Minimum Wage

This post was prompted by a FB post from an old high school friend of mine and isn't something I normally spout on about, but for better or worse here goes.[1]  

Minimum Wage:

Labor like all other goods and services is controlled by the interaction of Supply and Demand.  In short the market demand for something is the ability and desire of everyone in the market to purchase that item at all prices and market supply is the ability and desire of all the businesses in the market to create/sell them at all prices. [2]

This is a simple graph of just that. [3]

The place where the supply line and the demand line cross is called equilibrium.  If you price a product at equilibrium price (P*) you will succeed in having an equilibrium quantity (Q*). 

This is awesome for several reasons.  First because the quantity demanded by the consumers will be exactly the same as the quantity supplied by the producers. [4]  Which means that at that price level every consumer who wants to purchase at that price level gets to do so and every items created by the suppliers at that price level gets sold.  This is good because it means we aren't wasting resources and we don't have unhappy customers.  But for the businesses this is extra good because it is also where profit is maximized. [5]

"Okay, Mr. B," you say, "but what does any of that have to do with minimum wage?"

Hold your horses, I'm getting there.

Let me try to add one more concept, without drawing a lot of graphs and writing a lot of paragraphs.  So to save time, put your finger on the graph above and pretend it is the price line.[6]   Now move your finger up or down on the graph, but be sure to keep it horizontal.  

You should be able to see that at every other price, the price line will hit the supply and demand line at different locations.  And thus at each of these locations either the resulting Quantity Supplied or Quantity Demanded will be greater than the other.  This will result in either a surplus of a product if the price is above equilibrium or a shortage of a product if the price is below equilibrium [7].

"Um, Mr. B, minimum wage?"

Right, well it should come as no surprise that minimum wage works just the same way.  Only because this is the labor market and not the product market we typically think of, the roles are switched around.  Thus in the labor market the demand is not customers wanting to buy a product, but instead is businesses demanding employees to hire.  And the supply is not businesses providing products for sale, but instead is people wanting to supply their work to the labor market.  And finally the price line doesn't determine the price of a product but instead determines the wage that market should charge.  

Of course there is going to be a different graph for every different market or job.  So the equilibrium wage for a doctor is different than that of a plumber or a butcher or someone working the drive through at a burger joint.  But if the market is left alone, the market will automatically find the equilibrium price or wage [8] and the market will be efficient and profit will be maximized [9]

This means that if the equilibrium wage for a doctor is $150,000 a year then that's what they will get paid and if the equilibrium wage for a butcher is $45,000/yr that is what they will get paid and if the equilibrium wage for a person working the drive through at a burger joint is $12,000/yr that is what they will get paid.

But then someone in the government says, "Hold on a second.  You can't live on $12,000/yr.  Let's make it illegal to sell your labor for less than $14,500/yr.[10]  

When someone, in this case the government, says you can't sell something below a certain price, this is called a price floor.  And price floors [11] always cause a surplus.

"Woohoo!" you say, "That means there are more jobs than people looking for them! Right?"

Not so fast.  Remember in the labor market the roles are switched and a surplus means the quantity supplied of people wanting a job will be larger than the number of employees demanded by businesses.  So, what it means is that a lot of people are going to not be able to find the job they want.

Here's the graph you know you are wanting:

Pf is the Price Floor.  Qd is the quantity demanded and Qs is the quantity supplied. The distance between Qd and Qs is the amount of the surplus in the market.  In other words it is the difference between the number of people who want to work at a given price for a given job and the number of jobs businesses are willing to fill at that same price.  

But really that number is less important than the difference between Q* and Qd.  Because that number is the number of jobs that will disappear because of the price floor or in this case because of the minimum wage.

"So, then if we raise the minimum wage to $10.10/hr how many people will lose their job?" you ask.

Good question.  The answer is that nobody knows for sure.  Looking around you can find a veritable mixed bag of answers from some people saying that nobody will lose their jobs to others estimating that around 1 million jobs will be lost.  

I obviously don't know, but I do know that I have read articles about things like McDonald's in anticipation of a higher minimum wage creating test stores in which all of the food production is completely automated and thus cutting the number of employees that they would need to hire.  I've seen stories about parks that fired all of their gate attendants and replaced them with automated ticket taking machines.  And if you are old enough to remember when gas stations had someone who would fill up your gas and clean your windows for free and always wondered what happen to those jobs and who's to blame for them disappearing, you need look no further than minimum wage. So, I have to think there will be some impact.

