A “living wage” and the pursuit of equality

[lostinacause]

In discussing equality, although equality is a relative measure, what is important is the conditions that people live. Because of this, the primary concern should be measures taken to improve the living conditions efficiency and time considerations are vital in determining the measures to be taken. The approach taken should help the people who receive the most benefit from these programs. Because of the goals specified, aggressive wage restrictions are not the best way to pursue equality.

A maximum wage is probably the least effective type of wage restriction to pursuit equality. It is inefficient, does not help the people in need and does not provide the people in need with any long term growth potential. An income cap gets rid of much of the incentive to work harder because the primary means of encouraging efficiency are through salaries. Unlike minimum wage laws, which benefit the people at and just above the minimum wage, even if wages were to increase it would be to the benefit of people at near the maximum wage and they would only benefit by marginal amounts. The revenue losses through taxation would give result in less money available for those in need and there would be no long term benefit to this type of program.

In a minimum wage program there is a tradeoff between efficiency and equality. When a minimum wage is put into place, there an increase in people’s wages; the highest increases typically go to the people who are set to earn the minimum wage and this puts an upward pressure on the wages above them. There are diminishing increases in returns as income goes up. The costs associated with a minimum wage are due to unemployment and the welfare required to support the unemployed. With this being the case and an assumed high elasticity of demand, at low levels a minimum wage is a decent policy for pursuing equality.

Though minimum wages are efficient at low levels they face increasing costs. Since people’s real wages are bound to their productivity, as the rate goes up, unemployment will inevitably rise. There will be both a greater requirement of welfare and less ability to give it as less people are working. This becomes a terribly inefficient equality program as in addition to the unemployment and welfare payments there would also be the deadweight losses because of high welfare spending. This program is also short sighted as it cuts into growth and progress leaving less capacity to help in the long term.

Aggressive wage restrictions also skew the incentives to invest in human capital and take risks since it is possible that the full rewards to the risk may not be realized so perhaps methodology that provides productive incentives might be a better idea. A wage subsidy for low income earners would keep the individual productive and still provide the type of benefits that a minimum wage has. Job training and education initiatives focused at developing skills the less fortunate would help to increase the productivity of these individuals and their children providing them with better paying jobs. Programs such as these make better off at a lower cost which is the most effective way promote equality.

[Warpy]

1. Nice recitation of libertarian cant.

Now read some history and find out what the minimum wage used to be, how many people it would support, and what effect this had on an economy that was 66% consumer driven.

A large, stable middle class gives a democratic republic an astonishing amount of stability, but it is an artificial creation. Removing all the regulations which create it and maintain it results in exactly what we are seeing now, depressed wages for the majority while wealth concentrates in fewer hands and corporations merge to become near monopolies.

Your way doesn't work. Reading some history will tell you why.

[Armin Tamzarian]

2. You're right...

in the end there should'nt be any minimum wage at all.

[lostinacause]

5. At low level minimum wages are worth implementing.

As I said earlier it starts to become very inefficient and eventually counterproductive. My guess is that when it causes one percent unemployment it has passed to point of being worthwhile but I don't pretend to be an expert in this area. It is difficult to do research on the benefits of a minimum wage because people tend to only be on it for a small amount of time.

[newyawker99]

8. Hi Armin Tamzarian!!

Welcome to DU!! :toast:

[lostinacause]

4. Me a Libertarian?

I am by no means a libertarian. I don't know if you read the last paragraph but I suggested two forms of intervention that most libertarians would find more intrusive then a minimum. Libertarians have issues with graduated taxes let alone negative income taxes (or wage subsidies).

Libertarians also have this strange notion that is the governments that cause monopolies (as well as other beliefs about market failure that are strange).

As far as labor goes in most cases firms are monopsonist so there is no reason to choose a less efficient means of pursuing equality when there are better options available.

[lostinacause]

7. I should respond to your other point.

I agree with you point that especially in a democracy some equality measures have to be taken to ensure stability. At least to some extent it helps to prevent the political struggles that gave rise to things such as Nazism and Communism. I don’t believe that wage controls should be play the significant role that it seems to among people who want more equality. Part of the reason why it plays the role it does is because it is simple, it can be applied easily and people “see” results. Minimum wage laws are also becoming more costly because of the mobility of capital and low transportation and communication costs.

[Tux]

3. Nope

Libertarian doesn't work unless you're wealthy or Republician.

[lostinacause]

6. ... Or educated or shortsighted.

As I said this is not libertarian in nature

[idlisambar]

9. On what basis do you say this...

"The costs associated with a minimum wage are due to unemployment and the welfare required to support the unemployed."

The notion that a minimum wage causes unemployment has little basis; even in a neoclassical framework there is no theoretical justification for this claim. Whether or not a minimum wage causes unemployment depends on the circumstances of the particular labor market and the level of the wage; under many conditions a minimum wage is likely to leave employment levels unaffected and in some it may even even decrease unemployment.

[lostinacause]

10. Under what model do you assume that happens?

The neoclassical model predicts what will happen under floor and ceiling prices very effectively and the firm follows the profit maximizing goal. The simple fact is if you increase the real cost of labor then some people who were working at a lower real wage will not be profitable at a higher real wage. If the minimum wage does not increase the real wage then the result would be inflation and the desired effect of the minimum wage would not happen.

What type of model would you say would better fit the situation?

[idlisambar]

11. Consider a backward-bending labor supply curve

What if the labor supply curve bends backward over a certain wage range. Under this scenario, as the wage rate decreases, the number of willing workers increases along with the number job slots. If the number of willing workers increases at a faster rate than the number of job slots then unemployment increases. If the number of willing workers increases at a slower rate than the number of job slots, technically what develops is an increasing labor shortage -- though unlike the normal notion of a shortage the firm has no incentive to reverse it and so "real" unemployment is unaffected.

Why would the labor supply curve bend backward? The short answer is that the lower the wage the more hours a worker will be have to work to meet his needs, and so the more work-hours are available to employers. In practice, more hours could mean longer hours, a second or third job, or it may mean that the spouse goes to work.

The textbooks always have the labor supply curve pointing up and to the right, but there is no theoretical basis for this. The implication of the curve shape is that an employee will not choose to work if the wage rate is too low, but this is not realistic except in the case of those who don't need to work. This implication hardly applies at the lower end of the labor market.

Ultimately it is an empirical question how the minimum wage affects unemployment. The standard Marshallian neoclassical model, whether one posits a forward, vertical, or backward bending labor supply curve fails to capture what really goes on in labor markets.