Maybe you can explain to epbrown01 why you don’t just reduce your own salary or accept a cut in profits.
Regards,
Shodan
Because I’m too old to look at the big picture. If I am not profiting running a business, I might as well walk away and either apply for a job or else sit at home and let my gf support me to retirement.
Permanently hanging a “CLOSED” sign is a frequent temptation for small business owners who seem to get screwed over from every angle.
Is that because you have different product lines, with different levels of profitability, and the minimum wage increase would make the least profitable product lines unprofitable? Or would you need to raise your prices across the board to maintain profitability, and you’d suffer less of a hit with higher prices and a lower volume of sales than trying to maintain your current sales volume?
Honest answer? I’m too close to retirement to consider those things and would just go for the easiest solution.
ETA: additionally, I’m selling my time (a service) more than I’m selling goods.
In my experience with healthcare, most of the rates are based on the government’s rates. We do not have the freedom to raise prices, and our profits are a fixed percentage over what the government says are the costs (eg: 6% for physician administered drugs). Some of that “profit” goes towards maintenance and other business-related expenses, which can cut actual profit down to the low single digits for most patients, and into the negative for Medicaid patients. If a new minimum wage raises our expenses more than that margin, but the government fails to increase their rates, the only options are to 1) downsize, or 2) pay the doctors/owners less.
~Max
I’m reading Lumpy’s point differently than you are. In many places, there are large markets of unskilled labour. That means that the natural price for the unskilled labour is quite low, regardless of the profit that is made off of that labour. Some of the businesses demanding that labour will be making minimal profits. However, with cheap labour, most of the businesses will be making significant profits. Raising the minimum wage both reduces the profits of the business making significant profits, and puts the businesses making minimal profits out-of-business. The “pauper labour” Lumpy referred to is the labour that was going into the businesses that previously were making a minimal profit and have now gone out of business. It has nothing to do with whether that work was dignified.
The hoped-for outcome from raising the minimum wage is that putting money into the pockets of the lowest wage earners will have a stimulative effect on the economy that will exceed the negative effects of the reduced profits and closed businesses. This effect should expand the economy and lead to new different jobs. The risk of raising the minimum wage is that it has diminishing returns as an economic stimulus. If the minimum wage is set too high, that hoped-for outcome won’t happen.
Let’s assume that it is true that this demand side economic model will work (I don’t believe it will, but lets assume it will). Why does it take the form of a minimum wage and not a social program by the government?
If it is a societal good, it should be provided by the taxpayers, not solely by business owners whether they be large or small, rich or poor, or on the verge of bankruptcy themselves.
I’m with kayaker. The small businesses that we want to promote get screwed over and over again by government red tape and increasing rules and taxes.
And provided primarily to people who otherwise wouldn’t and shouldn’t qualify for assistance, while if ignoring many who do or should
Exactly. Like the teenage kid working for beer money or the surgeon’s wife who wants to get out of the house for 20 hours per week. They don’t need this subsidy.
And to piggyback on an earlier post in reply to the poster who stated that some jobs just shouldn’t exist. We already have a social safety net. Let’s say that it costs the taxpayers the equivalent of $10/hr to provide for someone who cannot make their own living.
Let’s also say that this person is of limited skills and can only fetch $6/hr in a free market. If the government mandates that I pay him $10/hr and he is not worth that, I won’t hire him, and then the taxpayers are on the hook for $10/hr.
Wouldn’t it be better if he could work for $6/hr so that the taxpayers are only on the hook for the remaining $4/hr? We would have then taken a step to eliminate his poverty, giving him work that he can take pride in along with the ethic that entails, he provides me a valuable service, and we have saved the taxpayers money. What is wrong with my thought process on this?
I had an older woman ask if she could work for me without being paid. She just wanted to keep busy at a job where she could work at her own pace, and had no need for money. As a favor to her I actually looked into it. Turns out I couldn’t do it as my insurance wouldn’t cover an unpaid employee.
OK, I hit a nerve, so let me explain myself a little better:
First, it’s obvious that a minimum wage has to be backed up by public assistance. The two more or less need each other.
Second, working at low-paying jobs is fine if that’s what you’re happy with; it’s terrible if you’re desperately struggling to obtain shelter and food.
Lastly, we already tried the old-fashioned “work builds character” theory, exemplified by what prevailed in America roughly between Reconstruction and the Great Depression. I’ll point out that it was necessary to pass vagrancy laws that virtually made it a crime to be homeless and unemployed, in order to get people to perform manual labor for the pittance many industries offered. Otherwise, many would have rather been beggars and tramps- at least they wouldn’t have had to be poor AND work.
Pure laissez-faire free markets in an industrial economy would have led to the “contradiction” Marx predicted would collapse the whole system. What we ended up with was a little socialism to save the rest.
Is this some kind of modified universal basic income?
The higher cost of living states are usually also the ones with higher minimum wages and also the ones that pay more to the feds than they get back. So, the low-skilled Alabama worker working for $4/hour will get the other $6 (or whatever) from NY, NJ, CT, or CA. Meanwhile, those states are also making sure to pay for their own with higher minimum wages and higher local taxes. Why should Alabama or West Virginia, for example, become even more dependent on transfers from richer states? This would just be another transfer from rich states to poor states, and another subsidy to corporations who can still attract employees even though they don’t pay a living wage.
