From: Mermaid (hidden@lucifer.com)
Date: Sun Oct 26 2003 - 16:38:23 MST
[rhinoceros]That said... Agreed, the burden of the 'minimum wage' is passed on to the consumer, and since the folks who get minimum wage are consumers too, inflation rises and their gains are neutralized. In fact, as Mermaid said, the real purchasing power of the "minimum wage" people is not just neutralized, but actually it even goes down when they get a raise. However...
I wonder (a) why this happens and (b) whether the real purchasing power goes down even faster when they don't get a raise.(Mermaid> only if the prices increase AND when there is no wage increase...) According to the initial post in this thread:
[...]
Since 1938, we have an increase of productivity and lots of whole new industries. After adjusting for inflation (which should have taken care of increases in wages and prices) and after taking into account unfavorable factors in raw materials etc, I would expect that the new technologies and the increase in productivity would be reflected in the purchasing power of the minimum wage as well. But instead of an increase, these numbers seem to show a decrease. Why?[Mermaid]Lets go to the very beginning. Forget about 'minimum wage' for a second, ok? One fine day, an increase in the wages happen. Hallelujah! BUT...the *real* wage increase will happen only if the price of the products in the market remain constant. How? If your old wage was $10 and the new wage is $15...i.e. your income has increase by 50%. Assuming that your only expense is food...you buy 10 blocks of food for a buck each. With the increase in your wages, you can buy $5 worth of food blocks, i.e. 50% increase in your purchasing power ONLY if the p
rice of the food block remains unchanged. i.e. your 50% increase in wages can be translated into 50% increase of your purchasing power *only* if the prices remain constant.
But price wont remain constant. Price will increase because the cost of production increases as cost includes wage/labour costs. Remember the laws of demand and supply. When there is high demand, there is an increase in price and on the other side, when there is high supply, prices fall. With more consumers wanting more with more change jiggling in their pockets, demand for good increases with higher purchasing power. Prices will also increase keeping up with the laws of demand and supply.
So, we have established that the food block is going to cost more. If it increases by 50%, i.e. costing 1.50/food block, then there would be no real change in wages because of the proportion of increase in wages is absorbed by the proportion of increase in the prices.
When will real wage increase? It will increase only if the proportion of increase in income is greater than the proportion of increase in the cost of food blocks. When your income goes up to $15 and the cost of food block rises from 1/block to say..1.2/block. i.e. a mere 20% increase compared to the 50% increase in your wages. (in 1968, this increase of purchasing power peaked)
When can real wage fall? It will fall when the proportion of increase in income is lesser than the proportion of increase of food block prices.When your income goes up from $10 to $15, but the cost of food blocks is 1.6/block. Income increases by 50%, but costs increase by 60%.(after 1968, this is what happened)
Also, you say that there has been an increase in productivity. But..but..has there been an *proportionate* increase in income since 1938?(until recently, if you work more than 40hours/week, you are entitled to an hour and a half pay for every extra hour you work...this is called overtime pay. people like nurses, firefighters, cops who earn as much as 22k/annum are reclassified as 'white collar workers..they can Dubya and his cronies...this means that these 'white collar' workers will be called 'executive' and managers and lose OT privelages. To make it look kosher, another law was introduced that ensured people who earned less than 22k to claim OT...earlier only those who earned about 8k/annum to claim OT. what has happened is a harsh wage cut to the working class *and* increasing their labour hours...sure..productivity is increased, but are the working class really getting paid for working off their butts? as a point to your query that appears much later...this is how CEOs and employers pocket their profits
. ) The rich get higher than proportional increase in their wages while the working man actually experiences a low real wage and his purchasing power actually goes down.