Thus, in my mind strike one against the minimum wage is that it causes jobs to go away.

"Okay, we don't know how many, but do we know what kind of jobs will go away?" you ask.

While we don't for sure what jobs will go and which ones won't, we can make some pretty good guesses.  Just looking at the examples I gave above you can see that they are low skill jobs that offer low pay.  They are jobs that aren't intended to be careers.  They are jobs in short that are pretty much meant to be for high school teens looking for extra cash or for a place to get experience, a foot in the door as it were.

So mostly the jobs that would disappear would mean more teenagers without jobs.

"But I know of several people who are working two minimum wage jobs just to try and stay alive," you say.

I agree that's a problem, but remember that we are currently coming out of the Great Recession and that the job market is not by any means back to where it should be.  When the job market and the economy is working correctly the percentage of people making minimum wage is only around 3-5% of the workforce and the vast majority of those people are, as we've already said, teenagers.

That's not surprising since as we said minimum wage is not meant to be a wage level that people earn for their career.  It's an entry level position or a summer job for a teenager. 

"So, if minimum wage goes up only teenagers will lose their jobs?"

Or we could say that if we got rid of minimum wage it would mostly be teenagers who saw their wages go down.

"Get rid of minimum wage?  If we did that business would just offer a tiny amount for their jobs."

Nope they wouldn't.  Because it works both ways.  If the business offers less than equilibrium they will be giving a price below equilibrium and as we already said that will just cause a shortage.  In this case we would have a large quantity of businesses demanding employees at this low wage and a very small quantity of people willing to supply their labor at such a low price.  

If a burger business really did say that they were only going to offer $3.00/hr for the job of working at their drive through they would quickly find the only people willing to work there would be people who couldn't get jobs anywhere else because they were such horrible employees nobody offer a better wage was willing to hire them and the business would find their customers did really enjoy ordering from them and they would start to take their business elsewhere.  In other words, the more a money a business offers the more people willing to work there and the better the pool of potential employees they have to choose from.  Which means happier customers and more profits.

And I know this is true because in a normal economy only 3-5% of people are even making minimum wage.  Thus most business already offer more than minimum wage.  In part because their job may be more difficult, but also because they want to attract the best employee that they can afford.

Of course, I'm not saying that some jobs wouldn't lower their wages, but most wouldn't and I know most teenagers don't want to admit it, but I suspect if you asked and they were honest, most of them would admit that they could get by even if their job only paid $6.00/hr.

"What about the people who have minimum wage jobs and aren't teenagers?  Lowering their pay rate might make it where they can't survive."

True, but to me the solution there is that they need to get a better job and before you get irate and start shouting about people stuck in dead end jobs and lack of skills and no money for college, etc, etc, etc.  Let me say that for those people the solution to me would be to help them get skills, training and school so that they can get out of those jobs and not to artificially inflate wages across the board.

So strike two for minimum wage in my mind is that it really isn't helping the people we want it to help at all.

Finally, there's inflation.

I don't have the room to give a full rundown on inflation, but the gist is that over time the purchasing power of money can get eroded.  Thus you may find that if you took $100 to the store today and bought a small pile of goods with it and then next year you went back to the same store and tried to buy the exact same pile of goods, you would find that you couldn't.  Inflation would have made it to where the cost of those goods had risen. [12]

There are a lot of things that can cause inflation but one of the major contributors is too much money in the market place.  

For instance let's pretend that all of the money in the country was only $1,000.  And that in the market place the equilibrium price for bread was $1 per loaf.  If we suddenly increased  the amount of money in the marketplace to $2,000 what would happen?

Well since the price of bread was determined by the equilibrium price, if suddenly everyone had more money [13] we would suddenly see demand for products rise.  In fact an increase in income is one of the things that determines that demand line we talked about way back at the first graph and as I just said an increase in income will cause an increase in demand.  So what happens when you increase demand?  Here's a graph that shows it: 

Demand has shifted to the right (from D1 to D2) and prices have risen (from P1 to P2).

