Models of the minimum wage (for what they’re worth)

November 18th, 2015 at 7:15 am

The recent minimum wage debates among the various campaigns are pretty disconnected from a model of how the damn thing actually works in the real world. In part, that’s a function of campaigns not doing nuance, but it’s also because there is no model that economists agree on as per why the empirical results on minimum wage increases are so different from the predictions of the classical model.

As I’ll show in a moment, that model predicts a lot of unemployment and you just don’t see that following moderate minimum wage increases. To be clear, I’m not arguing you don’t see any job loss. But you don’t see anything like the predictions of minimum-wage opponents: the number of beneficiaries of the increases virtually always far surpasses anyone hurt by them.

Start with the classical, textbook model. Now, as you’ve heard me say before, “all models are wrong; some models are useful.” But when it comes to the minimum wage, this model is both wrong and useless. If you’re in an econ class and your professor presents this model of the minimum wage and nothing more, she is guilty of malpractice.

BasicModel

The X-axis measures employment (N) and wages (W) are on the Y-axis. Demand curves generally slope down, a negative function of the wage rate, and vice-versa for supply curves. The equilibrium wage and employment levels are at the intersection of D and S. Impose a minimum wage above the equilibrium level and workers want to supply more labor than employers demand, so the wage mandate generates unemployment.

Why is this model so off? Staying within the competitive framework, the first variation adds dynamics, showing how a positive demand shock can absorb the wage increase. D_0 is the original demand curve, but Paul Krugman gets elected president and introduces a massive infrastructure program, such that the demand curve moves out to D_1, absorbing the wage increase with no unemployment.

This is, of course, fanciful, but to the extent that higher minimum wages get spent in places where consumer demand is constrained by working poverty, the model may be telling us something about why moderate increases have their intended impact. The same dynamic is likely operative when immigration raises labor supply: the demand the immigrants generate helps to offset their added supply.

PosShock

Of course, a negative demand shock would have the opposite impact. Yet even when wage increases have been introduced in down economies (e.g., 1991), we’ve not seen large disemployment effects, so this model too is surely incomplete. Also, demand increases can be accompanied by supply increases (I’m holding supply constant in this second figure), and that too will just get you back to the similar, doleful dynamics seen in Figure 1.

[During the 1990s, the minimum wage and the EITC were increased, and welfare reform was introduced. In the context of these first two figures, that might lead you to expect a large supply shock, lowering wages and boosting employment. Except what actually occurred was both low wages and low-wage employment went up significantly. Thus, in the context of these models, supply expanded but demand expanded further. Or, as we say around here: full employment solves a lot of problems.]

Still sticking with the model, we can introduce some ideas into the diagram that comport a bit more with reality. In the low-wage labor market, demand has consistently been found to be highly inelastic, meaning workers/employers are not that responsive in terms of employment to changes in wages (dlog(emp)/dlog(wage)=small number like -0.1 to -0.3, or something…). Let’s assume supply is pretty inelastic too, which at least from the perspective of low-income workers (versus kids of wealthier families) seems plausible, since they’ve gotta work as opposed to choosing whether or not to work.

When you draw inelastic supply and demand curves, you end up predicting a lot less unemployment. Given the confidence intervals (statistical uncertainty) around our econometric estimates, you can see how if this model is more accurate, significant estimates of job loss effects are hard to pull out of the data. Which they are, suggesting this version may well be trying to tell us something about low-wage workers and their employers’ tempered responsiveness to increases in the wage floor.

InelasticModel

In some cases, it has been observed that employment increases after the minimum wage is raised. There’s a model for that too, called a monopsony labor market, meaning a job market with one employer (details here; figure shown below). Compared to the models shown thus far, where wages are set at the level of the macroeconomy (vs. the level of the firm), in monopsony, the big employer sets the wage. If she sets it too low, employment and output can be inefficiently low. Since the employer faces an upward-sloping supply curve, when she raises the wage, she pulls more people into work (see the link for the meaning of the other labels in the model).