Actually, your scheme is worse than a UBI because corporations would be incentivized to pay as little as possible. The workers wouldn’t care if they were getting $1 or $9.99 per hour, because the government would make them whole, at $10/hour. With a UBI, at least, workers would get more benefit from employers who paid more (I’m not advocating for a UBI). So, Walmart would pay $0.01/hour and the government would pay the rest.
Anyway, to actually address the OP, yes, it is based on a calculation of how much someone working 40 hours a week would need to earn to be above the poverty line.
That’s <$6/h.
The wage is not just based on the “large market” (supply? number of people?) of unskilled labor. It’s also based on the demand for that labor, which is in turn based on the productivity of unskilled labor given the region.
There are large numbers of unskilled/low-skilled labor essentially everywhere, including the US. (Relative proportions are different, but in absolute terms, that’s still a lot of people.) Yet you can transport unskilled workers from the developing world to the US and they can quite often, and quite quickly, earn at least an order of magnitude more in wages than they would at home because unskilled work is more productive in the richer place. There are hundreds of millions of people out there in the world who still earn an average of less than two dollars a day, working full days. That same person could earn more money than that with half an hour’s equivalent effort in most of the developed world.
If they’re allowed to do so. Which they’re mostly not.
It’s simply not the “large market” (number of workers) that makes their wages low. A small group of hunter-gatherers isn’t a large market, but they’re all dirt poor on the edge of subsistence. Their small numbers don’t make them rich. The difference in wages is, overwhelmingly, driven by differences in productivity. Those differences in productivity are, in turn, driven by the existence of machines, tech, education. What economists call “capital”. Rich countries have capital, and financial systems that (at least sometimes) support the accumulation of capital. Poor countries don’t. That is the driving difference between rich and poor. The lowest earners in rich countries earn much, much more than the lowest earners in failed states.
You can go to a database like the Penn World Tables and look at figures for capital per person. You can soak up a huge amount of the variation in income just by looking at the variation in capital accumulation, and comparing it. Rich countries have capital. That’s why they are rich. That is not at all a question in international development. The question is actually how do people on the edge of persistence start to accumulate and intelligently allocate surplus production into capital that they can own, when they have so little surplus production in the first place? The answer to that has consistently been trade. They create the surplus with trade, and turn that surplus into capital.
That does not follow.
Profit is the difference between the value of what’s sold and the cost of inputs. If a firm competes in a highly competitive market, then the owners will be earning little more than the opportunity cost of the capital they poured into the business, regardless of how low the average wage of their workforce, because the price of what they’re selling will be pushed down.
For a more extreme example, if I could take a group of sophisticated engineers, each of whose individual output is worth six figures a year, and replace those engineers with crippled orphan children paid tuppence fortnightly, then yes, I would make an absolute killing. But I can’t. The kids can’t perform work of the same value. Just having cheap labor doesn’t give profits, if the price of the output is also low. Of course it can often work to shut down a factory in a higher-cost region and open another in a low-cost region, when a new region has opened up to world markets. The same good can be sold at roughly the same price, with a lower cost of manufacture and low transport costs. (We live in the age of the containership.) That’s profit, at least for a while. But even that’s a temporary expedient. Wages rise in the region that has opened up, and increased productive capacity drives down the final price of the good.
China ate up a large portion of the textile markets for a long time, but now labor is too expensive there, and most of those businesses have departed for places like Bangladesh. Where wages have also been rising. Chinese production is ever and ever higher on the wage scale. That is how this kind of thing works.
It’s simply impossible to look at the cost of any individual input, like labor, and determine the profitability of an industry from the cost of that input.
This also does not necessarily follow.
The economy is not zero sum.
Firms can be harmed, without necessarily helping the average worker or the rest of the economy. If the new job pay two dollars more an hour, and makes a person ten times as miserable, then that’s not necessarily a net gain. If firms downsize staff rather than increase their total payroll, then that’s not a net gain either for the people tossed on their ass. If firms have higher opportunity costs for their inputs, then the price of their output most often goes up, which hurts the people who rely on those goods to live. Firms and workers and the rest of the economy can potentially all lose simultaneously.
I don’t know that these things will happen, or more precisely, whether this would be the average effect of a policy change. Some people would definitely score a win, but enough of them? Demand curves tend to slope down, which means various kinds of damage are all extremely plausible effects. The empirical research tends to be split, and the advocates (while generally well-intentioned) tend to extrapolate from the poor data they have rather than considering the many, many, many potential flaws of that data.
…is merely “hoped-for”, and not anything close to compellingly argued and demonstrated.
I personally think it’s a net negative, tho I could be wrong about that. I’d like to be wrong about that, because it seems like a politically popular policy. But the case for it being a net positive is much weaker than the average advocate believes. Even if it’s a net-positive policy, there’s going to be damage happening at the edges, and that damage should be better appreciated than it currently is.
The minimum wage is ultimately a trade-off, even if its outcomes are positive on net. It’s deeply misleading when it’s presented it as an unalloyed good, most especially at the national level that completely ignores regional differences.
Seems to me that the best way to go about this whole thing isn’t to grandstand and throw fits about raising the minimum wage, and thereby getting into all the political/philosophical/economic debates about living wages, minimum wages, etc…
Rather, gradually redefine the poverty line such that it reflects what the living wage ought to be, then use that as a lever to readjust the minimum wage.
A person has to make $30,000 a year to be above the poverty line? That doesn’t seem right.
It isn’t, at least not for one person.