Thanks for the feedback. Which is the "more reliable opinion is that from the Council of Economic Advisers where the opinion is lopsided in favor of raising the wage to the ten dollar area having net negligible affect on the number of jobs" ? Do you happen to have a link? I don't think I caught that one here recently.
Increase of wages leads to both a decrease in number of jobs and provides incentive for workers. I guess the question is what do you think are the greatest factors behind which will ultimately prevail (long-term)?
Another question, while I have your attention
, you mentioned "true cost of labor". Are you saying that the true cost of labor has increased so then minimum wage needs to be increased?
Ok one more question haha
. It seems inevitable that minimum wage will be increased. So, my questions to you are not whether they should or not. But I'm simply interested in the theory behind your side of the story. So, I appreciate the feedback as I know that many have been arguing this for decades. With that said, we just went through and pumped the economy with funny money. Companies have been injected with working capital. Corporate earnings have come a long way. And now it seems that the only one that hasn't seen the increase is the wage earner. Isn't that when the inflation starts to step in? Give a poor guy 1k and he will spend it. Give him 2k and he will spend it also. Is this where the bidding up of prices starts to take effect. I apologize as I know that this thinking comes from Friedman. And you might not agree with what he said on wages and the monetary supply. So, then what happens next from your perspective, if it's not as Friedman suggested?
Nth, those are good questions. I wish I was an expert on economics and the minimum wage so I could give you expert answers. As it is I can only give you opinions. I do read widely in economics, and naturally what I read influences my opinions.
Let me start with Friedman. I'm not sure I understand your remarks with regard to Friedman correctly. Friedman was of course what we call a monetarist in that he thought that the best way to stabilize an economy was via control of the money supply. (There was a full scale experiment between 1979 and 1982, during which time the Fed put Friedman's theory into practice. What was good in theory was bad in practice, and the Fed returned to its previous practice of controlling interest rate as its primary macroeconomic stabilization tool.
Friedman, and perhaps someone else I don't recall now, was responsible for the idea of the "natural rate of unemployment" and he is quite famous for his prescient critique of the Phillips curve that relates the unemployment rate to the inflation rate. According to Friedman's theory there is a natural rate of unemployment and inflation can go up and down without any effect on the natural rate. Thus on the Phillips curve, with inflation rate on the y-axis and unemployment rate on the x-axis, Friedman's draws a vertical line intersecting the x-axis at what he calls the natural unemployment rate. In other words, the natural rate of unemployment is, according to Friedman, independent of inflation.
The real economy, naturally, does not follow, very well at least, the diagrams in economics texts. The real economy is beyond the capability of any economist to reliably model. Economists have always done best when they have fallen back on experience and what has worked in practice, and paid little attention to theoretical diagrams drawn on napkins. When demand for labor heats up to the point that unemployment drops below the natural rate it is inflationary, but according to Friedman only in the short term, as wages rise to satisfy demand for workers. According to Friedman, the unemployment rate will eventually return to the natural rate (That surely is near what the Fed calls "full employment".)
If we accept Friedman's concept of the natural unemployment rate, and it is widely accepted, then we are currently above the natural rate of unemployment. Raising the minimum wage when unemployment is above the natural rate and labor demand is slack should not be inherently inflationary. In any case, the Fed is doing a masterful job of controlling inflation. Their detractors dire predictions of hyperinflation haven't come true. The Fed will continue doing what they are doing already, i.e., controlling inflation.
But there is still another reason why raising the minimum wage from what, unsubsidized, would be a sub-poverty level to just above the poverty level should not be inflationary. The minimum wage applies to only a small fraction of the labor force. We are not talking about all wages, we are talking about the minimum wage only.
What are the drawbacks of raising the minimum? One of the drawbacks is that raising the minimum can cause some minimally qualified, least capable minimum wage workers to lose their jobs. Past raises in the minimum have shown this effect, but it has been temporary.
The true cost of labor is the cost of feeding, housing, and clothing, transporting and providing health care to a minimum wage worker. This is currently averaging between 10 and 11 dollars per hour. There is no U.S. location where $7.25 is not far below the true cost. What this means in practice is that a third party other than the worker and their employer is making up the difference between 7.25 and the true cost. Yes, the true cost of labor has increased hugely from the mid-1960s, when the minimum was $10.50 in constant dollars. We must have an increase in the minimum wage to account for this. The current minimum is abusive and absurd.
When the minimum wage is far below the true labor cost , as it currently is, raising the minimum wage to bring it in line with the true cost of labor should increase both incentive to work and labor efficiency. This is a win win opportunity for both labor and capital. Furthermore, the cost of subsidizing minimum wage workers will be greatly reduced if not entirely eliminated. We taxpayers will no longer be forced to subsidize the labor cost of large minimum wage employers such as Walmart and McDonalds.
Will prices go up if wages go up? Yes, a little, in a few places, particularly the deep South. Labor and materials are the big cost items for manufacturers. For retail, however, where most of the minimum wage labor is, labor is a smaller fraction of their costs. Furthermore, the minimums being paid in much of the country are already about equal to or higher than the proposed $10.10/hr. So a rise in the national minimum shouldn't have any effect on prices in many locations.
If labor is 20% of a retailers cost for an item sold, and 3 % of that is minimum wage labor, then, on average, after a 40% rise in the minimum wage is passed 100% to the customer, which of course it won't necessarily be, the price of the item would rise 0.8%. Could we afford that?
This is a long post. I'll leave the opinions of the Council of Economic Advisers for another time.
