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Isn't the question, what percentage of poor households earn the minimum wage? I agree that if you want to help the poor give them money. The easiest way of doing that is giving everyone a minimum amount of money and taxing back that above the minimum. The reason this is done through wages rather than directly is to encourage productive work. The down side is it misses those unable to do so. No solution is without its problems. Providing money without a minimum wage would discourage work. A negative income tax would be more efficient in distribution but less efficient in collection. Encouraging lower productivity work would encourage employment but discourage innovation.

Jim Stanford thinks that it's cause for celebration. I'm not sure why. I'm guessing that he . . .

If you are unsure, why don’t you just read his column to find out? There’s no need to guess.

I can think of three scenarios, 1) there are no gains only losses, those with lower productivity lose their jobs, 2) employers are labor short and forced to pay them more than their productivity, there are gains for workers but costs to employers whether passed on to customers or not, or 3) employers are labor short and invest to raise their productivity, gains all around. Which weight do you place on these scenarios?

I'm poor. Since June 2007. I became unemployed in July 2006 and when I couldn't get another job it took a year to exaust my financial supports (EI, Savings, Credit). What Stephen Gordon advocates is to give me money. I need more than money. I need money AND a job. I don't imagine there is any political party that could guarantee both at once should they come to power. That's why the gov't doesn't give the money you speak of. It's not enough. I'm a lost cause and so is my child. The poor are always with us. I like that Dr. Suess book 'The Lorax'. Unless. Lift me.

I found this particularly funny:

"This “trickle up” effect helps explain recent increases in real average hourly wages in Canada. In the three years ending in 2009, average wages (after adjusting for inflation) grew by 4 per cent. That's not a lot – but it's the best wage performance for Canadian workers since the 1970s. The unheralded revitalization of minimum wage policy is a big reason why."

If we really want to raise real average hourly wages, we should fire anyone making less than $50 an hour. Then the real average hourly wage will be greater than $50, by definition.

The labor force participation rate fell in Ontario by 0.6 percentage points between Feb 2009 and Feb 2010. If those individuals in the labor force who stopped working had below-average wages, knocking them out of the labor force would increase average wages.

Back when I taught econometrics I'd make my students read 'How to Lie With Statistics' as a guide on what 'not to do' (http://www.amazon.com/How-Lie-Statistics-Darrell-Huff/dp/0393310728). Stanford's article would make a good case study on how selective use of statistics can mislead.

Karen, presumably if we gave you money, and lowered the minimum wage, there would be an employer out there willing to take a chance on you for a lower wage rate. Since we are giving you money anyway, your wage earnings are not for survival but improving your standard of living.

Mike, do you think Stanford is being duplicitous or stupid?

"Mike, do you think Stanford is being duplicitous or stupid?"

I think Stanford is arguing on behalf of his favoured policy by presenting any data points that support his position and ignoring any that do not. I'm not suggesting that he shouldn't do that - it just means that he's acting as an advocate, not as an analyst.

Anyhow, you can call that what you will.

I will say this though - I'm impressed that *anyone* can suggest with a straight face that 2007-2009 was a great time to be a worker in Ontario.

Since I place little emphasis on scenario 2, I think the argument you should be making is a higher minimum wage will mean more unemployment among the unskilled, fortunately that falls mostly on the non-poor. Still, there is little evidence lower real wages (due to inflation) increase unskilled employment. Mostly, it just causes people to leave or not enter the workforce, but this is likely due to the minimum being below the market wage in substantial portions of the country.

First, all wages are dependent on the entry level. Just because most poor aren't on minimum wage, doesn't mean that their wages wouldn't be affected.
Second, many remain on welfare because taking a job doesn't give them an increase to their income.
Thirdly, Ontario industries have been severely crippled by the global deflation, and yet Ontario's economy has remained relatively strong, and I say that this is directly because of the annual increases to minimum wage.

"Thirdly, Ontario industries have been severely crippled by the global deflation, and yet Ontario's economy has remained relatively strong, and I say that this is directly because of the annual increases to minimum wage."

It could also be due to the fact that the Leafs stopped making the playoffs since the lockout, so productivity isn't being reduced in April-May, like it would if they were making a long run.

"Thirdly, Ontario industries have been severely crippled by the global deflation, and yet Ontario's economy has remained relatively strong, and I say that this is directly because of the annual increases to minimum wage."

That's just a hunch--not particularly useful and definitely not something to base policy on.

No it is not a hunch. All business depends on consumer spending, and all consumer spending is dependent on consumer income. It is not an accident that the regions with higher minimum wages have a much more robust economy. Your theory is not supported by evidence, and therefore it is your theory which is a hunch, regardless how many educated idiots ascribe to it.

Allan, tossing insults doesn't prove your point.

All business depends on consumer spending, and all consumer spending is dependent on consumer income.

Where is that extra income coming from?

This has always confused me. What's making poor households poor? Low wages that just happen to be above minimum wage, or unemployment/no wage income?

"Where is that extra income coming from?"
It comes from increased velocity. The poor spend their money, cleaning out their bank account before the next check arrives, while the middle and upper class tend to hang on to their money for up to a year before rebalancing their investment purchases. The faster the money gets from the business to the consumer and back to the business, the more transactions the same dollar can support. By legislating that the poorest paid worker gets at least so much, the government is in fact supporting the entire economy, while other initiatives that the government takes to support the economy like bailing out big business and supporting the growth of international finance and trade has zero effect at best.

I don't see how investments would necessarily slow velocity. The whole point of investment & financial intermediation (when it works) is to keep moving money that would otherwise sit idle.

"The whole point of investment & financial intermediation (when it works) is to keep moving money that would otherwise sit idle."
No, the whole point is so the rich can get richer! The talking point of the propaganda is to increase the velocity, but you can't increase the velocity better than to get the money quickly into the hands of the poorest paid worker. That money does a full cycle in two weeks. Most money cycles in a month with rents and monthly bills. Government money and new investment money often doesn't do a full cycle for a year. Conventional economics has many many things completely backwards.