Thus giving everyone more money just means that they will drive the price of bread up.  So, in our example, doubling the money supply from $1,000 to $2,000 will just cause the price of bread to double from $1 to $2.  

Sure there will be a brief period in which people will have extra money in their pockets, but quickly they will find that prices have adjusted so that however much they could buy with their paychecks before the money supply doubled, that is exactly how much they would be able to buy after the money supply doubled.

This is no less true for minimum wage.  But instead of doubling the amount of money in the money supply we are trying to artificially increase incomes with a different method, but the result will be the same.  More money = more demand = higher prices.  

To add an additional problem from the other side of the coin, if we tell the burger joint that they have to increase their employees wages by x%, the burger joint will have to raise its prices to accomplish this and so will everyone other job that hires at minimum wage and this will have a ripple effect through society.  So the prices of products will also rise because of this. [14]

Thus in my mind the third strike against minimum wage is that in the long run we aren't really even helping the few people who do get that pay raise, because in the end the increase in demand combined with the decrease in supply will mean that inflation will raise the prices for everyone.  

Again, I'm not saying that there aren't people out there working minimum wage jobs that are struggling to survive and who desperately need to get paid more.  What I am saying is that those people need new jobs, not an artificial increase in the wage of their old job.  They don't need to stay in a low skill, low pay, minimum wage entry level job.  They need to find a better career job that they can do and if there isn't such a job then they need to improve their skills set and situation so that those jobs are accessible.  And if their situation is so bad that they can't afford to do that or they are unable to do that, then society, the government, or others need to act to help them so that they can.

In summary, in my mind, raising minimum wage so that:

a) jobs disappear
b) few of the people who really need it are actually helped by it; and
c) it causes prices across the board to rise and ultimately negate any minimum wage increase anyway

seems like a giant failure.

Minimum Wage: D+[15]


[1] - Also, fair warning, this obviously involves a good bit of economics and is a pretty involved topic that I'm trying to handle in a short space and as such that means I'm not going to be able to go into as much depth as I'd like in some areas.  However, if you want me to explain anything further, I'd be happy to.
[2] - In regular English that means if I found out the total amount of CD's everyone in the market would be willing to buy at $5, $10, $15, $20 and every other possible price and I put all that in a graph, I would get the market demand for CD's.  If I did the same thing at every price for people willing to sell/make CD's I would get market supply for CD's.
[3] - In the interest of time and expediency I'm not going to go into depth on why Supply and Demand are drawn like that.  Just trust me on this one.
[4] - Quantity demanded is determined by where a particular price moving horizontally across the graph strike the Demand line.  Quantity supplied is determined by where a particular price moving horizontally across the graph strikes the Supply line.  At equilibrium those are the same place. 
[5] - And anyone who tells you that a business is in business for any reason other than making money and maximizing profits is probably selling you on something.
[6] - If William Shatner shows up you're thinking of the wrong kind of price line.
[7] - A surplus is bad because it means we've wasted resources and have extra products sitting around being unbought and a shortage is bad because it means that some customers are not getting to buy when they wanted to.  But even more importantly the seller is not maximizing profit.
[8] - Invisible hand ftw
[9] - Profit is maximized in the market, not necessarily in any one person's pocket.
[10] - Which translates to roughly $7.25/hr and obviously minimum wage didn't start at $7.25/hr and if you want to find who really started minimum wage in the US, you can pretty much point that finger at FDR.
[11] - That are set above equilibrium price
[12] - Historically the inflation rate in the US tends to be around 2-3% per year.
[13] - Or even if a significant portion of the people had more money
[14] - This is called the Wage-Price spiral and to see the beginning of its effects without me drawing another graph, this is the opposite of the increase in demand.  It is a decrease in supply.  To see the effect put your finger on the graph over the supply line and then move it to the left.  Note how the spot where the demand line and your finger cross moves up.  An increase in prices.
[15] - Minimum wage's heart is in the right place.  So I didn't give it an "F".

Nothing to Envy

Nothing to Envy: Ordinary Lives in North Korea (by Barbara Demick).

Imagine a world akin to 1984, Logan's Run or Brave New World.  The government controls everything.  Life is hard and often short.  Brain washing is so common and prevalent that it isn't even really commented on by the population in general.  There isn't enough food and what food there is is often plain and unexciting.  Not that the populace knows that their lives are odd or different, because they've no basis of comparison.

