Economics: Minimum Wage, Who Gets Hurt?

[DBTrek]

This is a tough one to tackle in a short(ish) post, so I'll lay out the foundational concepts as a starting point and see where things go.

Labor is an economic input, not terribly different from raw materials or other commodities. Labor has an economic value, and that value is generally based upon the productivity of the worker. Building upon this concept, we can observe that younger workers with little or no work experience are generally less productive than older workers - and looking at the wages people earn at various stages of life would support this.

What happens when you set an artificial price on a product? You are either going to create a surplus or a shortage of that product. Pick anything. Mustard. For the purpose of this exercise let's say the free market price of 12oz of mustard is $2.47. Let's set an artificial price on mustard and think about what happens economically:

• Mustard set at $6.00USD per 12oz bottle: At $6 a bottle there are going to be fewer consumers willing to buy. Buyers will turn to alternatives, or simply forego buying mustard since they can use the same money more efficiently to meet other needs. End result - a mustard surplus, as producers sit on top of large quantities of unsold mustard.
  
  Mustard set at $1.00USD per 12oz bottle: At $1 a bottle more consumers are willing to buy. This will include new consumers who previously could not afford mustard, and buyers who will find mustard a viable alternative to other condiments that cost more. As there is considerably more demand for $1 bottles of mustard than there is at higher price points, this low-priced mustard will fly off the shelves. End result - a mustard shortage, as producers are unable to keep up with the demand that exists for $1 bottles of mustard..

That's a simplified model of course. Producers can't actually profit from $1 bottles of mustard but that's not the point, we're just looking at how artificial prices create surplus or shortages. Let's take the mustard example, and apply it to labor - because labor, like raw materials, are simply one more expense in creating a good or service:

• Minimum Wage set at $7.25USD per hour: At $7.25 per hour laborers who don't provide at least the same amount in productivity for their employers are priced out of the job market. Likewise, jobs that require less than $7.25 worth of productivity to accomplish are eliminated from the job market. End result - a surplus of workers whose productivity is less than $7.25 per hour. This surplus of workers is represented by unemployment..
  
  Minimum Wage set at $15.00USD per hour: At $15 per hour laborers who don't provide at least the same amount in productivity for their employers are priced out of the job market. Likewise, jobs that require less than $15 worth of productivity to accomplish are eliminated from the job market. End result - a surplus of workers whose productivity is less than $15 per hour. This surplus of workers is represented by unemployment.

Those are the (generalized) mechanics at play. So here's my answer for the question posed in the thread title:

Minimum Wage, Who Gets Hurt? Low-productivity workers get hurt, as a rising wage floor prices them out of the job market. They become "surplus labor", aka unemployed. Who are low-productivity workers? The young (only 3% of people above the age of 24 work for minimum wage) are disproportionately impacted. By pricing the young out of the labor market early in their lives, their chances at earning higher wages in the future is also negatively impacted.

Minimum wage hurts the young.

[Speaker to Animals]

One way to look at it is that it provides a clear sieve that (should) allocate people squarely into two categories: self-sufficient and in need of state assistance.

Personally, I think if we are going to have it at all, the minimum wage should be set somewhere higher commensurate with the poverty line, and everybody who doesn't have a job might as well go straight to some kind of welfare or jobs program. What I don't like is minimum wage that is so low that we have people working AND tax payers still have to feed, clothe, and house them. That's actually a kind of theft of the public treasury in my opinion. It's basically businesses in a roundabout way getting state subsidies for their labor costs.

If we get rid of minimum wage, and obviously there exist lots of good reasons to do so, we need some alternative for people. One way to do this is to fund large government programs that accomplish things that are not otherwise profitable in the short-term, but provide a lot of benefit to society going forward (like space exploration, infrastructure improvement, vaccine research, etc.). Consider that we can take kids right out of high school and teach them how to maintain nuclear reactors on ships and submarines. We can do something similar with a lot of different jobs associated with such programs.