Any evidence that government money doesn't cycle faster than once per year? The only way that could be is if the government (feds) has two hundred billion in cash on their balance sheet, which they do not. They receive remittances monthly or quarterly from employers, which they use to pay rent, bills and payroll for civil servants.

"Any evidence that government money doesn't cycle faster than once per year?"
I never said that government money only cycles once a year, but often between the time the funding is secured for the budget and the money is spent is a whole year. Certainly not always. Most money, as I said, circulates once a month, and you cannot better the velocity of every two weeks as you get with minimum wage. When governments try to improve the economy with its spending, it can at best have a net zero impact, and I don't think that it does.

Considering many minimum wage earners are teenagers who might be saving money for a car, tuition, etc. I don't think we can assume that minimum wage earners spend the wages on average within two weeks. You haven't provided any empirical evidence to support your story. It's just hand-waving at this point.

rotflmao! You flaunt your charts and ignore anything that doesn't fit your ethic, presenting your theory that runs contrary to all emperical evidence as if it was something proven. You guys amaze me!
"Thirdly, Ontario industries have been severely crippled by the global deflation, and yet Ontario's economy has remained relatively strong, and I say that this is directly because of the annual increases to minimum wage."

Ive just seen a couple of years of my teenage son working minimum wage. In spite of my continual lecturing at him to save his money, he never could. He just got his first good job. I am certainly hoping that he manages to save some of that. And no, he doesn't have my car since he wrote it off a couple of years ago.

Well, it is good that the minimal wage in Ontario increased. But you are right, it is not a reason for celebration. At first glance, many might see a direct correlation between the minimum wage and poverty - it seems logical too. The truth is a little different, though. Thanks a lot for the graph which shows it very well.

Best regards,
Elli

OMG. This crap is insidious.

Allan, read the post again. Is there anything there that is wrong?

Raging against the facts is also pointless.

Allan said
"rotflmao! You flaunt your charts and ignore anything that doesn't fit your ethic, presenting your theory that runs contrary to all emperical evidence as if it was something proven. You guys amaze me!"

First, where is all this empirical evidence? I am genuinely curious to see the relationship between incomes and velocity in Canada.

Second, and more importantly, I think you are missing the point of this post. The post was not about the the effect of consumer spending on growth, or consumer spending from the bottom of the income distribution on growth. The post was about minimum wage being an inefficient mechanism for the reduction of poverty/ helping low income families.

All this talk of velocity strikes me as beside the point. Is there any standard (as in "it's in the text book") theoretical reason to believe that velocity has any effect on real wages? Besides, changes in V happen for some reason (i.e. recessions, changes in interest rates). Seems to me that Stephen's advice to give money to poor people would probably increase V ... but so what? The point is to find policies that effectively and permanently decrease poverty and it's associated misery and waste. Who cares about the side effect on some esoteric monetarist accounting identity.

The velocity point assumes in a recession there are already full-employment spending behaviours, you buy beeswax candles and employ a beekeeper if not laidoff; the shortfall is just consumer demand. I reject this specifically because of our carbon footprint (in general some dollars are better than others). A moderate, not counting human extinction or anarchy fat-tails carbon price would see oil sands profit go to zero. It is better for our species if our Canadian economy and all tar/coal/LNG goes into Great Depression; you'd want to formulate mature velocity economic sciences for actors who aren't on a deadend trajectory. Wahhabi interpretation of Islam is a blueprint to wait for an inevitable ice-age to wipe us out. Buddhists wait to be conquered. And Neocons like us Canadians unleash AGW anarchy. So no, let's not talk about how to consume more tar unless Harper/MSM honestly informs: AB/GOP ideology kills humanity off.

The poverty economic point is that you/dependants lose human capital when you are malnurished/depressed/resentful after being unemployed. I guess as long as habits are healthy Stephen is right and give away the money. Why don't we have food stamps in Canada?

I've a quibble with the definition of "household" in the chart. It shouldn't matter who you live with whether or not you can access safety nets. "Nuclear Family" is the definition that is meant. If I'm renting from middle class strangers I'm still poor and I still need food however my home is accounted for tax and safety net purposes.

"I've a quibble with the definition of "household" in the chart. It shouldn't matter who you live with whether or not you can access safety nets. "Nuclear Family" is the definition that is meant. If I'm renting from middle class strangers I'm still poor and I still need food however my home is accounted for tax and safety net purposes."

I don't know much about the definitions of a "family unit" but would that not be offset by all of the broke students living on their own but still with access to a safety net?

As a non economist not immersed in the vernacular, I find it important to check the sources for the definitions of "poor" and "low-wage". Unfortunately, the source document in Canadian Public Policy is not freely available.

So, my first question is does "low wage" = minimum wage? I suspect low wage includes min. wage, and hourly rates above it to some cut-off level. If they are not the same, then of interest to me would be a similar Venn diagram with min. wage earners overlapping with poor household members. It might tell a different story.

Got any stats for what percentage of workers in Ontario earn min. wage?

I posted this
"First, all wages are dependent on the entry level. Just because most poor aren't on minimum wage, doesn't mean that their wages wouldn't be affected.
Second, many remain on welfare because taking a job doesn't give them an increase to their income.
Thirdly, Ontario industries have been severely crippled by the global deflation, and yet Ontario's economy has remained relatively strong, and I say that this is directly because of the annual increases to minimum wage."
No one made comment on my first two points, even though they are very applicable to the subject of this thread. The third point was in answer to other things that had been said, and was the "evidence" that people wanted explanation for.
The commonly held theory is that minimum wage hikes are bad for the economy. I hold the opposite point of view, and feel that the empirical evidence is with my side. In explaining how the economy grows strongly when the poorest paid worker gets a raise, talking about velocity is most pertinent, even though it is not something that is well documented. Causality is the theory that well explains the evidence of correlations. Correlations should never be simply dismissed with a "ceteris paribus"
Now Philip seems to be saying that we shouldn't better the conditions of the poor so that we aren't as a society as hard on the environment. Again I would take a position on the opposite.
It is not people who are hard on the environment, but industries. We do not need more stuff produced at lower prices! We do not need big companies swallowing little companies in the name of efficiency. All we need are jobs that pay a fair wage! We could double the minimum wage, and then cut the work week to 24 hours through legislation. We could reverse the amalgamation trend with simple sliding rates on business taxes. There are always more than enough ways to spend your money, and there are always a lack of ways to make your money. We do not need more production, but a more fair distribution, and the cornerstone of a fair distribution must be the minimum wage.

