Why The Poor and Minorities should vote Ron Paul

A Visual on the Effect of the Minimum Wage

Labor Economics #3 - The Minimum Wage

Labor Economics #3 - The Minimum Wage
by Alex Merced

One of the most sancrosanct bastions of Labor laws is the minimum wage, and if you want to go beyond this article in learning about it listen to Roger Garrisons lecture on topic from Mises U 2010. Essentially what I want to demostrate through a brief example is...

1. The Minimum Wage actually transfers wealth from the those at the bottom, to the people marginally above them, so it transfers wealth upwards instead of downwards like it intended.

2. The Minimum Wage Creates Unemployment

So let's imagine a world with 300 people in Labor force working at the current wages.

100 People working at $8/hr ($800 spent)

100 People working at $7/hr ($700 spent)

100 People working at $6/hr ($600 spent)

of course, the lower paid workers are the lower skilled and lower educated workers who may be payed more in the future if they learn skills and information on the job. What happens right now is that the economy can allocate work for the entire labor force at these wages, but what happens if we establish a minimum wage of $7/hr. Now our workforce looks like so...

100 People working at $8/hr

185 People working at $7/hr

15 people unemployed

The minimum wage law did not make these employers magically have more resources, so the $600/hr that was was going to the 100 laborers at $6/hr in the first scenario can now only afford to continue to employ 85 out of the 100 laborers leaving 15 unemployed since there is no more resources to employ them. Essentially the lower you are on the wage ladder the more negatively affected you will be by an increase in the minimum wage, it's those in between the bottom wage and the new minimum wage who benefit at the cost of those at the bottom.

(NOTE: One may ask why wouldn't the labor force reduce the wages of the $8/hr workers to keep the $6/hr workers? The answer is simple, the $8/hr workers add more value which is why they are payed a higher wage in the first place so if you had to choose between possibly causing a valued worker to quit from a  pay cut or laying off workers who add the least value you'd choose the latter.)

So this example shows how it causes unemployment, and how increases the wealth of a few at the cost of not those at the top but those at the bottom. So what happens to these unemployed people, they still have to find work so they may move to another location with a lower or no minimum wage in which they can enter the labor force at their skill/education level. Although, if these uneducated/unskilled people migrate from all the places with a minimum wage to this one bastion of freedom with no minimum wage it causes a huge concentration of uneducated/unskilled people in one place.

This explains why the places that are the most free sometimes seem to have some large concentration of uneducated people (a very gross and misplaced charachterization of many souther red states), not because freedom is backwards but because these free places are the only places that will welcome with open arms those from other locations who've been kicked out by wage laws, forbidden to enter the labor market and develop the skills to later make higher wages.

"Give me your tired, your poor,


Your huddled masses yearning to breathe free,


The wretched refuse of your teeming shore.


Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"
 
- Statue of Liberty

Labor Economics #2 - Labor Geographic Mobility

Labor Economics #2 - Labor Mobility
by Alex Merced

 There is usually a decent job somewhere out there waiting, but the ability for someone to take advatage of that oppotunity also has to do with their willingness and ability to move to where the job is located. Like all capital, labor can be mal-invested for many reasons and this problem occurs out of the laborer actions themselves. Capital usally naturally moves to where it's needed, but if it does not in the form of labor or can't it can slowdown growth or a recovery. While many people will always be hesitant to move due to family, friends, and the life they'd leave behind I want to explore how policy can and usally makes this problem well... more problematic.

Problem #1 - Housing

In the US in particular they've made the pursuit of something they like to call an "Ownership Society" where more and more of the population owns homes. Although ownership of the land or house that you live in, can make it quite encumbering to make changes and follow the demand for labor leaving someone stuck in a bad labor market. So while well documented are all the bad loans, derrivatives, etc. from all the housing incentives in the US, less talked about in the media is reduction in mobility caused by pushing for more housing ownership by more and more people.


Problem #2 - Employer Benefits

If your someone who really enjoys the benefits that your current job provides you you may forgoe a better opportunity elsewhere (I guess it wouldn't be better if you didn't choose it). So one thing the government can do to make things worse is to make more and more services that you may have purchased individually intrinsically attached to employment such as what was done with healthcare and retirement in ERISA in 1974. So if legislation and at the time much higher tax brackets cause an overwhelming incentive for employer to take care of you instead of you yourself, then it'd be difficult to cut ties with an employer in order to keep those non-monetary benefits.


Problem #3 - Local Wage Laws and Taxes

Sometimes Labor doesn't need to move where the demand is, the demand can move to where the labor is. A good example of this is where people start web start ups in cupertino cause it's know for having a base of technology oriented labor. Although some businesses may not move their offices or operations to somewhere with a huge supply of labor with certain skills if the taxes are too high or labor laws too penalizing which actually tend to be the places that give labor the kind of government benefits where they wouldn't want to move from (I'm looking at you California), this is a bad combination of mobility reduction.


The interpersonal reasons why one may move or not move somewhere are endless, but government policy can often create harfmful manipulations of these incentives.

Labor Economics #1 - Sticky Wages

Labor Economics #1 - Sticky Wages
by Alex Merced


The next few posts I'll be writing will be a series on some aspects of labor economics which will mainly center around wages and upward mobility. In this initial part of the series I'm going to address one of the main Keynesian buzzwords, "Sticky Wages".