The programs themselves I would rank and organize around the principles outlined in Black Swan and possibly Antifragile. Think of all the high-impact events that might seriously hurt American civilization and set programs towards mitigating them. If that thing never happens, fine, we still put people to work, fed them, etc., and they can still hopefully look for work in the commercial sectors with their new skills. Win. If it does happen, then we are prepared. That's not really a sunk cost like welfare in general is in the way that we do it now.

[Ph64]

Producers can't actually profit from $1 bottles of mustard

But...but...according to the internet meme they can lose money on every bottle but they'll make it up in volume!

All they need is lots of VC funding flowing into their business... like TWTR.

[heydaralon]

This is a tough one to tackle in a short(ish) post, so I'll lay out the foundational concepts as a starting point and see where things go.

Labor is an economic input, not terribly different from raw materials or other commodities. Labor has an economic value, and that value is generally based upon the productivity of the worker. Building upon this concept, we can observe that younger workers with little or no work experience are generally less productive than older workers - and looking at the wages people earn at various stages of life would support this.

What happens when you set an artificial price on a product? You are either going to create a surplus or a shortage of that product. Pick anything. Mustard. For the purpose of this exercise let's say the free market price of 12oz of mustard is $2.47. Let's set an artificial price on mustard and think about what happens economically:

• Mustard set at $6.00USD per 12oz bottle: At $6 a bottle there are going to be fewer consumers willing to buy. Buyers will turn to alternatives, or simply forego buying mustard since they can use the same money more efficiently to meet other needs. End result - a mustard surplus, as producers sit on top of large quantities of unsold mustard.
  
  Mustard set at $1.00USD per 12oz bottle: At $1 a bottle more consumers are willing to buy. This will include new consumers who previously could not afford mustard, and buyers who will find mustard a viable alternative to other condiments that cost more. As there is considerably more demand for $1 bottles of mustard than there is at higher price points, this low-priced mustard will fly off the shelves. End result - a mustard shortage, as producers are unable to keep up with the demand that exists for $1 bottles of mustard..

That's a simplified model of course. Producers can't actually profit from $1 bottles of mustard but that's not the point, we're just looking at how artificial prices create surplus or shortages. Let's take the mustard example, and apply it to labor - because labor, like raw materials, are simply one more expense in creating a good or service:

• Minimum Wage set at $7.25USD per hour: At $7.25 per hour laborers who don't provide at least the same amount in productivity for their employers are priced out of the job market. Likewise, jobs that require less than $7.25 worth of productivity to accomplish are eliminated from the job market. End result - a surplus of workers whose productivity is less than $7.25 per hour. This surplus of workers is represented by unemployment..
  
  Minimum Wage set at $15.00USD per hour: At $15 per hour laborers who don't provide at least the same amount in productivity for their employers are priced out of the job market. Likewise, jobs that require less than $15 worth of productivity to accomplish are eliminated from the job market. End result - a surplus of workers whose productivity is less than $15 per hour. This surplus of workers is represented by unemployment.

Those are the (generalized) mechanics at play. So here's my answer for the question posed in the thread title:

Minimum Wage, Who Gets Hurt? Low-productivity workers get hurt, as a rising wage floor prices them out of the job market. They become "surplus labor", aka unemployed. Who are low-productivity workers? The young (only 3% of people above the age of 24 work for minimum wage) are disproportionately impacted. By pricing the young out of the labor market early in their lives, their chances at earning higher wages in the future is also negatively impacted.

Minimum wage hurts the young.

I have an interesting (to me) point on this subject. At the moment, I am young (not so much anymore lol), unskilled (in marketable subjects), and paid like shit (indisputable). It will take me awhile to type up my response, but if you are interested, I'd like to hear your thoughts on this. I will warn you in advance, it is probably more philosophical than economic. Anyway, give me a bit and I will run this by you and see what you think.

[jediuser598]

What about when employees get paid more, and they stop qualifying for welfare and start paying more taxes?

Not only that, but when the business down the street is mandated to pay their employees more, that might get you business as well. Poor people tend to spend at a 1:1 rate. I'll have to research it but have you thought of this? What if raising minimum wage increases profits by increasing business?

