| hershel_layton said: Bernie Sanders has a goal of making a $15 minimum wage, ranging from librarians to your McDonalds cashiers. I've been thinking about it a lot lately, but wouldn't that cause more harm than good? I'm not exactly the smartest in economics, so please bare with me. If we drastically increase the minimum wage, wouldn't that result into inflation, thus making the wage increase redundant and useless? Again, I'm not the most educated on American economics. I'm still learning about it, so don't be surprised if I have misunderstood this subject. |
Right, okay...
The issue with minimum wage is not inflation. Inflation is a monetary occurrence, which I will describe properly later in the post. The primary issue with minimum wage laws is that it causes unemployment, and I will describe how:
Almost everybody understands the basics of supply and demand: people understand that as demand for something goes up, prices go up; and the inverse is true for supply (if supply goes down, prices go up). But the relationship between S/D and price is a two-way relationship. If a price is artificially manipulated outside of the marketplace by a Government agency, that will alter the supply and demand.
People understand this intuitively, too. People say that we should "subsidise" green-energy (ie, artificically make the price lower) to increase demand for green energy. People also say that we should "tax" tobacco (ie, artificially make the price higher) to decrease the demand for tobacco.
Where people lose this intuition is with wages, and I think one of the reasons for this is precisely because of the fact that we call it wages. A wage is nothing more than a price. It's a price for labour. Lots of people understand this when they buy labour on a temporary basis - getting your hair cut, washing your car, contractors to work on your house, in this situation, people understand that labour is price. But the same is true for more-permenant fixed jobs, too. Your hourly wage, or yearly salary, is the price of your labour.
It's a price, which means it's in a two-way relationship with S/D. When you artificially manipulate the price of labour, you break the S/D relationship. A minimum wage is a price-floor, meaning that prices can not drop below that level. This artificially increases the price of labour beyond the "market clearing rate", and thus you end up with higher levels of unemployment.
I live in Hong Kong, and in HK, the minimum wage is 32HKD per hour (which works out at $4.11USD). However, this minimum wage is actually BELOW the market-clearing rate. You will not find a job in HK advertised at minimum wage levels, if you walk into any fast food restaurant or supermarket, you will see jobs posted for 10-20hkd more than minimum wage. I have also noted that these jobs go primarily to immigrants and students.
I think for a lot of people out there, reading the paragraph above (if they got that far) would be entirely shocking. Why would McDonald's pay MORE than minimum wage? Those guys are evil bastards and would pay you nothing if they could. Which is true, they would. But they can't. Because the minimum wage is below the market clearing rate, it's effectively pointless. It's like if the Government passed a law saying that a Ferrari can't be sold for less than $1. It's not going to effect anything.
What being at the "market clearing rate" means, is that nobody is unemployed because they can't find a job. Every time a person enters the workforce, there will be many opportunities for work. Those employers bid eachother in the marketplace for your labour. The reason why McDonald's pays above minimum here is because if they didn't, you'd just go work at Pizza Hut or Subway across the road, who were offering more.
This isn't anecdotal, either. Hong Kong is at (well, very close to) full-employment. http://www.tradingeconomics.com/hong-kong/unemployment-rate
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"Inflation is a monetary occurence", this stuff is a bit more complex, and off-topic, so I won't go into it in too much depth.
People tend to forget that a trade is a two-way thing. It's not just the S/D relationship of the thing you buy, but of the thing you sell, too. In days of barter this is a bit more intuitive. If you're selling pigs for sheep, for example, it's easy to understand that the rate of pigs-to-sheep you get will be determined by the S/D ratios of both pigs and sheep.
The thing is, the same is also true for USD, or HKD, or EUR, or AUD, CAD, RMB, etc. Currencies have their own S/D ratio. These are obvious in between curriencies, these are called FX-rates, you will know about this if you've ever been on holiday in a country that uses a different currency to your own. Currencies also have their own S/D relationship with the goods and services you buy with them.
Again, like I said I won't give too much depth, but I will give a simple example: hyperinflation in the Weimar Republic (the name given to the period of time in Germany between WWI and WWII). During the hyper-inflation, http://www.usagold.com/germannightmare.html, prices exploded (look at the table on the left a little down the page). There is a famous tale of a man who left his house to buy a pair of shoes for his child. When he left, he had enough money for the shoes, by the time he got to the shop, he could afford nothing. Did anything happen to the S/D relationship of the shoes? No. This price change was entirely due to the S/D relationship of the currency.
