and the key drivers of overall employment (2015a).

    After the vertical differentiation of the product and the labor market the next task is the horizontal differentiation of arbitrary many product and labor markets (2014).

    To recall, Keynes’s main issue was employment theory and he was quite clear that orthodox employment theory was defective. However, Keynes succeeded only partly, his employment theory is not general either and misses a crucial feature (2012). The most elementary version of the correct employment equation reads:

    From this follows inter alia:
    (i) An increase of the expenditure ratio rhoE leads to higher employment.
    (ii) Increasing investment expenditures I exert a positive influence on employment.
    (iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment. This implies that a higher average wage rate W leads to HIGHER employment. This explains the Phillips curve.
    (iv) A price increase is conductive to LOWER employment. This explains stagflation.

    Consisting exclusively of measurable variables, the structural employment equation can be tested. So there is no need to continue the silly guessing game as the main occupation of substandard thinkers.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
    http://ssrn.com/abstract=2130421
    Kakarot-Handtke, E. (2014). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25.
    URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2406891
    Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment.
    SSRN Working Paper Series, 2576867: 1–11. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2576867
    Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547098

  3. macroambiente
    July 28, 2015 at 3:12 pm

    Mainstream economists abide by the few who command the economy and among other targets intend to tame minimum wage and all sources of inflation but theirs.
    Supply and demand is often used to explain economic phenomena but real world supply and demand curves are almost never estimated, probably as a consequence of the prejudices mainstream imparted to the real world supply and demand theory. An exception is the paper “Supply and Demand Is Not a Neoclassical Concern” (http://mpra.ub.uni-muenchen.de/63135/). It stresses the neoclassical mistakes, presents a new and scientifically coherent approach to the matter and describes an experiment, the estimate of the US aggregate supply curve for the period 1960-2007. This approach allows for analysis of the importance of the economic policy exogenous variables that eventually defines all endogenous variables, for instance the GDP and the general price index. Conclusions are as anticipated by Keynes: for instance, fiscal policy may increase GDP for it shifts the aggregate demand. On the opposite direction monetary policy causes GDP to fall and prices to rise.
    About the minimum wage the conclusion allowed by the experiment is that “The minimum wage causes prices Pde to rise but has no effect on GDPde; so, higher minimum wage means aggregate demand expansion and more income to workers without causing unemployment” (page 18). What happens is that minimum wage is a cost item and so a minimum wage increase shifts the aggregate supply curve to the left.
    Of course more minimum wage implies higher prices to everybody. However, a minimum wage increase transfers money from rich companies’ shareholders to workers thus increasing their income. As Keynes anticipated, the size and the propensity to consume of the latter group are greater than those of the former. Therefore, the aggregate demand expands thus fostering the national available income and consequently people upgrade their levels in the Maslow Pyramid, being then better than otherwise. Meanwhile, companies’ shareholders expend the same and save less, and this looks socially healthy.

  4. July 30, 2015 at 4:58 am

    Raise the minimum wage, tax at 100% all income over $10 million… $50 million… $100 million, transfer personal wealth above $1 billion to government life-saving program accounts, establish 0% tax up to $50,000, etc., and so on… It’s obviously necessary for the wealth inequality pendulum to begin moving in the opposite direction. Maybe doing something to finally abolish the global trillion dollar per year tax haven/evasion industry is worth a “peak” as well…

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