They were evaluating the increase in the minimum wage between 2004 and 2010; the people whose wages in 2004 were such that they'd be affected by the change - between the old minimum wage and the new one - were classified as 'low wage'.

Some numbers for who earns exactly the minimum wage are here

Canuck, I'd venture that some students have access to the net and some don't, depending upon Province especially. In BC (winter +5C) probably access if could wait three weeks homeless (ie. weaker souls no longer students). In MB (winter -30c), you have access in teens but are told later in life to find work regardless if you can, unless you get yourself knocked up or incapacitated. ON (winter -10C) you are denied welfare if you are lucky enough to live in a shelter and accepted if you are crashed on Queen St...
My point is about 1/2 of people that call a welfare # get accepted, not 100%. Students are younger so more likely to be accepted as too puny for deadend labour but also less likely to be accepted in terms of being healthier. The left red circle seems irrelevant to me. I've lived in a household as a dependant, as a friend sharing some things, as a stranger not even being able to pay to wash clothes, and with nearly shared personal finances. Only in half of these scenarios does the red circle mean anything. If the 2004 Ontario min wage was up a dollar my monthly savings would've quintupled from $50/month and I'd've been doing a later job search from home instead of telling cynical employers and I was living in a shelter. I think raising it assuming you shift capital intensive taxes up or whatever, solves 10% of the problem as opposed to 1.8%. Many Canadians don't get hired, get safety nets, or foodbanks. I'll avenge their hunger if necessary.

Thanks. Your link doesn't seem to be working.


Stephen, your link is broken. Allan, I was saying I don't want to brainstorm how to make tar/coal/LNG countries like ours, economically stronger. Neocons killed the Soviets on such grounds but haven't looked in a mirror since 1970s CIA econo intel established the end of the Cold War.
I'd guess min wage hike solves 5-10% of poverty and I'd guess GAI solves 50% (other 50% buy beer and popcorn) but creates 30% more lazy problems..to me is a partial success but to commie Stephen is a distraction. Come back Chretein!

"I'd guess min wage hike solves 5-10% of poverty"
No. Take all middle class, and without the minimum wage, they too would be poor. Minimum wage as is has solved about 90% of poverty, and if it was where it should be, about doubled, then it would solve the rest.
All wages are based on the entry level floor plus percentage allowance for education and experience. Without the support of the minimum wage, ALL wages would be pushed down below subsistence levels.

Allan: "Without the support of the minimum wage, ALL wages would be pushed down below subsistence levels."

Not even wrong. What an absurd statement.

Link is fixed - sorry.

As I've said elsewhere
All wages are based on entry level plus allowance for education and experience. Kill the foundation and ALL wages would fall to subsistence.You think you could still command 12/hour if the entry level fell to 1/hour??? No way you are ever worth 12 newbies, regardless your education and experience. Whatever you do, it is just an augmentation to what a newbie can do. We don't need you to run the backhoe if we have 12 newbies with shovels. There is no way that you are worth 12/hr if the newbies are getting one.

The question is whether newbies would work for $1 per hour. I doubt it, especially since there is a limited resource of labourers. Competition would keep wages above that.

Are you seriously suggesting that, say, hedge fund managers and professional baseball players only earn their multi-million dollar salaries because of minimum wages? Warren Buffet is replaceable by a million McDonald burger flippers? To tone it down, a lawyer or doctor is replaceable by 10 burger flippers? No wonder we're disagreeing! You're proceeding from some very unorthodox (to put it politely) premises.

Allan, you are just making yourself look silly. Start by reading this:

http://ingrimayne.com/econ/resouceProblems/MarginalProd.html

"The question is whether newbies would work for $1 per hour. I doubt it, especially since there is a limited resource of labourers. Competition would keep wages above that."
Competition never pushes prices up! Only a lack of competition allows prices to rise.
Take out the minimum wage, and entry level would fall, some. All other jobs would be worth less money. As wages fall, so too would consumer spending, which is the source of all work. As consumer spending dries up, entry level positions would become more and more scarce, and so the pay would become less and less. This was the foundation of the Great Depression when minimum wage was outlawed in the courts in 1924. Without the minimum wage, all wage earners would be poverty stricken, and all business would be in trouble.

Allan, Andrew F is trying to point out that the textbook standard econ that every undergrad learns (and some high school students) is that wages are marginal product. Of course, the real world is a lot messier than than, but you really need to get your head around that basic idea first.

Allan: if you'd like some empirical evidence to show you that you might be going wrong, see Singapore. No minimum wage whatsoever, and it is a prosperous society with many people (including middle class) income earners earning above subsistence wages. Please explain how this might be the case there, but couldn't possibly be true here.

Singapore started out in the 60s with a minimum wage about 3 times what was available anywhere else in the world, and amazed everyone by growing out of a backwater useless sprig of land into the economic powerhouse of today. When their minimum wage was curtailed in the 70's, there was still minimums on the lowest classes, the domestics, which was a defacto minimum wage for everyone. Today Singapore's real wages are dropping dropping dropping, and the history of Singapore's minimum wage is burried. It is almost impossible to find any reference to it anywhere.

