Hacker News Reader

Comment by derefr | Hacker News Reader

If I recall, economists tend to point out that the causation between minimum wage and poverty is actually reversed from its "intuitive" position.

What actually tends to happen, is that first, a city/county/state/country's economy improves to the point that everyone is making a certain wage, just because of competition for workers. And then, policy-makers notice this, realize that there's an upside (better civic image) and no downside (workers out of jobs) to raising the minimum wage... and so they do.

Thinking of minimum wage as an adjustable variable, rather than an indicator, is trying to use the tail to wag the dog.

View on HN

Not quite. What actually happens is that by raising the minimum wage, you lift minimum wage earners from a state where they barely survive to make ends meet to one where they consume the stuff that society at large is producing. There's a virtuous circle in there. It's that thing Ford showed in its early days: paying workers extra so they can buy the cars they produce yields more economic activity for the benefit of everyone -- they also bought fridges and what not.

The trouble is stopping just short of the level at which (by minimum wage earner standards) they begin to live in opulence. That meaning, in this case, not so much when they're able to afford a yatch, but when they begin to consider putting on more debt than they can actually afford -- debt that won't get repaid. In that case, a vicious circle creeps in, because the ups and downs in excess debt levels contribute to inordinately sized booms and busts, e.g. like we have now.

So the real conclusion should be, since most people in developed countries earn barely more than the minimum wage itself: having a large consumer class benefits everyone in the economy provided that it is solvent.

Ford and a lot of other thinkers thought this way but a basic understanding of how things are actually produced and paid for would tell us that high wages are not what causes prosperity but rather high wages are a sign of prosperity. In a world without continual non-stop inflation higher wages aren't necessary to raise your standard living because falling prices would do it.

Actually, they do. The classical economist's understanding is that money is created exogeneously, meaning a central bank prints it and it trinkles down into the mainstream by virtue of banks having excess reserves.

What happens in practice is that banks extend loans first and worry about their reserves later. By virtue of that, the enterpreneur gets a buck to invest in whatever he's doing, and part of that buck lands as extra pay (and thus economic activity) in the hands of workers who will spend every last bit of it for all intents and purposes.

Say would tell us something else-that supply is paid for with supply. Ultimately math cannot make you richer-you need to produce more to consume more.

You're misunderstanding money creation:

Classical economist's explanation: bank has 100, lends you 90 so as to keep 10 in reserves. 90 gets spent and part of it lands in the bank. Rinse, repeat.

What actually happens: bank has 10, lends you 100. It gets spent and part of it lands back in the bank. If it's not enough to post proper reserves, bank begs central bank for a buck or two to make things work. Rinse, repeat.

It's not an opinion by the way: it's by the own admittance of the SEC. See Steve Keen's research for more details.

I'm not misunderstanding the nature of how credit works. I'm well aware that reserves follow loans and not the other way around. That money creation cycle is what leads to the business cycle in my opinion (see Austrian business cycle theory for more). The problem is that it creates a pyramiding of debt that eventually will collapse as inflation gets out of hand and interest rates rise.

> by raising the minimum wage, you lift minimum wage earners from a state where they barely survive to make ends meet to one where they consume the stuff that society at large is producing

Do you have a citation on this? A raise of the minimum wage actually having an effect at the margins, in either direction, is unusual, because places don't tend to raise the minimum wage until it wouldn't have an effect anyway.

Raising the minimum wage does serve as a ratchet, to prevent productivity from slipping down to previous levels. But this basically mirrors the other way in which places transform to exclude low earners: gentrification.

Not handy, but use your common sense if you will: if you're surviving on $8/hour or whatever it currently is in the US, and your wage increases by a dollar per hour, then all things being equal you're going to be spending that extra buck on a range of things that had been delayed for a while: shoes for the kids, new tires for the car, and what not. This is consumption, and it's going to get recycled over and over again across the economy for the benefit of everyone.

The trouble is if you increase it to $50/hour. (Assuming the businesses survive, which is indeed a big if...) In this case you buy everything you ever needed or wanted, and...?, then what? You save it, put on debt to buy a huge mansion that you'll never actually be able to afford in the end, or otherwise contribute to some random asset bubble, snd you get booms and bust cycles. (See Steve Keen's research on the latter point, fwiw.)

It's like you didn't even think through your example at all. If minimum wage is suddenly $50/hr, businesses begin to collapse.

The Fed, seeing this collapse, would massively inflate the dollar. Anyone with savings would have their savings destroyed, and the churn would make everyone poorer than before, quite specifically the same people you were trying to help.

The question you have to ask is, where does this extra dollar come from? (owners' margins? wages of workers who are now unemployed? consumers' budgets?), and how much extra consumption it generates in the still-employed workers' pockets, compared to where it was before?

I guess we can agree that the money is shifted downwards in the income spectrum relative to where it was before. Other things equal, lower-income households have a higher marginal propensity to consume. So shifting money downwards will boost consumption.

> What actually happens is that by raising the minimum wage, you lift minimum wage earners from a state where they barely survive to make ends meet to one where they consume the stuff that society at large is producing.

That may happen to some workers, but many others will simply find themselves out of a job. Even if 90% of the workers simply see a good wage increase, is it really appropriate to put the other 10% out of a job to do it?

> There's a virtuous circle in there.

Sounds like a vicious circle to me.

> It's that thing Ford showed in its early days: paying workers extra so they can buy the cars they produce yields more economic activity for the benefit of everyone -- they also bought fridges and what not.

You can only raise salaries so high; eventually you'll reach a point where the company isn't profitable anymore. Then you either have to keep salaries at a lower rate, or raise prices to the consumer (and that's already at the point where the company makes no profit). Between the employees, company (or owner or stockholders) and consumers, someone has to make a sacrifice.

Reply on news.ycombinator.com