Outside of this dystopia lies a world where none of that is true.  People are free.  Life is full of fun and possibility.  The only brainwashing is advertising and you are free to ignore it.  There's an abundance of food and it comes in a multitude of varieties and flavors.

However, the people in the government controlled section aren't upset that they are being denied, because they don't know anything about the other places.  They think everywhere is as bad or worse than where they are.

Now realize that you don't have to imagine this dreary, oppressive world.  Because it exists right now.  It is called North Korea.

Nothing to Envy was compiled from several people who defected from North Korea.  Their stories have been woven together to create a tale that is at times so hard to believe you have to assume it is fantastical fiction.  At other times it is so sad and depressing you can't believe that such a reality can be allowed to exist.  Finally, it is so scary that it does exist and there isn't much anyone can do about it.

Sure if the people of North Korea rose up to overthrow their government, there would be plenty of help from the outside world, but they are so brainwashed and unaware of the outside world that it would never occur to them that they either could rise up or that they should.

Even if you are someone who typically doesn't read or even really like non-fiction, I encourage you to give this one a try.  Page after page is filled with stories that literally amaze you and stun you at the same time.

I could give a hundred examples, but to do the book justice I would just be reprinting the book here.  So instead, I'll just give three and hopefully that will encourage you enough to buy it yourself.

1) North Koreans are not allowed to hang anything on the walls of their homes.  Because every family is given a picture of the current leader to hang and nothing else is allowed to compete with that picture.  In addition they are all given a special white cloth that is to be used for nothing other than cleaning the picture that they were given.  Further, there are special police who come to your house for surprise inspections to make sure that the picture is hung.  It is the only thing hung.  And that it is completely spotless.

2) The North Koreans all believe that the Japanese and the Americans are evil and out to get them.  They are brainwashed from birth and have no reason to believe otherwise.  School begins every day with a lesson in communism, but the indoctrination doesn't end there.  All of the lessons from reading to math also contain and reinforce these ideas.  For instance the average math problem would never be what is 8-3?  Instead it is "You are walking home with 8 apples.  A Japanese soldier steals 3 of them.  How many apples do you have left.  Another example is that one of the most popular rhymes that small children sing as often as American children sing "Twinkle Twinkle Little Star" is a song that talks about growing up to join the military so that you can kill lots of Americans.

3) The lack of food in North Korea is astounding.  The average North Korean man is something like six inches shorter than his South Korean counterpart, simply because of malnutrition.  When the one lady in the book defects to China, she sneaks into a building to hide for the night.  There she sees a bowl of food full of rice, fish and other things sitting on the floor.  It is more food than she has seen or eaten in months.  Then when she hears growling, she realizes it is food left out for the dog.

The book was completely enthralling from the first page to the last.  At a time when Kim Jong Un is threatening to attack at any moment, it is an interesting way to see what the average North Korean's life is like and to get a bit of a glimpse into the crazy mind of the men who have been leading their country down the road to ruin.

Nothing to Envy: A+

I Didn't Want to Go Here, But You Made Me

I'm not sure how this post is going to end or even where I'm going to go in the middle, but I do know what started it.

Facebook started it.

Or more specifically, reading through the posts on FB by people who either clearly never took a civics/government class in high school or more likely paid no attention while they were in it and/or have simply forgotten what little they did learn.

I have to admit that I'm going a little afield of the stuff I usually post about.  This is not going to be rant on some movie, book or random food that I recently ate.  Instead I'm putting my foot in where I should probably not tread and I'm going to talk about politics.  But the completely stupid things that I see otherwise reasonable people posting is driving me up the wall.

Before you start predisposing yourself to disliking what I'm saying, let me get this out of the way.

I am not a democrat.

I am not a republican.

Instead, I'm one of those (evidently) rare people who actually looks at the issues and the candidates and then picks the best match for the job.

And if you just responded to that sentence by saying, "That's what I do too!  And the best candidate is always a [insert your political party here]" then think again.  Both parties have had their share of wonderful, brilliant people and both have had their share of dolts.

Anyway, back to where we were before, with you driving me up the wall with the stupid reposts of fundamentally retarded posts.  And if it looks like this rant is starting to lean a bit to the left, that's only because those of you on the right have lately been hogging the spotlight shouting out to everyone trying to prove your ignorance.