 John Maynard Keyes (read "Where Keynes went Wrong") makes the admission that it's plausible that an economy can self correct by allowing all prices to adjust downwards if the money supply is reduced for whatever reasons, but contends that there is a problem cause wages are "sticky" so this would make it difficult for businesses to adjust their inventories and prices to maintain the current labor supply since wages won't fall in line with everything else so unemployment ensues. This unemployment will then cause further contraction of the monetary supply causing the economy to just spiral downwards as Keyenes expounds on ideas first proposed by Irving Fisher which really are just echoes of antiquated mercantilist thinking.

 What I contend is not to deny that wages move slower than the prices of consumer goods, but if anything this should be a reason to want deflation not inflation. First let's look at the structure of production to explore why wages would move slower in either direction.

Let's say my structure of production looks like so...

Labor+Materials+Tools = Consumer Good

Deflation Scenario

So if the Demand for the consumer good increases I have three choices on where I can costs in this simplified scenario. For many reasons I may try to cut costs as much as possible in Materials and Tools since they are homogenous instead of giving up my trained skilled labor which is heterogenous. I may still have to ask my labor to take some level of a cut in pay but only after I exausted my ability to lower the other prices. So essentially I may have been able to cut my costs enough to get a drop in price in the good of 10% yet from cutting costs elsewhere only had to cut labor costs by 5%.

So if this is going on across the economy essentially laborers will have gotten an effective pay raise cause goods have dropped in price more than their wages did. Given if you look at editorials in times like 1870's or late 1830's when you had this sort deflation without massive unemployment (actual growth in the 1870's) going on, yet psycoligically many people felt things were bad cause they saw the nominal numbers going down so there is something to be said for the psycological state of people.

Inflation Scenario

So let's say the demand for my goods has increased cause the money supply has grown for whatever reasons. Since demand is increasing all over the economy, the demand for the same materials and tools I use will increase over different industries and firms that use those same tools. This widespread demand increase will cause an increase in the price of my materials and tools which I'll have to pass on to the consumer yet this increase will be larger than any raise I may give to my laborers in a attempt to prevent too much of an increase in the final goods price that would effect it's demand.

So basically due to increases in costs primarily in capital goods the price of the good has gone up 10% and wages went up 5% which if this is a widepread phenomena results a pay cut for the laborer. Again, psycologically they feel good cause they see their nominal wages going up without realizing their real wages are going down. This is essentially the story in any bubble or boom, except due to problems with CPI calculations inflation is usually understated.

Conclusion

If sticky wages are a real phenomena then deflation would be the much better environment for real wages and for the laborer. Although what is usally proposed by Keynesians and other types of leftist is to push for more inflation which actually hurts real wages yet psycologically breeds consent of the labor class since they only think in nominal terms. In order to have the benefits of deflation yet without the psycological pessimism, it would be a proper use of an economic figurehead such as a president to explain this phenomena to manage expectations and sentiment.

New York Shoots itself in the Foot

This is a Response to this New York Times Article:

If you havn't seen my video on the Fallacy of Progressive Logic then I recommend you watch it to get a better appreciation for the frustration I have over the actions against "Illegal" internships which has several problematic assumptions...

1) An Intern can't REPLACE a job - Now while I've intervied, hired, and overseen academic marketing interships for Shane&Shawn and Greico Financial Training, I can safely say an intern can't replace specialized and skill labor. A business doesn't get applicants with the same experience level and skill that someone who can demand a wage brings, and the business and it's production would suffer if it were to attempt such a replacement. This drop in productivity and returns is punishment enough for such a poor business decision.

I doubt many would make this decision unless the market is already putting downward pressure on production costs in which case that jobs wouldn't exist much longer anyways. The sooner job losses occur in an economic adjustment, the sooner the capital tied up in that unproductive job can put to more productive means creating jobs somewhere else. Why would i say the job is unproductive? If the job were productive it would produce more value than it costs meaning there would be no reason to cut it. The interships I've overseen were productive exercises that helped developed skill and experience for those who participated in them who went to greater things.


2) This hurts the Adjusting Labor Force - You have two categories of people who are going through a pain ful adjustment...

College Graduates - This new crop of laborers are overwhelmed by the lack of experience and skills in an overcrowded labor market, meaning they must develop the skills and experience to demand a wage. If the amount of internships is violently reduced then less graduates can enter the labor market and climb up the wage ladder, since the surplus of skilled labor from layoffs pushes the price of unskilled/unexperience labor below the minimum wage, meaning the only other way to enter is through interships since no middle ground is allowed.

Layoffs from Shrinking Industries - This skilled and experienced labor faces a different problem, a lack of jobs that need their current skill set meaning they must develop a new one. The cost and time of education much of the time can be cost prohibitive but an unpaid internship can often be the cheapest method to develop new experience and skills to enter growing markets after overinvesting in a shriking one.

Just the threat of sanctions for "illegal internships" would severly discourage the supply of internships for these groups to have a speedier transition in this adjustment period. Again, while these groups adjust to a changing demand for labor the capital saved by businesses in certain tasks helps spur investment in growing areas meaning for new jobs to put these new skills and experience to use in.


3) Everyone is volunteering - If unpaid interns are putting long hours and handling what may be handeled by someone at some wage, then the effective market price for the labor is... 0. In that case to force an employer to pay more would be price fixing above the market price which will cause a surplus in labor (aka unemployment). Also to prevent voluntary labor at any price is just a violation of someones liberty.