Monopsony

The monopsony model may sound arcane—the classic example is the one-company coal town—but it may not be too much of a reach to conclude that the low-wage labor market in a given town or city works kind of like this. As the link concludes, “the minimum wage is increasingly effective in improving efficiency, the more the market is controlled by buyers. A minimum wage is increasingly problematic, the more the market is competitive.” The fact that employment has not responded to wage increases as in the competitive market (Figure 1) might confirm your suspicion, as it does mine, that the low-wage labor market is typically not in equilibrium and is dominated by buyers (of labor), like fast-food restaurants, who may well operate in ways that mimic monopsony.

In a Republican debate the other night, Donald Trump, when asked whether the minimum wage should be raised, answered “no” because, he asserted, our problem is that wages are too high. His colleagues generally seemed to agree with him.

The next figure plots this (cockamamie) idea. W_0–the current minimum wage–is too damn high, and is thus restricting job growth. Take it down to the intersection of supply and demand, and you end up with more jobs. But here’s a fun wrinkle: deport 11 million unauthorized immigrants—7 percent of your workforce—and build a wall, thus whacking the heck out of your labor supply (as seen by the inward shift of S_0 to S_1) and the competitive model predicts higher wages but fewer jobs. If the negative supply shock is strong enough, it can fully offset the initial wage loss such that the post-wall wage of W_2 equals the original minimum wage.

TrumpModel

This part of the exercise proves that much as you shouldn’t look directly at a solar eclipse, thinking through Trumponomics is ill-advised.

Otherwise, do we learn anything from all this modeling? Most importantly, the competitive model as conventionally drawn is misleading. Economic models vastly simplify the economy, which can yield some insights, such as the dynamic, inelasticity, and monopsony points above. But at end of the day, you really don’t want to push any of these too far. In economics, when the theory doesn’t match the evidence, trust the evidence.

(h/t, Ben S for help with figures.)

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42 comments in reply to "Models of the minimum wage (for what they’re worth)"

  1. Smith says:

    Equating increased demand from a higher minimum wage with increased demand from immigration overlooks a fundamental difference.
    Raising the minimum increases everyone’s wage except for those whose hours are cut, or lose employment. In the long run, even without President Krugman’s stimulus, hours and employment return, and wage levels are higher. Higher minimums have a ripple effect, boosting everyone’s wage just above the new minimum and similarly those just above those just above, and so on and so forth. Employment returns in the same manner that it does when demand is cut from other causes. Notice we don’t attack high unemployment with lower minimums. The exception would be ill-advised wage subsidies which effectively lowers prevailing wages vs boosting labor demand with stimulus or adding programs for training.
    Increased demand from immigration however gets offset by lower wages. When those with hours cut or jobs lost return to full employment, their wages are lower. Downward nominal wage rigidity means this takes a long time to show up and ripple through all income levels. Immigrant wages are lower because lower home country wage rates lower expectations, they may need to offer lower rates to counter language barriers or discrimination, and worst of all, all the programs requiring employer sponsorship by definition take away labor rights and bargaining power. The Democratic immigration bill would vastly expand exploitation of immigrant labor instead of decreasing it.
    Every year, young people enter the job market without restrictions, competing with immigrants without labor rights that no one should be denied in a free country.


    • Smith says:

      To be fair, I left out the business owners who may be presumed to absorb some of the costs of higher minimums initially. On a macro scale everyone wins, but some sectors are more sensitive to higher minimums.


  2. Denis Drew says:

    Why don’t progressive economists (or any economists) put at front and center in wage discussions the factor that wages are only a fraction of the product price? This can be shown graphically by flattening out the “demand” curve — almost completely flat for a firm like Walmart that has 7% labor costs. Not to do so is the major cause of the misunderstanding that jobs will drop off in any kind of proportion with the price of labor going up (which seems the universal misconception).

