The goal of minimum wage is not to increase productivity, but provide a "safety net" for people at the bottom of the pyramid salary-wise.
Public education and healthcare also artificially reduce the price of these services, but the goal again is to provide a safety net to all those that otherwise would not be able to afford them.
That being said, I hope it isn't about a safety net. What a minimum wage really does is outlaw jobs that provide less value than the minimum wage (eg, if I have cleaning work that requires 1hr of labour and generates value of $10, it theoretically will not happen under a minimum wage regime of $11/hr).
With this frame, there does seem to be much debate about the interaction between the market price for labour and the value-add of different work. People want to make decisions here and I suspect they don't consider have all the facts. Politics as usual :].
In the most general sense it's straightforward.
Your salary is a function of your economic power vis-a-vis your employer - and nothing else. That power is usually derived as a function of the necessity (i.e. value creation) and scarcity of your skills, and possibly some other non-market forces.
Skilled workers have some modicum of leverage and can get a decent salary. Or have powerful guilds (like doctors).
'Capital class' will use their status as major asset holders, and non-market things like class, relationships, political patronage, lobbying, direct control of political systems etc. to manage their careers.
But unskilled workers have a problem. Basically, if there was no minimum wage (or other social intervention), workers would be paid the absolute minimum necessary to survive, and economies to support those very low levels would develop (i.e. 'Dollar Store' would be the '25 cent store) and there'd be favela like living conditions just as they already exist in advanced economies like Hong Kong and almost advanced economies like Brazil. (Obviously, if there is 'welfare' than the amount of welfare comp. would set the floor on this, i.e. 'work for the government and do nothing' would be the 'lowest alternative' to paid work.)
But especially without welfare, or non-market interventions in general ... that floor would be very, very low. Just take a trip outside of the 'rich world', it's easy to find workers working for 'a bowl of rice a day' whilst owners make considerably more, and by that I mean, there are definitely surpluses in the system to allow for higher salaries, but pure market power doesn't provide any impetus at all for employers to provide it.
So - 'minimum wage' is a non-market intervention, much like a 'union without membership' to establish a kind of meta collective bargaining.
Non market interventions are basically essential and they exist in one way or another in all advanced nations (either social services, welfare, min. wage. etc..). Should note that some argue that social intervention is correlated but not causal to wealth creation, but I disagree with this ... but that's for another discussion.
But that only happens when there is fairly high unemployment. Otherwise there will be an employer with a job worth $25/hour who can't find an employee for $5/hour and will offer $6/hour because $19 in net yields is better than none. Then the original employer will have to offer $7 because they don't want to lose their productive capacity either, and so on until the wage rises enough that employers stop raising their wages even if it means they can't hire someone.
For unskilled workers that doesn't really happen, because as a segment they typically have a high unemployment rate. But in that case you have a problem: Some of the employers paying $5 have employees who are worth $25, but some of them are actually only worth $5. Raise the minimum wage and the first group gets a raise while the second group loses their jobs.
It's basically a tax on hiring low wage employees where the tax revenue goes to subsidize the employee's wages. Which like any tax may cause the work to fall below profitability and cease to exist. But is especially distorting because the burden falls exclusively on employers who hire low earning workers, which is a very narrow base that makes the "rate" quite high -- if they have to pay $12 instead of $4 it's effectively a 200% tax on the original wage.
The better solution is a UBI, which is very similar on the "give lower income people some extra money" side but gets funded from broad based taxes so the effective rate doesn't get out of control like that.
That's not true though. Surplus value is produced all the time[1].
However, I agree with you about your conclusion on UBI
1-www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus
What I mean is that the surplus isn't that large unless there is high unemployment. At low unemployment the marginal employer might pay a $24 wage producing $25 worth of value, not a $5 wage producing $25. In which case a) a low minimum wage does nothing because everybody already makes more, and b) you can't raise it to e.g. $30 or you're back to causing unemployment.
At high unemployment the employer producing $25 worth of value and the employer producing $5.25 worth of value can both pay $5. A higher minimum wage extracts more from the first but prices the second out of the market and causes their employees to lose their jobs. Which is quite silly when there are known alternatives that don't do that.
That's still not true. You're confusing market price with value, and the more difficult to define term, worth.
What's the water you drink valued at? What's its price? There's a huge difference.
When you buy an expensive toy and spend more money on it than your water, it's not because it has more value than you living beyond 3 days, but it's because you are spending until your marginal value-add reaches equilibrium with marginal price. Same thing goes with jobs, which is just a business buying labor.
Because water is not particularly scarce. If it was scarce (more demand than supply), the equivalent of low unemployment, then its price would approach its value, i.e. be much higher.
The price already approaches its value, but only at the margin.
I'm just trying to explain why this argument about surplus value that I always hear in this context is not accurate.
It's not that there is exactly none, it's that there is relatively less.