>you really need to get your head around that basic idea first.<
No, you need to get your head out of the propaganda and into the messy world! The world does NOT operate according to Smith!

And even if you refuse to accept my account on Singapore, it is the exception that proves the rule. Today's ecconomy depends on a good minimum wage.

Allan, there are intelligent arguments for a minimum wage but you aren't making any of them. Throwing around pejoratives doesn't make your above statements any less ridiculous. If you don't understand the basics, nobody is going to take you seriously. Repeating silly statements doesn't make them any less wrong, nor does saying them with additional volume.

If you can't take the time to understand something as basic as wages = marginal product, then we have no basis for discussion.

And you're misrepresenting Singapore's history. A quick Google search turns-up a several accounts of wage reform in Singapore.

Interesting reference to Singapore. This was of the countries (in addition to the US) that Roger Martin suggested Canada should emulate in terms of developing an innovation strategy at the Liberal gabfest. My quick Google search picked up this summary:

The tax system was also attractive to foreign companies, often giving lower tax rates for foreign investment than for local residents.

One of the keys to Singaporean development was the upgrading of infrastructure, streets, roads, an airport, port facilities. The upgrading was financed not primarily by borrowing but by a special infrastructure tax.

Lee Kuan Yew was not infallible. His ideological background was the social democratic Labour Party. His intention was to raise income levels of Singaporean labor and when his program for attracting foreign employers was proving successful he announced an increase in the minimum wage levels. This produced a serious recession. The higher wages were a discouragement to foreign companies considering Singapore relative to other locations, but probably the most serious effect was the signal that Singapore might be like other Third World governments that would encourage investment and then change the rules when companies were vulnerable. Lee Kuan Yew learned his lesson and took a different strategy for raising Singaporean incomes.

The strategy was to improve the training of Singaporean workers through government training institutes. A typical training program would meet twice a week for three-hour sessions over a two year period. The training was voluntary and free and it was geared to the needs of the companies operating in Singapore at that time.

http://www.sjsu.edu/faculty/watkins/singapore.htm

I think Singapore is a net importer of oil. That and the recession might explain any recent declines in real wages.

Patrick, I admire your optimism. It took me more than just one undergrad course to 'get' wage = marginal product of labour. You have lofty expectations.


Do you think lay folks would understand the following?

know-how (human capital) -----> economic productivity ------> higher real per capita incomes

Minimum wage hikes cannot increase productivity, unless they pull workers back from malnourished subsistence levels. Having some modest minimum wage in place is probably not a bad idea because it allows the state to closely monitor for sweat shops.

Do you think lay folks would understand the following?

know-how (human capital) -----> economic productivity ------> higher real per capita incomes

Perhaps if you also acknowledged that there are other ways to become more productive - eg working harder; working smarter; working longer.

When I took an accounting course (only needed one) I quickly realized that many accounting conventions (rules for allocating overhead - fixed costs, for example) had been developed when manual labour was a very significant part of a product's cost. Not really relevant today when things are highly automated and/or in knowledge based industries.

I often wonder if many economic theories/principles were also developed in that era and suffer from the same irrelevance today. That thought occurred to me when Nick wrote the following commenting on Frances's blog Human Capital: literal truth, fairy tale or myth?:

But formal economic theory has been able to handle that, at least since 1871, when we discovered marginal analysis. In team production, the marginal product of a worker is not the same as the average product, in general...

But, as a lay-zee folk, I didn't bother posting the observation, then.

"I will say this though - I'm impressed that *anyone* can suggest with a straight face that 2007-2009 was a great time to be a worker in Ontario."

If I were his employer at the CANADIAN AUTO WORKERS UNION, I would be seriously concerned about the quality of the economic advice I was getting if I thought he believed that.

Doubtful any CAW member has seen anything close to min. wage. I wouldn't be surprised, however, to find some union wages are pegged/negotiated relative to the min. wage.

One should equate wages to the marginal productivity of the work, not that of the worker. This is why raising the minimum wage can increase productivity; it can induce the investment necessary to do so. This is not without cost, and there are limits to what it can achieve, but this is a better reason to support it than helping the poor.

I'm really struggling to see what the issue is here. Housing costs in much of Canada are so high that it's extremely difficult for a person earning minimum wage to form an independent household. The fact that people earning the minimum wage aren't in poor households is a *consequence* of the inadequacy of wages relative to living costs.

As a general rule: One or no wage earners=poverty, two or more wage earners (children in parental basements, roommates living together) = not poverty.

I really don't see how giving money to people avoids the issue of giving funds to people who are not in poor households. Steve, how much of the GST credit goes to people (like my daughter) who are not in poor households?

Plus cash transfers simply have different efficiency costs in that they raise marginal effective tax rates at some part of the income distribution, and they have to be financed somehow. I don't see a compelling efficiency argument here for cash transfers as opposed to the minimum wage as an anti-poverty instrument.

"it is the exception that proves the rule"

Which is another way of saying "data that contradicts my theory, which I will now proceed to dismiss on the grounds that I dislike it."

Incidentally, "the exception that proves the rule" doesn't mean what you think it means.
http://en.wikipedia.org/wiki/Exception_that_proves_the_rule

westslsope wrote: Do you think lay folks would understand the following?

know-how (human capital) -----> economic productivity ------> higher real per capita incomes

And Just visiting from MacLeans responded: Perhaps if you also acknowledged that there are other ways to become more productive - eg working harder; working smarter; working longer.

westslope continues: Productivity is usually measured as follows: a measure of output divided by a measure of input. Working harder and working longer increase the denominator, and thus for a given level output, decrease productivity.

The notion of working smarter is included in the know-how or human capital variable.

Big question for everybody: In the context of a resource-levered, rent-seeking economy where non-productive rent-seeking enjoys wide social acceptance and support, should Canadians simply give up on improving Canadian economic productivity? Maybe we are just a society of takers?