    We could add that besides jobs lost at firm A where collective bargaining may have lead to fewer units of production being sold for more money — EVEN MORE JOBS (!) are lost at firms B, C and D where consumers used to buy (and create jobs) with the money now going to firm A. OMG!

    Now better paid union members at Firm A of course dig holes and bury their extra income, they cannot remember where — OR — they may instead spend more money at firms X, Y and Z (and probably at B, C and don’t forget A): creating er, uh, jobs. :-)


    • Smith says:

      An even better question is why everything from my Iphone to sneakers and shirts at the gap cost so much and yet labor input is minimal and wages for foreign workers are so low? The implication is the savings from many overseas operations are minimal, which doesn’t stop corporate America from gutting the wages and job opportunities of the lower income strata to benefit the upper income strata, say above 50% median. Above the median wage, you wouldn’t assemble Iphones, cars, sneakers or shirts so you only benefit from marginal savings of overseas production.

      More importantly, because the 1% controls income distribution, and because they make up such a small percentage (obviously just 1), small gains in profit reap the few enormous benefits.

      The result is the lower income wages (below the median) are reduced due to foreign competition and surplus of workers caused by jobs shipped elsewhere.

      See Germany for an alternative. Factories can not be closed and jobs shipped overseas, wages are kept high, and a premium placed on productivity, and mechanization or automation without job loss. And not just Walmart, but in high tech engineering and auto, factory labor costs for US cars are about 10% to 15% of the price. Giving auto workers a 13% raise eats up 1.3% of the companies revenue, for a $25,000 car, that’s $325 more, vs 5% profit going completely to stockholders (mostly rich people).


    • Denis Drew says:

      COME TO THINK OF IT
      Why can’t we simply explain that — if a higher minimum wage costs jobs — that the extra money earned by the remaining workers will be spent elsewhere, re-creating jobs sort of automatically …

      … AND! that given that low wage labor tends to patronize low wage businesses more than average (and medium, medium, etc.) that more low wage jobs may be created ALBEIT at the cost of some mid and high wage jobs (because mid and high who pay more for low wage labor will have less to spend on their own …

      … AND that mid and reasonably high can get their money back by taxing the income, say, over two million dollar at 90% (cutting mid and high tax bills) …

      … WHICH HIGH TAXATION WILL IN TURN free up the log jam of demand created by super high incomes making more money than they can practicably spend — a virtual stimulus with no debt hangover.


    • Ken Schulz says:

      Doesn’t this consideration (labor-cost fraction of total cost, or of total price) account for the relative inelasticity of the demand and supply curves in the third graph? It seems that the price elasticity of demand for the final product, multiplied by the labor fraction, sets an upper bound on labor-demand elasticity. Suppose wages rise 10%, but wages constitute only 10% of the cost of a product; the cost of the product rises 1%. If passed through, the price to the consumer rises 1% or less, depending on whether margin is held fixed in absolute or proportionate terms. So the demand for labor can not fall more than .01 x elasticity of demand for the final product. Say that is 1, I still need 99% of the labor hours I needed before the rise.


  3. spencer says:

    Take the basic model taught in most introductory classes.

    The demand for labor is downward sloping so that if the price increases demand for labor must fall.

    OK. Apply this theory to total employment. We have data on labor compensation going back to 1948 and it has increased every year since 1948. Consequently, according to the theory taught in basic economics US private employment should have fallen every year since 1948.

    Right, that is exactly what the theory that says an increase in the minimum wage must reduce employment concludes when applier in a different context.

    It is obviously a terrible conclusion conclusion.in this case, but it is identical to what the basic theory claims about the minimum wage.


    • Patrick R. Sullivan says:

      That’s not what supply and demand analysis tells us to expect, Spencer. An increase in demand for labor will cause wages to increase.