Suppose it takes a unit of water to live and there are a thousand people and a million units. Then the price is near zero and the surplus is huge -- the value of not dying is maybe a million dollars for the average person and more for people with access to more money, and they all get it for free.
Now suppose there are still a thousand people but only a hundred units of water. The price of a unit rises to five million dollars. At the [new] margin the surplus has gone from five million dollars to zero. The surplus for the person willing to pay six million has fallen from six million to one million etc. Everyone has lost five million in surplus and everyone with less than five million in original surplus has been priced out of the market.
Now suppose you want a "minimum price" for water. If the market price is just under five million dollars and you set the minimum price to five million even, you aren't pricing many people out of the market who weren't already. But you also aren't doing much to raise the price.
On the other hand, if the market price is zero (or, say, $5) and you set the minimum price at five million, you're causing widespread economic harm and pricing lots of people out of the market.
At least favelas have some space, some basic amenities however hacky, some community, sunshine - and mobility at least during the day there are vast spaces for people to access including some of the world's best beaches.
[1] https://www.theguardian.com/cities/gallery/2017/jun/07/boxed...
They had other non-market social interventions long before that.
And in early 20th century, many were living in favela like conditions.
No, it isn't. The point of minimum wage is to outlaw jobs that cannot reasonably* feed people doing them. (*Subject to societal norms.)
Existence of such "jobs" is immoral, and is not very different from slavery. If the society cannot pay enough for some work, it simply shouldn't be a job (and should not be called such).
Despite what some economics schools try to make it, people are not apples. Apple doesn't care what is its market price. But a human almost always does. Survival of apple and human depends on their respective market price, but we as a society, I hope, value human survival more.
OK, how does a society put a dollar figure on what a reasonable minimum wage should be, subject to societal norms, as you put it?
Keep in mind that what an unskilled worker 'll end up with at the end of any given week will be:
- agreed hourly rate x hours worked
If the unskilled worker ends up with pneumonia for that week, s/he essentially gets nothing since no hours were worked, so a minimum wage doesn't really insure against inability to work due to circumstances beyond one's control. That's a separate issue on its own.
True, but I think the far more common scenario is this: I have cleaning work that generates value of $25/hr. Since the labor is unskilled and there is ample supply I can pay my workers the minimum wage and still find plenty of applicants. If there was no minimum wage I could pay them $5/hr and would still have plenty of applicants who would be even more impoverished.
Just because minimum wages go up, doesn't mean humans are getting replaced. Instead, people often adjust their price limits (e.g. if cleaning was thought to generate $10, and then you don't clean for a while, you'll feel it warrants $11) and workers get better pay. The workers who do get fired due to financial constraints can now get a job elsewhere for more money.
I agree that there is a breaking point and that point does vary by company, but that breaking point (for the vast majority of things) happens to be far greater than zero
or they drop away from employment entirely.
https://bebusinessed.com/history/history-of-minimum-wage/
The big drop goes from June 2008 to October 2009 - which is indeed when we had not one but two increases to federal minimum wage.
However, look at all the other times when we had minimum wages increase - even when employment decreased, there was a pretty quick recovery. I'd argue that 2008 and 2009 minimum wage increases also happened during a recession, and that they were only part of the contribution to the large drop. Am I missing something?
This reminds me of someone who once argued that schools cannot reduce their costs when the number of students that need educating declines, because e.g. you can't stop renting a building just because there are 10% fewer occupants.
Is there a flaw in this sort of logic?
You don't need a larger building when there are less people in it, and you don't need more teachers when there are less students.
The argument you described is very different from mine. Mine is more like "schools say books are worth $10, but the prices of books raise to $11. Nevertheless, schools continue buying books"
If you don't believe this, there's data on the subject of minimum wage increases and percent employment. Look at this comment and my explanation below it:
You don't need fewer, do you? You can't fire a teacher because their class now has 27 people instead of 30 - those 27 people still have to be educated.
Do you think teachers are not essential to schools in the way that minimum wage employees are to restaurants? How does that work?
I'm not debating whether simplistic supply and demand analysis applies to the restaurant workers - clearly we have empirical results that say it does not.
I think that to understand something, you have to have data, but you also need to have a theory that is consistent and leads to further insight.
Indeed, if this doesn't happen (which is fully possible) you get an interesting avenue of inquiry about market inefficiencies.
As an aside, I personally know of a case where a school needed to cut costs, and they did that by increasing the student:teacher ratio. That ratio is a metric that gets attention and consideration; at least in the Australian system it is not some arbitrary number.
Why, exactly- assuming that the reason you hope minimum wages are enacted can be both for your reasons and to provide a safety net?
They would like to be, but they are heavily supported, between society educating their workers, providing them basic health care, the emergency services, allowing their owners limited liability, the odd massive bail out, etc. Etc.