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View Diary: Where Adam Smith Was Wrong (121 comments)

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  •  There's a market for labor (0+ / 0-)

    Wages are determined by supply and demand. If you try to offer $10/hour in a developing country, you'll have way too many applicants for the jobs, and people will bid down the wage they demand. There must be an economic equilibrium between supply of labor and demand for labor - and that's what determines wage rates.

    •  again, the magic of the market solves all... (4+ / 0-)

      So I suppose then that you're against the minimum wage?

      •  Well, depends on the context (0+ / 0-)

        I'm not taking a stance on minimum wage, but here's the truth about it.

        Having a minimum wage does increase unemployment (among people who are generally poor and uneducated). On the other hand, minimum wage laws increase wages for people whose labor is valued near but below the minimum wage level (because companies will make the hires anyway and just get less profit from those hires). Whether or not this increase of wages from people near the minimum wage level outweighs the total wages from the additional people who would be employed without minimum wage laws is the trade off I'd look at to take a stance on minimum wage.

        I'd go with the policy that maximizes total wages.

        •  See past the supply and demand chart (2+ / 0-)
          Recommended by:
          sixeight120bpm, Saint Jimmy

          "The truth" that you put forward here is based on a whole load of assumptions -- more than I can catalog right now -- that aren't necessarily true in the real world.

          The first is that because supply and demand might set a certain job's wages at a certain level, that the worker is only "valued" that much.  This idea of how much a worker is "valued" is very vague and ambiguous, but I'll assume that you mean the amount that that worker is worth to the employer in terms of the profit that the worker helps the employer to bring in.  This value that the worker brings in might be far, far greater than the worker's wages as set by the labor market; the going rate of pay might be low due to the abundance of desperate workers, or any number of extraneous influences, such as lack of information, etc.  In such a scenario, the employers may be willing to pay far higher wages than the market sets; imposing a minimum wage may make practically no difference in the number of hires made, since each hire is still very useful to the employer in meeting the demand for their goods and services.  The main difference is just that a larger proportion of the profits go to low-level workers.

          This is, of course, a hypothetical proposition, but I venture that it is far closer to reality most of the time than the scenario you propose, whereby raising wages above the market level leads to proportionally fewer hires.  The minimum wage has never led to any waves of unemployment.

          In short, just because the market sets the price of something at a certain level does not mean that it would not be worth possessing even at a much higher price.  The simple supply-and-demand model that you see on a chalkboard fails to capture reality most of the time.

          Another assumption you make is that the workers under consideration are significant only as workers -- not as consumers.  While individual firms might prefer to pay their workers as little as possible, in the aggregate, it is better for them to pay workers more, and so to create a class of consumers with disposable income.  The US economy is suffering right now because consumers are paid little or are unemployed, meaning they cannot consume.  Firms are basically in a prisoner's-dilemma situation.

          •  So you make two basic points (0+ / 0-)

            First, the issue of valuing labor by the output of that labor rather than market prices for labor is a good point. In the scenario you describe, minimum wage laws can be used to transfer wealth from the ownership stake in a company to its lowest paid laborers. However, at the higher wage rates, you are going to be left with excess supply of people wanting to do those jobs, and you will see unemployment rise. The increase in supply will come both from the unemployed and those employed in more lucrative, but more demanding jobs. Considering that these people are probably more qualified for the positions, they are likely to get them - which puts at risk the rate of technical advancement and the rate of standard of living increases. How it all plays out at a macro level is what's interesting.

            Your second point is much less interesting. Primary effects are much greater than secondary effects. For a particular firm, paying laborers, say, 10% higher wages results in a significant cash outflow for the company. Very little of that returns as an inflow to the company because the laborer has more money to spend on the firm's product offerings. That's the micro view. The macro view is that ultimately, money is just a proxy for facilitating trade of products and services. If you try to just start paying people more, you're saying their labor is worth more than a bunch of other goods that it was worth less than yesterday. That just throws the whole system out of wack.

            •  Whack the system (3+ / 0-)
              Recommended by:
              wsexson, Saint Jimmy, zedaker

              From the first point:

              at the higher wage rates, you are going to be left with excess supply of people wanting to do those jobs, and you will see unemployment rise.
               This is begging the question.  The notion that imposing a minimum wage will lead to any significant increase in unemployment is exactly what is at issue, and I see no good evidence that it will.

              From the second point:

              If you try to just start paying people more, you're saying their labor is worth more than a bunch of other goods that it was worth less than yesterday.
               This is also begging the question.  In what way is a worker "worth less" when they are paid less?  My argument was that we must question this idea of a worker's "worth," and recognize that the wage a worker can garner on the market often fails to capture what he or she is really "worth" to an employer.
              That just throws the whole system out of wack.
               Too bad.  Looking at the history of this country, including the conditions that workers faced before safety laws, child labor laws, minimum wages, etc., I'd say the unrestrained free market needs some whacking.
          •  see history of minimum wage (1+ / 0-)
            Recommended by:
            Saint Jimmy

            there was a reason it was fought for in the 1800s and 1900s. Large employers competing with each other in a particular industry routinely imposed wage cuts and living standards, health, nutrition, access to even minimal medical care all worsened...

            Arbitrary cuts were destructive and those who could not survive or endure the situation were replaced by immigrants who did not know what they were getting into... paid with company script redeemable only in company stores etc. for basic necessities. We may not devolve to a Walmart only script system for the working poor set up by large corporations.. sort of privatized food stamps instead of money but we'd get near enough... and how wonderful that some manufacturing would come back... import 3rd world workplace safety and environmental standards and the return to the "glory days" of late 19th century robber baron capitalism will be complete.

            With no minimum wage, unions crippled and less protection from abuse by government agencies the race to the bottom would begin again. We already have industries full of undocumented immigrants working for less and expanding prison labor working for 3rd world paychecks. This cannot have a happy ending if this trend continues... it will only end with a severe 2 level class system with a very weak middle class in between... and eventually a lot of re-unionizing and strife when people are pushed far enough into a corner where they have nothing much left to lose and they will fight back for the minimum standards that made the US prosperous with a strong middle class.

            Pogo & Murphy's Law, every time. Also "Trust but verify" - St. Ronnie (hah...)

            by IreGyre on Wed Jan 11, 2012 at 02:27:54 PM PST

            [ Parent ]

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