It is not intelligent at all to suggest, no demand, that competition raises prices. Competition always pushes prices down!! As is, the price floor, that is the minimum wage, pushes prices up, while competition pushes all prices down, and these TWO forces working together brings you to a marginal product. You are demanding that the house will remain firm without a foundation.
As for Singapore, do you deny that their real wages have been falling over the last 3 decades? Singapore became very rich between 62 and 75, and everyone there shared in the prosperity. Since then it has become almost a communist state, with the rulers holding all means of production and the wage earners struggling in poverty. Sure, the city state is wealthy, but most of that wealth is in the hands of the few, and the commoner struggles daily to make ends meet with his paycheck constantly dwindling. Wages will not go up on their own, and I do not misrepresent the history.

Productivity is usually measured as follows: a measure of output divided by a measure of input. Working harder and working longer increase the denominator, and thus for a given level output, decrease productivity.

Again, you are stuck in the 1871 paradigm of manual labour getting paid an hourly rate. Take two salaried individuals. Input = same. Output can differ depending on how hard they work and for how long. Just look around wherever you work/have worked for examples. They're not hard to find (without resorting to comparing cultural norms between countries re: sick time off, vacation time taken etc)

Frances makes an interesting point.

Allan: "Competition always pushes prices down"

That makes absolutely no sense. Ever been to an auction? Examples: CEO pay? Professional athletes salaries? Or consider less rarefied fields of endeavour like software engineers during the dot com boom, skilled tradespeople in Alberta today (who can earn $100K +), etc ...

> But competition to consume a product will raise the price of that product.<
That would presume a shortage of product. There are always inventories of product available. There are always unused labor. There is always excess capacity and there is always excess supply.

> This is true when buying workers too: there is not an unlimited supply,<
There is always excess supply.
Maybe we should get this bit out now. I should guess that you think that scarcity would mean choices. But wealth means choices, and choices mean wealth... always! So scarcity means wealth, and scarcity also means poverty, and so the usage of the word scarcity in economics circles is as an antonym to itself. Such purposeful confusion is common to all propaganda.


Gah! I was deleting a spam comment, and I mistakenly deleted some others - don't know how or why. In particular, there was a long one from jj that I am really sorry to have deleted.

My apologies, everyone.

Oh, man - it looks like I deleted *all* comments made after the spam. I really am very sorry, everyone.

omg, you did! That's an "oops"!

The thing that you guys seem to be missing is that there are no good arguments against minimum wage
hikes. Not to say there are no arguments, but none of them hold any water. I've been arguing against the group "abolish the minimum wage" for the last three years, and I think all those arguments were just nailed shut

Allan, I don't have an economics degree - I have no formal training in economics whatsoever - and I can pick apart your arguments in my sleep. Above, you seem to deny that resources are scarce. On another thread, you actually claimed that a business requires a fixed number of employees and therefore, a business has no choice but to pay its workers a higher wage if required to do so by the state.

I'm not trying to insult you. I'm sure you know plenty about lots of things, but economics isn't one of them. Your position is so poorly reasoned and so ill-informed that frankly, if you weren't so persistent I'd be absolutely convinced that you were an aspiring satirist.

Frances, it seems to me as though you`re talking about the problems associated with *poverty*, not the minimum wage. In that StatsCan thingy I linked to earlier, adults working full-time are minority of those who earn minimum wage - and only something like 4% of people earn minimum wage in the first place. And most minimum wage earners are part-time workers.

"On another thread, you actually claimed that a business requires a fixed number of employees and therefore, a business has no choice but to pay its workers a higher wage if required to do so by the state."
Business employs the number of people that it requires for its operations. It pays the least it can get away with. The requirement to pay more does not mean that it can employ less people.
The thing is, business is not a consumer of laborer, but a marketer of labor services. It is the consumer that pays for labor and it is the consumer that is employed as labor. In the macro, it is in fact the labor that pays for the labor, with the business taking off a share. It is extremely liberating to the economy to limit somewhat the share that the business takes for itself.

We could use more information on the poor that don't earn the minimum wage, retired, disabled, unemployed/unemployable, employed at higher wages but seasonally or limited hours, students, single parents, large families. Just as low wage may be a poor measure, poor may be as well.

After that last whopper from Allan I'm throwing in the towel. He won't even try to meet us halfway. There is none so blind as those who will not see.

I was where you are when I came out of business college. It took me years and years to come to a realization that everything I had been taught in economics was phoney propaganda. You want me to stick my nose in the shit again?
Adam Smith did not write an intellectual investigation, but a brilliant piece of propaganda, designed to explain why big business should be allowed and even encouraged to get bigger. Smith promoted the powerful, and so was powerfully promoted, and his doctrine became foundation to a systematic indoctrination through the universities.
You don't think that labor pays for labor?? You throw in the towel because there is nothing that I state that you wouldn't know is true if you would just stop and think about it!

Allan, you have reached a point where you are stringing together nouns, verbs and other parts of speech into sentences that are grammatically correct but convey no meaning. Please stop, it's a bit embarrassing.

If you have been at all involved in conventional economics you should be embarassed by what I tell you. As for your mental block which completely denies the meaning of what I am telling you, that is an issue between you and your God.

"We could use more information on the poor that don't earn the minimum wage, retired, disabled, unemployed/unemployable, employed at higher wages but seasonally or limited hours, students, single parents, large families. Just as low wage may be a poor measure, poor may be as well. "

This is a good point in looking at any sort of data. How was it compiled? What did the definition mean of a "low-wage earner?" What is the definiton of someone who is poor?

And for those of you that are reading allan's writing, he has been saying the same things on facebook and other areas. He types out the same arguments.

The excess supply one bothers me because rising prices would then make no sense. Prices only rise when demand goes higher than supply in a free market. But according to Allan, supply ALWAYS exceeds demand. So rising prices must happen some other way. Therefore, I can conclude that rising prices for anything has come from the government. Health care, oil prices, food, etc. We pay more for goods all because of the government. It is the government's fault we have high health care prices, not because of the way insurance is structured.