      Anyway, funny you should mention 1948, because, until January 1950 the legal minimum wage was only $ 0.40/hr. That was so far below the marketing clearing level that it was irrelevant. Unemployment was below 4%, even with the demobilization after Japan surrendered and released millions of military back into the civilian labor market.

      Black/white unemployment was basically the same (for men). However, with the near doubling of the legal minimum to $0.75 in 1950, that equality diverged.

      http://econbrowser.com/wp-content/uploads/2015/01/fairlie_sundstrom1.png

      The graph at the above link tells the tale, clearly. Textbook economics.


      • spencer says:

        Gee Patrick,, if you are right I wonder why the NBER says a recession started in late 1948.


        • spencer says:

          Maybe it is because nonfarm payroll employment peaked in September 1948
          and fell over the next 12 months.

          By the way,where did you get your data on black employment?
          The BLS did not publish employment data by race until many, many years later.

          Do you ever actually doubled check the claims you are making?


  4. Peter Dorman says:

    Jared, your next post on this topic should explain why a dynamic search model is a much better and more realistic basis for minimum wage analysis than static S&D. (The benchmark labor market model in a good textbook begins with a Beveridge Curve.)


  5. jonny bakho says:

    Higher paid workers must be more productive. Employers will invest to train an retain higher paid workers. If labor is cheap, disposable and readily replaced, employers have little incentive to invest in worker training.


  6. Avraam Jack Dectis says:

    .
    The bigger challenge to a higher minimum wage is more political than anything else, so some attention should be focused on possible clean elegant politically palatable solutions.

    If you want to see all opposition to a higher minimum disappear, simply mandate that the government will provide the difference between the minimum wage and $15 per hour, for a period of time, with the size of the subsidy gradually decreasing after that.

    Pay for that subsidy with bonds, to be monetized when due.

    I do not think there is a genuine issue in justifying a higher minimum, it is only getting agreement from actors fearing diminished profits.

    In fact the same mechanism could be used to address the entire diminished equality issue.

    For example, if it were determined that the average worker would have 25% higher compensation if he had continued to see his compensation rise at the same rate of percentage of GDP as in the immediate postwar years, the government could merely add a bonus of 25% to the compensation of each worker in the 90%.

    Once again, those funds would be raised through bonds and monetized when due.

    The alternative is a terrible politically costly fight with no guarantee of success.
    .


  7. Patrick R. Sullivan says:

    ‘… the low-wage labor market is typically not in equilibrium and is dominated by buyers (of labor), like fast-food restaurants, who may well operate in ways that mimic monopsony.’

    No, that’s backwards. The market for low skilled labor is closer to textbook ‘perfect competition’ than it is to monopsony. Not only do fast food restaurants compete for labor with each other, they compete for it with construction firms, nursing homes, landscapers, carwashes….

    I think you’re mostly wasting your time trying to model this. For example, how do you account for an employer who is hit with a minimum wage increase, who responds by more closely supervising his workers to squeeze more productivity out of them?


  8. spencer says:

    Patrick– I just looked at your chart of black and white male unemployment.

    May I suggest that the divergence after WW II was caused by the widespread adoption of the mechanical cotton picker, not the minimum wage.

    I so happens that in 1948 I was a first grader living down in the boot hill of Missouri–cotton country. Our summer vacation was divided into two segments. Once in the spring during planting season when everyone turned to — including children — to plant the crops. The second vacation was in the fall — we went to school in the middle of the summer — to help pick cotton. As a 6 or 7 year old I picked abut a 100 pounds of cotton a day and was paid a penny a pound. But in 1948 the great black migration north was just starting and the typical black
    male was either a tenant farmer and/or underemployed farm labor. So the typical black male was not unemployed, rather they were underemployed in farm work that had massive cyclical swing. But if it was not planting or harvesting season most rural black males might have been unemployed, but it was not counted as unemployment as that was the seasonal norm.