Let's start with this bunch of geniuses.

http://www.facebook.com/pages/Obama-is-the-Worst-President-in-US-History/296856040436954?fref=ts

And while were at it let's throw in all the memes, pictures, posts and other FB flotsam and jetsam in the same vein.

Obama is the worst president ever?

Really?

And what are you basing that on?

Because it is clearly not your extensive knowledge of U.S. History.

Spending two minutes reading about Warren Harding and then get back to me.

Now I am by no means saying Obama is the greatest president ever.  He wouldn't even make the top ten.  But let's be realistic.  By any reasonable measurable test he wouldn't make the bottom ten either.  Not even close.

Again, go spend a few minutes alone in a closet with a book about the 43 presidents.  Then get back to me.  [1]

I think through a little arguing, debate and compromise we could probably agree that currently he's pretty solidly in the middle of the pack.  [2]

The new round of FB nonsense posts will inevitably be about the sequester. [3]  I've already seen one that has a banner essentially blaming Obama because the average American now has less money.

Again, go read a government textbook.  I bet amazon.com probably has a Government for Dummies or something. I'll wait.  [4]

.......

Done?

Okay, did you notice the part about the three branches and separation of powers?

Go back and reread that part.  In particular look and see if says anything about who in our government spends the money and who sets the taxes.  It'll probably use some phrases like 'appropriations bill' and 'revenue bill'.  Go ahead.  I'll wait again.

........

Did you find it?

In case you were having trouble locating it, I'll go ahead and spell it out for you here.

It's Congress.

That's the House of Representatives and the Senate.

In other words the Legislative Branch of the government.

More importantly, it's not the Executive Branch.

Also known as the President.

So, if you find that your paycheck is suddenly short a few or even a lot of dollars, or perhaps completely gone because of government budget cuts, then the people to blame number 535 and not 1.

Perhaps some of the more astute of you kept reading in the book and got through the part on checks and balances.  And now you're throwing back at me that the President actually is involved because he can veto anything he doesn't like.

I might even agree with you IF, and this is a big if, IF Congress had actually passed something that he vetoed.

But they haven't.  In fact, the sequester happened because Congress continues to do what it's been doing for the last four years.  Which is essentially, "nothing".

It's no defense to say, "Yes, but if they did Obama would just veto it."  Well, if that did happen then you could rightfully blame him.  But blaming him because he might do something, if Congress ever actually tried to do something is like saying your not going to apply for a job because they might not hire you, or your not going to ask out the girl you like because she might say no or your not going to turn on the light switch because the bulb might burn out.

Give it shot!  It might work!  If it doesn't then you have a gripe.  Before then, you're just somebody that never bothered to try to do anything.

And let's be clear that this isn't a problem with just the Republicans or the Democrats.  It's both.

Neither party is willing to compromise at all.  And so instead of trying things that might be solutions, they stand around arguing while the house burns down around us.

Oh No!  I've once again used that dirty "C" word.

Compromise.

It's seems to me that lately, both parties feel like compromising at all is akin to death. [5]

Check that book again, this country was founded on compromise.

And if you just responded to that by saying something along the lines of, "No it wasn't!  This country was created by people standing up for what they know was right and then laying down their lives to make sure that happened", let me fill in a few blanks for you.

First of all, after the Revolutionary War [6] we created a country based directly on the ideas that they were fighting for and guess what?  It didn't work.

It was called the Articles of Confederation.

Then when it became clear that the Articles weren't going to work, we scrapped them and wrote the Constitution.

And then we immediately compromised to get it ratified.

Go ahead, check that book again.  Look for the part about the Federalists and the Anti-Federalists.  I'll wait.

........

You done?

See those two groups were essentially our first political parties.

And they couldn't agree. [7]

The one side wanted this.  The other wanted that.  It was a mess.

But then, after a lot of discussion and debate, they Compromised. [8]

To get that new Constitution ratified, the Federalist gave the Anti-Federalist some of what they wanted so that the Federalist could get what they wanted.

What did the Federalist want?

The Anti-Federalist to sign on to the Constitution.

What did they give the Anti-Federalist?

Not much, except the Bill of Rights.

So when the Republicans say that they aren't going to budge.