"Thirdly, Ontario industries have been severely crippled by the global deflation, and yet Ontario's economy has remained relatively strong, and I say that this is directly because of the annual increases to minimum wage.""

Global deflation? So in that case, your fellow canadians would argue then that prices for goods have been dropping? The purchasing power of your currency has been increasing? So people earning the same amount of money are able to buy more goods. Actually, deflation would argue that you can buy more goods with the same amount of money. That is the power of deflation. Economists argue that deflation is worse than inflation simply because of debt issues. It's harder to pay off that debt when less money is circulating.

Xevec: Under monopolistic competition (where sellers have market power, and so set price above marginal cost) there is a sense in which supply exceeds demand in equilibrium.

I really wish we taught macro with imperfect competition more. I can (in principle) build a model that makes sense of all of Allan's assumptions and observations, about output and hence employment being demand-determined. But is still gives normal conclusions at the macro-level. Minimum wages don't help employment.

>Global deflation? So in that case, your fellow canadians would argue then that prices for goods have been dropping? <
The prices on most things do not fall off very quickly. The prices that are most responsive to the real value of the cash supply are those on the stock market, where millions of vendors and millions of buyers are constantly doing very transparent exchanges.

> So rising prices must happen some other way. Therefore, I can conclude that rising prices for anything has come from the government.<
Rising prices are a direct result of the minimum wage, but not, as most believe, due to the increased cost. Prices are not fixed on cost, but set according to what the market will bear. Therefore, as minimum wage gives more money to more people, more people are able and willing to pay more, and so prices rise.

>Minimum wages don't help employment.<
Yes they do! Work is not provided by the largess of a business, but is demanded by the spending of the consumer. Giving the laborer (consumer) more money can not result in a shrinkage of the labour market. This point is proven every time there is a minimum wage hike anywhere.

So a rise in minimum wage neither increases cost nor reduces demand for unskilled labour? Sorry, Allan, I just don't see it. I work for a firm that employs quite a number of such workers, and the recent increases in min wage have been one of the driving motivations to increase productivity, that is, revenue per labour hour. That won't be achieved by rapid top line growth either, so that leaves one parameter.

Funny thing is, increasing productivity calls for more skilled workers to design and implement better processes. Good for the much smaller number of skilled workers, not so good for the unskilled and jobless.

>That won't be achieved by rapid top line growth either, so that leaves one parameter. <
Why not? In the macro, what is on the top line is wholly dependent on the other lines. The business can only get what the consumer spends, and the consumer can only spend what it gets from business.

>Funny thing is, increasing productivity calls for more skilled workers to design and implement better processes. Good for the much smaller number of skilled workers, not so good for the unskilled and jobless.<
So are you promoting the idea that increased technology and industrialization creates unemployment?? See, yes, increases to the minimum wage DO promote increases to technology and industrialization, but this does NOT promote unemployment!

"Rising prices are a direct result of the minimum wage, but not, as most believe, due to the increased cost. Prices are not fixed on cost, but set according to what the market will bear. Therefore, as minimum wage gives more money to more people, more people are able and willing to pay more, and so prices rise."

This is the dumbest statement I've ever heard. saying "what the market will bear" is economist speak for dumb-ass. No, it doesn't explain anything, yet you use it. And I thought you hated economist talk.

Rising prices are not a direct result of minimum wage. You are going to argue that for oil? After katrina hit, oil prices increased. So I guess that particular oil spike was not because of hurricane katrina, but instead of a secret minimum wage hike that the government placed that we did not know about. Prices are determined by BOTH supply and demand. It isn't one or the other. It is both. If supply goes out, then prices start to rise. That is why prices rose during the 1970's and the oil crisis. OPEC cut off supply, and prices started to rise. We had a shortage because of it, but that was more due to the price control that kept the prices low. But it is hard to say that it was NOT in due to OPEC cutting off supply. It had it share in the problem. So Allan, saying that minimum wage is the SOLE cause of rising prices is silly.

"Work is not provided by the largess of a business, but is demanded by the spending of the consumer."

The spending of the consumer funds the business to fund the consumer. Do you not see this circular logic? The consumer funds the business which funds the consumer which funds the business......etc.

"The prices on most things do not fall off very quickly. The prices that are most responsive to the real value of the cash supply are those on the stock market, where millions of vendors and millions of buyers are constantly doing very transparent exchanges."

Sure they do. Things can drop and rise in price quite quickly. I've seen oil prices do this. In a one month time span, I saw oil prices drop at least $2. A lot of products are constantly being bought and sold at the same time, not just stuff on the stock market. The Company 3M does millions of transactions a day. Same thing goes with newspapers, who deals with millions of advertisers each day. So prices can change dramatically in a day. The stock market is just a really good visual representation of it.

">Funny thing is, increasing productivity calls for more skilled workers to design and implement better processes. Good for the much smaller number of skilled workers, not so good for the unskilled and jobless.<
So are you promoting the idea that increased technology and industrialization creates unemployment?? See, yes, increases to the minimum wage DO promote increases to technology and industrialization, but this does NOT promote unemployment!"

You can't read, can you Allan. He never said that increased tech creates unemployment. He is right that it requires more "skilled" workers. It makes those "unskilled" workers have to move towards other areas. My god, you want to attribute minimum wage to everything Allan, which is simply not the case. Yes, minimum wage cured the depression, it creates employment, it resurrected jesus, etc. And bullcrap Allan, you were telling me a while ago that increased technology does harm ourselves. Increased technology does create unemployment, but it does not create a NET loss of jobs. It does however, does create loss of jobs. Because of DVD's, there is no longer a need for people to create VCR's. So all VCR manufacturers lost their jobs. That is a job loss. But that doesn't mean a NET job loss overall.