    The divergence in black and white unemployment reflected the massive migration of black population to northern cities where they were under-educated and otherwise poorly prepared–
    not to mention discrimination — to take good jobs.

    Again, Patrick, all your wild claims do is demonstrate your massive ignorance of the real world
    and your right-wing fantasies.


    • Ben Groves says:

      Your both wrong. Neither the Min. Wage or Cotton Picker happened. It was the infrastructure the New Deal provided, went to White’s and they became vastly more skilled.

      Blacks migrated to cities because of the post-war boom and the first baby bust generation had created a labor shortage during the war and after. Blacks were needed to fill in the void, until the Boomers came along and that was that.

      Then came the long historical unemployment. The ghetto’s and degeneration. The government should have pushed for abortions and sterilizations to keep the population numbers down..


      • Smith says:

        How is a comment in favor of government programs promoting abortion and sterilization for particular groups to control population allowed on this blog? I’m all in favor of free speech, but why grant a forum for someone who espouses the worst elements of Nazi-like solutions to socioeconomic problems. It’s ok to be politically incorrect, it’s not ok to be to the right of Hitler.
        “The ‘Sterilization Law’ did not target so-called racial groups…”
        http://www.ushmm.org/learn/students/learning-materials-and-resources/mentally-and-physically-handicapped-victims-of-the-nazi-era/forced-sterilization

        One can make a modest proposal, like Jonathan Swift, but that is clearly not what’s intended. Haters and racists are free to post anything they like, just not anywhere they’d like. This is not a public square or constitutionally protected space.

        It’s beyond the pale.


  9. Kevin Rica says:

    I think that you just made Trump’s case, except by failing to show that the number of legal workers initially employed – you did not note that the number of legal workers employed increases. In fact, illegal (and legal) immigration takes the jobs of the domestic labor force and cuts their wages.

    If you are a construction worker you know that everyone swimming the Rio Grande wants you job and every frigging journalist on MSNBC is lying against your interests. That is why Trump’s people are so angry (and rationally so).

    Trump thanks you Jared!


    • Ben Groves says:

      Except barely anybody is “Swimming” the Rio Grande. Trump wants lower wages as all global elitists do.

      Cut white wages, hire black people should be his slogan.


    • Smith says:

      Suppose everyone ate the newly FDA approved GMO salmon after it mutated unbeknownst to regulators and fish farms, and it caused every person in the US to wake up in the morning with a duplicate of themselves (memories and skills included in the deal). The population would be doubled, demand for everything they possessed would be doubled, but the labor force would be doubled. After a period of adjustment as business ramped up production to meet new demand, the economy would double with some extra emphasis on reduced carbon footprint.
      It is silly not to have effective automatic triggers in immigration tied to growth (there are some phony triggers in the Democratic bill, meaning unemployment rates greater than the last recession’s). But as the fish story shows, population growth is not in itself the problem.

      The real problem is exploitation (which the Democratic bill vastly expands, while also further extending legal protection to businesses doing the exploiting).

      This country has a history of exploiting immigrant labor, but immigrants became the driving force in creating labor power. Any and all laws that ties the immigrant laborer to their employer strips the worker of all their rights. By extension, all workers competing for the same work are similarly disadvantaged, they must accept the wages of one with no labor rights. This is true for high skills as well as low skills.

      Those rules are in addition to the discrimination immigrant labor might encounter. But without labor rights, he can’t fight back.

      Trump people are angry because the 1% rips them off, takes all the gains in productivity, outsources, insources jobs, and yes, part of that is giving jobs to immigrants for lower wages. Sanders takes aim at those doing the actual exploiting, the ones who benefit most from the situation, the guys who are running things and laughing all the way to the bank. So if Trump wins, he’d find a way to pay you the same substandard wages that immigrants now get.


      • Smith says:

        Amazing, wrote this note before a refresh, before seeing an eerily similar prediction (from an opposite perspective) on Trump (and I’d add the rest of the Republicans too).