Which costs the tax payer less? The workers that are working at 7.25 an hour and employed (at 40 hours that's 15,080, the majority of which are on some sort of government assistance) or those getting paid $15 an hour, making 31,200 a year? (and who are probably not on assitance) Lump in with those making 31,200 a year those that are unemployed, because they're not productive enough to be in the market.

[DBTrek]

What about when employees get paid more, and they stop qualifying for welfare and start paying more taxes?

Not only that, but when the business down the street is mandated to pay their employees more, that might get you business as well. Poor people tend to spend at a 1:1 rate. I'll have to research it but have you thought of this? What if raising minimum wage increases profits by increasing business?

Which costs the tax payer less? The workers that are working at 7.25 an hour and employed (at 40 hours that's 15,080, the majority of which are on some sort of government assistance) or those getting paid $15 an hour, making 31,200 a year? (and who are probably not on assitance) Lump in with those making 31,200 a year those that are unemployed, because they're not productive enough to be in the market.

Before I detail why that is unlikely to happen, let me ask you a question.

Your questions are posed entirely from the perspective of the workers. Where are the businesses getting the money to give all their minimum wage employees a %206 raise? Money trees? Magic geese? Dragon hordes?

[jediuser598]

What about when employees get paid more, and they stop qualifying for welfare and start paying more taxes?

Not only that, but when the business down the street is mandated to pay their employees more, that might get you business as well. Poor people tend to spend at a 1:1 rate. I'll have to research it but have you thought of this? What if raising minimum wage increases profits by increasing business?

Which costs the tax payer less? The workers that are working at 7.25 an hour and employed (at 40 hours that's 15,080, the majority of which are on some sort of government assistance) or those getting paid $15 an hour, making 31,200 a year? (and who are probably not on assitance) Lump in with those making 31,200 a year those that are unemployed, because they're not productive enough to be in the market.

Before I detail why that is unlikely to happen, let me ask you a question.

Your questions are posed entirely from the perspective of the workers. Where are the businesses getting the money to give all their minimum wage employees a %206 raise? Money trees? Magic geese? Dragon hordes?

Let me ask a question in return, are you against a minimum wage?

In these jobs, these minimum wage jobs, worker's pay doesn't increase when the company makes more money. I believe that the wage increase per year was 10 cents? So if you're making $7.25, you work there a year, then you'll make $7.35. (if you pass their "exceeds expectations" evaluation, which most don't regardless of performance.)

Are you for or against welfare? Because the wage that they're not paying those employees? Coming out of our pockets.

But why not lower the minimum wage? Companies shouldn't have to come up with such a price point as $7.25. Why not pay them $5, or $2, or $1?

Let me ask this, say we get rid of all welfare, all social welfare, for everyone. Foodstamps, wic, medicare, medicaid, just all of it, hey even for veterans. And no more Fasfa for students. Then we also put the minimum wage down to $1 an hour.

Surely this would be better for business?

[Speaker to Animals]

How about this: no minimum wage with alternate work options for people who cannot find suitable employment (government research, infrastructure improvement, etc.).

You can charge as little as you like but people will always have the option of earning a basic living wage in a work program that hopefully teaches them new skills they can use in the private sector.

[DBTrek]

Are you for or against welfare? Because the wage that they're not paying those employees? Coming out of our pockets.
I'm for not letting Americans starve to death.

But why not lower the minimum wage? Companies shouldn't have to come up with such a price point as $7.25. Why not pay them $5, or $2, or $1?
Every time you lower Minimum wage you enfranchise a new group of workers (those whose productivity meets the new minimum wage but was below the old), and open up more work as paying work. So there are merits to the idea.

Let me ask this, say we get rid of all welfare, all social welfare, for everyone. Foodstamps, wic, medicare, medicaid, just all of it, hey even for veterans. And no more Fasfa for students. Then we also put the minimum wage down to $1 an hour.
Why would we tie social support programs to minimum wage? We can modify them independently of each other. What's your goal in modifying them in relation to each other?

[DBTrek]

How about this: no minimum wage with alternate work options for people who cannot find suitable employment (government research, infrastructure improvement, etc.).

You can charge as little as you like but people will always have the option of earning a basic living wage in a work program that hopefully teaches them new skills they can use in the private sector.

It's an idea I'd like to see tried.