"Yes they do! Work is not provided by the largess of a business, but is demanded by the spending of the consumer. Giving the laborer (consumer) more money can not result in a shrinkage of the labour market. This point is proven every time there is a minimum wage hike anywhere. "

Then please provide evidence of this Allan. Show us where a minimum wage hike has given an increase in employment. And then also explain any of our attempts of other factors contributing to employment increases. Cause it seems according to you, ONLY minimum wage can increase employment, nothing else.

>Cause it seems according to you, ONLY minimum wage can increase employment, nothing else.<
Yes, that's right. Without consumer spending you can't have good employment. Doesn't matter how big the factory is or how big the warehouse is. The limit to consumer spending is consumer income. Now you might be able to increase consumer income by government handouts, but I really do not feel that such is a good way to go. No, the consumer's income is supported by the minimum wage, and such is really the only way to have a good economy.

I expect I ought to do a post on this, and build a little formal model which captures Allan's view of the world (output and employment is determined by aggregate demand, and aggregate demand is an increasing function of wage income, so an increase in the minimum wage will increase aggregate demand), but which nevertheless shows that an increase in the (real) minimum wage will cause employment and output to fall.

Sounds totally contradictory, but that's what happens. It's one of those paradoxes of macro with imperfect competition (New Keynesian stuff). The reason is that aggregate demand determines output and employment *for a given price level*, but the position of the Long Run Phillips Curve determines output and employment when prices are allowed to adjust. And an increase in the (real) minimum wage shifts the LRPC adversely. (Assume individual firms set prices as an elasticity-determined markup over marginal costs, and let wages be a prime determinant of marginal costs).

It's exactly the sort of question I spent my late 20's and early 30's thinking about.

But I need to motivate it.

A question: who else (apart from Allan) argues that an increase in the minimum wage would be good for employment because it increases workers' incomes and so increases demand for goods? Is this a widely-held view? Can I point to some group and say "this is what these people believe, and here's why their argument doesn't work"?

Worth doing?

Of course, I've also got to grade 350 exams! Aaaargh!

It's one of those paradoxes of macro with imperfect competition (New Keynesian stuff)

I don't profess to understand macro theories to the same level as a good number of readers here, but it seems to me "imperfect competition" of some form is more the norm than the exception. This is how fortunes are made, and how one company figures out how to get competitive advantage over another and flourish while others flounder.

So, as a layperson, understanding/discussing why the real world may deviate from the ideal I personally would find of merit.

>A question: who else (apart from Allan) argues that an increase in the minimum wage would be good for employment because it increases workers' incomes and so increases demand for goods? Is this a widely-held view? <
Not that I have determined. I have encountered some with an economics background that will allow that minimumm wage is not as detrimental as some teach, but I have not encountered anyone with any interest in economics that would allow as I do, that the minimum wage is the foundation price on which all others depend.

>Assume individual firms set prices as an elasticity-determined markup over marginal costs, and let wages be a prime determinant of marginal costs<
But wages are not the only determinant of marginal cost. I estimate that wages are about 30% of cost, and how much of that wage package is really fixed cost? Certainly higher output from higher demand will mean some increased wage, but the increased output brings in an economy of scale right from the start of increased demand. This is reflected in many wholesale price lists too. Increased demand does not mean higher costs like your supply curve teaches. The per unit cost does not increase with increased production, but decreases.

Allan: you have to distinguish between marginal cost and average total cost (not sure which of these your "unit cost" refers to).

But, much more importantly, you have to distinguish between the individual firm experiment, and the macroeconomic experiment. First, because an individual firm buys many of its inputs from other firms, so while labour may be a small percentage of the costs to an individual firm, it's about 70%(?) of GDP. Secondly, because the supply curve of inputs facing an individual firm when it expands output will be very different from the aggregate supply curve of inputs facing all firms in aggregate when all expand output. This can mean that the individual firm's MC curve can be horizontal (or even downward-sloping), while the MC curve for the economy as a whole can be steeply upward-sloping (or, indeed vertical if nominal prices are on the vertical axis).

In general, it's this confusion between micro and macro that is at the root of so many mistakes in macro.

>This can mean that the individual firm's MC curve can be horizontal (or even downward-sloping), while the MC curve for the economy as a whole can be steeply upward-sloping (or, indeed vertical if nominal prices are on the vertical axis).<
I am saying that all firm's MC are down sloped, and so no, the economy as a whole can not be steeply up sloped. There is always unused capacity, and there are always stocks of unsold merchandise. The better the velocity, the better the economy.

>Allan: you have to distinguish between marginal cost and average total cost<
There is a difference? Not in my book, and frankly if you want to nit pick on the vernacular difference between marginal cost and average total cost, I think you make much ado about nothing.

">Allan: you have to distinguish between marginal cost and average total cost<
There is a difference? Not in my book"

You're kidding right? You're saying that the cost curve is a perfectly straight line?

Nick : The most common argument I hear for minimum wage revolves around power imbalances and limiting exploitation. Occasionally I come across people who think that (presumably evil) executives can just pay themselves less and the workers more (good luck with that). The macro argument you present above is way too sophisticated for most people (I know I'm still puzzling it out).


What's ironic is that the first crude macro model with imperfectly competitive firms I built (published in 87, beating Blanchard and Kiyotaki by a couple of months, IIRC, though theirs was of course much better) was so very similar to the model in the back of Allan's mind.

It had excess capacity (unemployed resources) in equilibrium; Marginal Costs and Average Total Costs were the same; actually MC and ATC were both zero, until you hit full employment. I didn't put minimum wages in the model, but it would be easy to do so. I could make an increase in minimum wages increase the Aggregate Demand curve, if I wanted to make that assumption. So very much like Allan's world.

Yet, an increase (rightward shift) in the Aggregate Demand curve would have no effect on unemployment. And an increase in minimum wages would nevertheless cause output to decrease and unemployment to rise.