  10. Kaleberg says:

    Anyone who has ever worked for a living recognizes that there is a labor buying monopsomy except in some rare cases. Whether you are a hotel worker in Seattle, where the hotels set wages in concert, or a high tech worker in San Francisco, where company heads have gentlemen’s agreements to control wages, you are well aware of this. The only people who aren’t seem to be economists.


    • Kevin Rica says:

      Yes, that sort of monopsony makes it tough to find new workers since you cannot do much to hire more domestic workers. that is why high tech and hotels always want more immigrants and H-2 visas.


      • Smith says:

        But it is the government who enforces the monopsomy in the labor market. They provide all the rules for immigrant exploitation, so that if an immigrant complains, they can be dismissed and deported (high or low skills). They provide weak employer sanctions so there is no significant penalty for illegal aliens. They allow businesses the freedom to move aided by enormous tax breaks from competing states or parking of overseas profits. When Wallmart pays substandard wages and then charges lower prices while employees collect low income government benefits, that effects every smaller business competing with Wallmart. A modern economy makes a mockery of former protections provided by Fair Labor Standards Act because office jobs are deemed management or professional and thus exempt (plus a special blanket exemption for tech workers). The government does not enforce anti-trust regulations either, even in egregious case of Amazon cutting out a publisher, or Google allegedly slanting search results, closer to an Orwellian control by business instead of government.
        I don’t want to sound like I’m echoing a certain presidential candidate, so I’ll insist that I’ve held these views consistently, expressed them on this blog, well before I ever heard them in a presidential campaign. But then to liberally borrow from some of the rhetoric, the game is rigged, people are fed up, instead of government helping people, we have corporate socialism.


        • Kevin Rica says:

          every time an immigrant or guest worker comes here, they reduce the number of jobs that need to be filled by American workers by one. Whether they are linked to a single employer or not is no more important than keeping track of their blood type. That is just your own personal theory or visa problem.

          If they were not here, wages would be higher.


          • Smith says:

            Immigrants never reduce the number of jobs that need to be filled by American workers by one. The money they earn gets spent, less the money sent back to their home country. That money spent increases demand which must out of necessity increases the number of workers hired (unless you think American workers are hired with nothing to do, waiting for increased demand). One could argue the case that increased demand is just met by employment of another immigrant. Worst case scenario. this is only be partly true, reduction is always less than one. More workers mean a bigger economy. Double workers, and you double the size of the economy.

            The key is being linked to single employer. Look at the history of the U.S. in the south up until 1865 to realize the implications.


          • Kevin Rica says:

            Sorry, that,s just not macroeconomics. That is just one of those alternative economic universes never seen except when discussing immigration.

            If you kicked the immigrant out and hired a kid from inner city Baltimore, he too would spend his salary on goods and services.

            If your parallel theory of economics were correct, we would always have full employment and would not need macroeconomics at all. smith, as the French would tell you, “If my aunt were anatomically different, she would be my uncle.”


          • Smith says:

            You missed the two main points.
            Of course immigrants can take the place of American workers, and both drive unemployment up, and wages down.
            But if the economy is growing, it’s possible for immigration to add to the economy with the beneficial effect of satisfying labor needs that might otherwise inhibit growth.
            Unfortunately the current immigration policy is geared to exploit immigrant labor at the expense of American workers, including recent immigrants. The Democratic bill would greatly enlarge the exploitation. Lack of full labor rights and complete autonomy and freedom enslaves us all.


          • Kevin Rica says:

            Smith, the fact that you can hypothesize a more rapidly growing economy is not the same as a fact. the fact that you really,really want to believe it doesn’t make it a fact either.

            if the lack of unskilled labor slowed the economy, then labor costs, wages, would rise faster as would per capita income and living standards (at the expense of the wealthy).

            As an old-fashioned Truman Democrat, I lust over that outcome.