And the Democrats say that they won't give in.

It just makes me want to sigh and tell them both to remove their heads from their . . . [9]

Okay, I seem to be losing steam here.  I could go spend a few more minutes on FB and get riled up again, but it's late and I'm tired.

I'm not sure what you'll take away from this post, but if it is anything hopefully it's something like this:

Don't post and/or repost political nonsense that you really have no idea about.  Especially when, if you did have some idea, you wouldn't be posting it.

Better yet, in all seriousness go buy a book or two and read up about our government.  You might find two or three [10] of other Compromises we've made along the way as well.

Seems like it might be time for another.


[1] - Someone out there is currently saying, "Shows what he knows.  Obama's the 44th president."  My response: Yes genius, but Cleveland served twice.  So if you want to read the chapter on him twice be my guest.
[2] - Granted in four years he could have moved substantially in either direction and in twenty years some of the longer reaching effects of his actions and policies might move him further.  But how about let's wait for some evidence.
[3] - If you don't know what that is, then why are you posting about Obama making you poorer?
[4] - A quick search of Amazon finds several.  If you aren't comfortable calling yourself a dummy.  There's an idiots guide to government as well.
[5] - Seems like not compromising might just get the country there quicker.
[6] - During which a lot of people did lay down their lives for their beliefs.
[7] - Sound similar?
[8] - Big 'C' intentional.
[9] - Well, you know.
[10] - Or 50 or 400 or who knows maybe even thousands

No They Can't

No, They Can't: Why Government Fails-But Individuals Succeed:  As mentioned in a previous blog, I had the pleasure of meeting John Stossel last year.  Since he was nice enough to come and talk at a public school, I figured I would be nice enough to buy his book.[1]

If you've seen much of Stossel's previous work on ABC and his current work on Fox then you've already read this book.  It isn't anything that he hasn't said before many times.  The gist of it is simply that the cumbersomeness of government makes it ill suited to handle most of life's problems in any type of an efficient way and that the framers of the Constitution never intended the government to handle them anyway.

And as I've said before, he's got a pretty good point.  Government (any bureaucracy really) is inherently inefficient.  I don't think there are too many people out there who really believe otherwise.[2]  Throughout the book's thirteen chapters he reiterates this point over and over.

Stossel's solution is free enterprise.  In other words, government get out of the way and let the market handle it.  There's no need for an inefficient government to try and duplicate the success that the market creates on a daily basis.

Okay, so enough with the nice-nice.  What you really want to hear is what's wrong with the book.

The first thing I always think about when I hear somebody say something along the lines of, "that's not what the framers of the Constitution intended" is 'perhaps but then again the framers of the Constitution aren't here.'  In other words, maybe we can figure out what they were thinking back then, but we're not back then.  We're here in the present.  In a world that is so different from back then, I think if Thomas Jefferson were to suddenly be transported to the present day he'd declare a lot more than independence, if you get my drift.[3]  Once he'd calmed down and had a few things explained I suspect even he would say that some [4] of the ideas from the Constitution might need to be adjusted for the modern world.

If we are willing to except that, then the question simply becomes determining which things the government should be doing and which it shouldn't.

The other big problem I have with the book is the chapter on the war on drugs.  If you are willing to accept Stossel's assumptions then his points are valid and correct.  However, I don't accept them.  I agree that the war on drugs is a failure, but I don't agree that we should just give up or that we never should have started in the first place.

Finally, the book starts out [5] on a fairly positive note.  It essentially was saying, here's some issues and here are some solutions.  Perhaps we should look at them and at the least have a discussion about them.  The book basically ended on a note that was saying, 'things will never get fixed, so we're all doomed.' [6]  If you want to get people on your side of an argument, making them feel like the whole thing is pointless isn't the way to do it.

No They Can't: B-

[1] - And get him to sign it of course.
[2] - Okay there are plenty of people who might think that they believe otherwise, but there aren't too many who would believe that if they've dealt with or worked for the government on any kind of regular basis.
[3] - If you didn't, I meant he'd say a few choice words in his astonishment and perhaps wet his pants.
[4] - Not all or even nearly all, but some.
[5] - Or at least for me it seemed to start out
[6] - Of course his last chapter was about the skyrocketing debt problem, so it's hard to not get a bit depressed.