Allan: "I am saying that all firm's MC are down sloped, and so no, the economy as a whole can not be steeply up sloped."

Oh yes it can. The individual firm's MC curve is drawn holding other firms' prices and outputs as given. When *all* firms increase output and/or raise prices together, this can and will cause an *upward shift* of each individual firm's MC curve. In fact, if nobody suffers from money illusion, so they aren't fooled by a proportionate rise in all prices and wages, then the MC curve for the economy as a whole, with the nominal price level on the axis, *must* be vertical, regardless of whether the individual firm's MC curve slopes up or down. It's back to the difference between micro and macro.

Patrick: Here's intuition: some people (including Allan?) argue that an increase in minimum wages will increase aggregate demand and therefore increase employment. What they forget is that an AD curve by itself cannot determine the level of output and employment. You need a second curve in {P,Y} space, to tell you whether an increase in AD (a rightward shift in the AD curve) will cause Y to increase or P to increase. (This was a very costly lesson that economists learned in the 1970's). And in the long run, unless prices are permanently sticky, or people suffer from permanent money-illusion, that second curve will be vertical. So an increase in AD only affects prices in the long run. And if an increase in minimum wages shifts that second curve to the left (which it generally will), it causes output and employment to fall, regardless of Aggregate Demand.

(That second curve, by the way, is often called a "Long Run Aggregate Supply Curve", but it isn't really a supply curve. A Long Run Phillips Curve, maybe.)

"You're kidding right? You're saying that the cost curve is a perfectly straight line?"

Allan believes that MC is a downward sloping line. That the more product you produce, the cheaper it is. But that is assuming TOTAL COST is constant. Yes Allan, assuming total costs stay constant, as quantity produced increases, marginal cost decreases. Marginal cost = change in total cost / change in quantity. But since you are increasing the quantity, you are also increasing total cost. The total cost is simply fixed + variable. But saying as you constantly increase, costs get lower. No, that is not true. Total costs will constantly increase because variable costs are increasing. Fixed costs may increase as well, if you need to buy a new plant, new vehicles, etc.

But Allan has now admitted that minimum wage is the ONLY way employment increases. So job increases can ONLY be attributed to minimum wage. Then how do you explain China's surge in jobs in the 90's when no minimum wage existed? As you said, ONLY minimum wage can increase employment.

Xevec: close, but not quite. If TC is fixed (i.e. does not increase when q increases) then MC=0, and ATC decreases with q.

For a monopolistically competitive firm in equilibrium, *locally* the ATC curve must slope down (though it may slope up further out). The MC curve could slope up, down, or just go sideways. Sideways is not a bad assumption, until you really start to hit capacity constraints, but for most firms that usually happens only in a boom, would be my guess.

I just remembered something *really* paradoxical!

Suppose you believe, as Allan does, that the individual firm's MC curve slopes downwards. Then, under reasonable "benchmark" assumptions, an increase in the *nominal* real wage will cause the *real* minimum wage to fall. So even those workers that keep their jobs will be worse off.

Remember that MC=W/MPL, where W is the nominal minimum wage, and MPL is the marginal product of labour. So if MC slopes down, and W is exogenous for the individual firm, that means that MPL must be increasing as the individual firm's employment and output increases.

Profit-maximising firms choose a point on their demand curves where MR=MC.

Assume that elasticity of demand for an individual firm is a constant. That means that the individual firm will set a price as a fixed markup over Marginal Cost. So P=(1+m)MC=(1+m)W/MPL.

Rearranging, to solve for the real minimum wage, we get W/P=MPL/(1+m).

Assume a crude Quantity-Theoretic AD curve: MV=PY (or Y=MV/P)

Start in equilibrium, with unemployed workers. Now cut the nominal minimum wage W. Say you cut it by half. At existing levels of output, firms' (nominal) Marginal Costs are also halved, so they cut prices in half. For a given MV, Y will now double. But if all firms double output (I'm assuming there are enough unemployed workers to allow this to happen) then MPL will rise. So P will fall further still (since P=W/MPL, and MPL increases if Y rises). So the real minimum wage, W/P will rise.

Now, I admit I've cheated a bit, by ignoring the possibility that the real wage cut might reduce aggregate demand (I have implicitly assumed that Velocity and therefore aggregate demand is independent of the distribution of income between wages and profits). And that might make the original equilibrium unstable, if that effect were strong enough. But that possibility could always be fixed by an appropriate monetary policy in any case.

This is actually fairly close to my view of the world. If we could weaken union (and other influences) that tend to push up nominal wages, it is quite possible that both employment could rise (fairly standard view) *but that real wages could rise too* (which is definitely a non-standard view)!

Just to give some more intuition for my previous comment: If we assume nominal wages are fixed, we normally get an upward-sloping AS curve, in {P.Y} space. And equilibrium is where the downward-sloping AD curve intersects the AS curve. And a 50% cut in the nominal wage will cause the AS curve to shift vertically down by 50%. And so P will fall by less than 50%, so W/P falls, even though Y increases.

But if the individual firm has a downward-sloping MC curve (because MPL increases as employment and Y increase), then the AS curve for a fixed nominal W will slope down. (Equilibrium is still stable provided it's not steeper than the AD curve). So a 50% cut in W will cause AS to shift down by 50%, and cause P to fall by more than 50%, so W/P rises.

Nick: "If we could weaken union (and other influences) that tend to push up nominal wages, it is quite possible that both employment could rise (fairly standard view) *but that real wages could rise too* ... "

Are there any natural experiments to test the hypothesis? The US vs. Canada seems like one possibility. If memory serves, real wage growth in the US has been pretty miserable over the last decade or so (I assume the same is true in Canada), though until recently employment levels where better in the US overall...

Ugh .. were better.

Patrick: Good question. I don't know. Ireland? But then we so rarely get clean natural experiments.

Stability of equilibrium can be a bit tenuous in this sort of world, though.

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