          • Kevin Rica says:

            Furthermore Smith, you are not keeping you story straight.

            On November 20 you say that immigrants never reduce American jobs.

            but on November 21 you say “of course immigrants can take the place of American workers.”

            As Mark Twain said, “Always tell the truth. That way you never have to remember what you said.”


          • Smith says:

            What I actually said Nov 20 was :
            “Immigrants never reduce the number of jobs that need to be filled by American workers by one.”
            That was a reply to:
            “every time an immigrant or guest worker comes here, they reduce the number of jobs that need to be filled by American workers by one.”
            I stand by that statement which in no way conflicts with my Nov 22 post:
            “Of course immigrants can take the place of American workers, …”

            You are arguing that each additional immigrant displaces an American. This ignores the immigrant’s need for food, clothing, shelter, and transportation. I account for the possibility that some of those needs are met by the labor of other immigrants. It’s nearly impossible to imagine that it’s 100%, although immigration populations do tend to cluster. But to the degree that they cluster and create a closed economy among themselves, that also takes away from spreading their labor in the general economy and displacing Americans.

            All I did is posit that it’s not a 1 for 1 trade-off.

            In a growing economy if there are labor shortages, then the shortage inhibits growth, investment, productivity improvements that make everyone richer. Higher wages in a labor shortage do help to lessen inequality (unless it’s like the 1% bidding wars for CEOs, or colleges seeking fundraising presidents, or sports teams seeking top wins over replacement). A shortage satisfied by exploited immigrant labor lowers everyone’s wages.

            There is good immigration policy and bad immigration policy, we have the bad exploitative kind, that business Republicans and Democrats are eager to expand. Fear the exploitation, not the immigrants.


          • Kevin Rica says:

            Again Smith with the parallel-universe economics!

            “In a growing economy if there are labor shortages, then the shortage inhibits growth, investment, productivity improvements that make everyone richer.”

            Individual employers and businesses don’t care about labor shortages per se. They care about labor costs. Labor shortages raise wages and that’s what bothers them. That affects their business and is the signal to stop expanding (or invest in additional labor-saving/productivity-enhancing equipment and techniques). Once you have a labor shortage, it means that you don’t need as many new jobs and wages increase to balance the market and eliminate the lowest productivity jobs.

            But while there is the temporary and occasional shortage of some hot skill (like petroleum engineers two years ago until oil prices collapsed), there hasn’t been any sort of sustained general shortage of labor shortage since the current surge of immigration began in the early 1970s – at least not in the US. Certainly not now when so many Americans (especially the unskilled, who are most directly exposed to immigration) are dropping out of the labor force.

            In your parallel and hypothetical universe, there may be a shortage of labor, so why don’t you warn those trying to sneak in here to go there instead?

            If and when labor shortages do occur in this universe – wages will rise. I LIKE THAT (or would like that if it every happened). It is my dominant priority. You, Smith, have other priorities and that is the difference between us. Why not just admit that and we can have an honest disagreement?


          • Smith says:

            My priority is higher wages too.
            We both agree the current system is no good.
            We both agree the corporate business interest written sellout corrupt bipartisan Democratic Republican Senate bill is worse.
            We both agree that illegal immigration is still a problem (despite a net zero influx last year)

            Our honest differences are over any level of even a better managed immigration regime.
            You seem to want zero, at least for now.
            I’m ok leaving the levels where they are, but would like to see greatly increased employer sanctions (large fines, loss of license to do business, or triple damages from competitors) to deter use of illegal or non documented immigrants.
            Moreover, what I’m not ok with is the continued exploitation of workers, immigrants denied any and all labor rights and freedoms, and thus made slaves to the machinations of greedy businessman and the politicians they’ve paid to do their bidding both on the right and left.

            “I believe this government cannot endure, permanently half slave and half free.” This was supposed to be settled.


          • Smith says:

            I should add extra sanctions and tightened borders are a precondition for amnesty, another area of disagreement I’m sure.


