Monday, July 21, 2014

More simple stuff

It appears now that raising the minimum wage increases employment. This is directly opposite of the "small bakery" micro-analogy that conservatives appeal to and everyday voters imagine.

I offered students "Raising the minimum wage will/will not raise prices or lower employment." I warned my students in advance that, no matter what they thought, no matter what "common sense" told them, if they did what I required them to do and accessed scholarly reviews, they would find virtually no support for the "will" position. I warned them that academic economists saw the issue as complex, with various effects.

Of about 22 papers that chose the topic, two chose "will not." The rest chose "will," and they either used no scholarly evidence (a consensus) -- opting instead for Hurtage Foundation and Kato Foundation papers that wouldn't fool anyone and newspapers -- or used websites. All of the "will" people, though -- every last one of them -- informed me of the Iron Clad Rule of Capitalism.

If you have someone make you pay your employees more all of a sudden, then you have to make that money up. You either have to increase the prices or fire an employee. Suppose you ran a bakery...

That little canard was inescapable. I read it and read it and read it.
The problem is that this mythical bakery didn't exist in Adam Smith's day, and it sure doesn't exist in 2014. The bakery they imagine is a zero sum, and that's typical of a childhood imagination. Actual bakeries, and we'll drop the bakery as soon as possible, pay for their materials, their labor, their advertising, their insurance, their licensure, their utilities, and then charge extra. The cost of the cupcake is not zero sum. The bakery is costs + profit = price.

Profits, in most small businesses, grow and get shared with the employees, or else they go toward growth. The owner gets richer, sure, but the small business doesn't keep very many workers at minimum wage. As it grows, it rewards its employees.

Who pays minimum wage? 1. Restaurants, 2. "big box" retail. There was a study of a local environment that showed inflation when there was a minimum wage increase, but it was of Chicago, when it mandated waiters and waitresses getting minimum wage. The restaurant business hadn't be set up to handle that, and so it did have a bulge in prices. Otherwise, true minimum wage (non-tipped) tends to show up in fast food.

Mike's Manufacturing doesn't keep a large part of his staff at minimum wage. McDonald's does. Papa John's demands it.

So, aside from some businesses with high turn over and manual labor, who holds the bag? Mal-Wart and McWendy King. The problem with worrying over their labor costs is that the true nature of capitalism is that non-publicly traded companies have the duty, as Henry Ford said, "To make the highest quality possible for the lowest price possible while paying the highest wages possible." Once a corporation is publicly traded, though, its board's duty is to gain profit at all costs, and reducing labor is the easiest way to achieve an illusion of profit. No board can voluntarily increase labor costs (pay) without facing an investor law suit or loss of stock value.

$ = Labor + Materials + Rent on capital + Profit

In low unemployment, employers are forced to increase wages. In a recession or depression, employers have no market force compelling an increase in wage. Furthermore, publicly traded corporations are compelled to increase profits. Since the Great Recession began, corporations, most especially including those that page minimum wage, have increased their profits. McDonald's has turned a huge profit, and Wal-Mart continues to be the most affluent non-oil or drug business one can imagine, but neither may pay employees more without being sued. Neither is compelled to pay more. The balance of the integers in the formula of capitalist price are out of whack. P > L, and it keeps going up.

The companies can't break the cycle.

There is a need for government (the external regulatory authority) to act as a guarantor of the continuing function of capitalism. I.e. it has to negate the impulse of boards of directors in order to make some of the vastly increased profit go to labor.

"If someone says you have to pay your people more, where is that going to come from," students would ask. It would come from PROFITS, of course. If you are one of the main industries paying minimum wage as a large component of your labor, you have been growing in profit and passing none of it down.


Ripberger said...

How about "Raising taxes will/will not raise prices or lower employment?" That would be a humdinger of a paper.

The Geogre said...

My first demand would be that the student understand what a tax is. It seems to me that there have been multiple tax increases, effectively, without governmental involvement, in the form of oligopoly price increases without market pressure. Then there are the taxes "no one" thinks of: payroll, sales, excise.

The only question, it seems to me, is who's GETTING the money and whether they're doing it to achieve a social or private good.

Clyde P. said...

The truly amazing thing (IMO) is that the right-wingers have convinced the working people to believe them, and convinced the poor and working classes to SUPPORT the war against themselves. :-(

My grandfather, a poor farmer, used to say: "Anybody dumb enough to vote Republican deserves everything that happens to him."

The Geogre said...

You know, I'm reading (fitfully -- it's not a compelling read) Gillens's Affluence and Influence. The basic rule is this: the rich always vote their interests, so why do the poor almost never do the same? Well, the old explanation that the poor think they're going to be rich just doesn't wash.

The poor refuse to believe they're poor, sure. The poor also, though, have an awareness of economics that extends as far as the AM radio and the television that's always on at the SubwayArdee Jr's, which is Fox News, and it loves the zero sum analogy.

See, suppose you've got a bakery....