          • Kevin Rica says:

            Well Smith. Then there may be areas of agreement.

            And I do believe some immigration may be useful – but not at low wages and not at low benefits. They should only be allowed in at significant premiums to rent wages and employer-paid benefits. There is the rub.

            Making sure that immigrants and specialized Gastarbeiter are actually working under such conditions is extremely difficult if workers are allowed to change employers. If the workers are allowed to move from employer to employer, the esteemed chaired professor of applied particle physics will suddenly decide to process chickens for $9/hr and go on medicaid. And who can be held accountable? If the original job isn’t good enough, then the worker should not come at all.


          • Smith says:

            You have been bamboozled and brainwashed into thinking guest workers without freedom are ever a good idea.

            First, there are no jobs that Americans can not do, and none they will not do if you pay them enough.

            Secondly, immigrants are people who come to live in this country, and whether or not they eventually decide to return home, it is essential for everyone’s freedom they possess the same labor rights granted to Americans competing with them for jobs. Otherwise immigrant wages will be lower while Americans lose jobs, and worse still, everyone’s wages drop (or nominally stagnates). There is no practical way to enforce a premium wage, wages are kept high only through employer competition in a fair and free labor market, and besides, working conditions, hours, opportunity for advancement are just as important as wages, and often more so. The only way to keep the American worker free and prosperous, is to let the immigrant live as a free man or woman too.

            Business, Democrats and Republicans paid by them, tech industry, big agri, they love the guest worker because it saves them money and suppresses wages, always. It also enslaves the guest worker under threat of deportation and helps to keep the American worker in line, and everybody in their place.

            Whatever amount of immigration you would like, big or small, pick a number, fine, but guest workers without full labor rights are a disaster for the American economy and freedom.

            Guest workers without mobility are like peasants tied to the land in the middle ages, or slavery here in the U.S., or white indentured servants (at times, half of all immigration) in the colonial era. The thirteenth amendment was supposed to end that.


          • Kevin Rica says:

            Then there should be no “guest workers.” Nonetheless, there will always be the Swedish medical researcher from the Karolinska Institute who does two years at the Mayo Clinic or the Dominican ballplayer who could be traded to another team, but neither would have any expectation of permanent status.


  11. Gadzooks Crosby says:

    Am I wrong to think of reported profits as slack that can either be taken up as increased wages, returned to investment/investors (capital), or set aside as cash?

    If not, could not the anomaly between reality and the classical model be at least somewhat due to this slack?


  12. Homer Schaaf says:

    If you distinguish, as you should, between average cost of labor & marginal cost, then set marginal cost equal to marginal revenue, you find that a minimum wage could increase employment by lowering marginal cost.


  13. mulp says:

    Classic free lunch economic discussion.

    Trump like pretty much all economists believe consumers are never workers and workers are never consumers.

    As a two handed economist, my response to Trump is, “so you think gdp is too high?”

    After all cutting wages does save employers money to pay for labor, but on the other hand, there will be less money to pay for what the employer produces, so he will sell less at the same price or need to cut the prices to sell the same amount.

    TANSTAAFL

    Economies are zero sum. Cut wages and gdp must go down because demand will go down due to less income to spend consuming. Hike wages and gdp will go up because more income means more spending means more demand and more production.

    High wage inequality can result in the Trumps spending much less than his income cutting gdp, and low wage workers not being able to buy the means to get to a job and they pay nothing for what they consume by living in abandoned building, eating out of dumpsters, picking trash for other needs, trapping wildlife to eat, picking poke salad,…

    Somewhere around Reagan going to Washington the connection between wages and consumption good severed in economic models, and labor cost became a blackhole sacking money out of the economy to never be seen again. Thus it was profit from not paying workers that drove gdp growth higher, not consumers earning much higher wages due to labor unions and the pressure of higher minimum wages pushing all incomes and spending higher.


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