Where does minimum wage come into all this? Minimum wage is meant to protect employees from slipping below poverty line. To provide them with a sustainable living wage. This basic wage is calculated by federal economic bigwigs...simply put, the increase in minimum wage is just not enough to cover the basic needs of the working man. As with everything else in economics, there is an assumption that minimum wage law is compulsarily enforced by the state. Of course, everything is based on this assumption. So assume that there is a huge factory. A legal entity that employs people at a minimum wage stipulated by the govt. Given a choice between employing someone at a high minimum wage and someone at a wage lesser than the stipulated minimum wage, the employer will opt for the latter. A compulsary minimum wage regulation will increase unemployment levels. This is not necessarily true irl all the time(especially in the short run...long term effects almost always involve unemployment on the rise), but with a compulsa
ry minimum wage, unskilled labour is trapped in a wage band unable to move up. People barely manage to make ends meet because their real wage keeps slipping while they are stuck being paid minimum wage(which the govt keeps increasing when they feel moved by the plight of the masses). Upward mobility in the labour markets is very crucial. Minimum wages should be directed to the darkest shade of blue in the blue collar division where the employees are unskilled or rather low skilled. As their skill set improves and they become medium skilled or highly skilled, there should be opportunities for them to get higher wages than they earned in their low skill job. Instead of protecting the poor, it locks them up and traps them in a minimum wage hell cutting off all opportunities to 'move up' the wage ladder. It also creates a 'static' labour market in the lower levels. A compulsary minimum wage law would tempt employers to employ slightly skilled or medium skilled employees in low skill, low wage jobs to increase pr
oductivity. Lets not forget substituting foreign labour which is lower than the minimum wage. Thats a can of worms *I* dont want to open atm. It takes a bit of meandering and mental gymnastics to get all of this..but the economy runs efficiently by juggling various factors and each of them affecting each other. or does it?
[rhino]Inflation due to wages is not only caused by the minimum wages, is it?
[Mermaid]Simply put, inflation is caused when there is an increase in money supply. When the supply of money increases, then the value of what the money can buy goes down. as an example: Prior to inflation, you can buy a block of food for a buck. During inflationary times, the value of the dollar decreases because its worth is lesser than one food block.
also, the wage-price spiral automatically places the seed of inflation to a certain extent into an economy. America has historically recorded very insignificant inflationary trends over the years and has been the case where most theoritical economists scratch their bald head over...it breaks every rule of economics and it is so because the american economy is tightly controlled and monitored..its is led..despite popular opinion, there is nothing 'free' about this economy...
[rhino]*All* wages are passed to the consumer, including those of the middle/upper management and the CEOs. Even "too high profits" are part of the equation which pushes the cost up.
[Mermaid]hmm...technically speaking, minimum wage is only for maintaining unskilled labour force above poverty level. Note that the wage-price spiral doesnt translate into any real fulfillment of demanding wage increase and mostly, its because of the minimum wage laws. On the other hand, the CEOs and the 'well paid' can demand and get an increase in their pay checks.
[rhino]If the wages of the CEO's and of the "well paid" ones are raised, a burden is added on those who get minimum wage, even if they didn't get any raise at all. Is it absurd that they would demand a raise too in this case? Or that by demanding a raise they are actually cutting down their losses?
[Mermaid]The rich eat the poor for breakfast. The higher wage earning groups preys on the lower wage earning, unskilled labour force. Minimum wage laws traps the darkest shade of blue collars from improving their lot.
[rhino]Hence my first post in this thread, where I wondered how many people, in numbers and in percentage, get minimum wage today. I am also curious how the "medium/high" and "high" wages were affected since 1938, and how all of these wages contribute to inflation today.
[Mermaid]Wage controls to are essentially considered a failure. Until the 70s, a reduction in the wages(translated as lower income but higher job security..)was implemented to curtail inflation. Noone takes that theory seriously anymore.
re people who get minimum wages...everyone starts out like that..a school kid who buses tables at McD starts out with minimum wages..if he improves his skill set, he moves up. On the other hand,unskilled adults are trapped in minimum wage hell without an opp. for upward mobility.
[rhino]All this is interesting, since the dominant practice for countering inflation today is maintaining a "healthy" unemployment pool.
[Mermaid]Actually, its interest rates manipulation in the US. Unemployment is a trade off for keeping inflation at bay. Traditionally, a little inflation is tolerated to stay out of unemployment flux. An economy that is blighted by unemployment is far uglier than one that bears the cost of inflation. An increase in interest rates will reduce the money floating around in the economy and help combat inflation. i.e. when interest increases from 10% to 20%, you will probably be motivated to put them in a savings account instead of spending it on the newest toy in the market. It would also prevent you from borrowing capital if you are a company because you'll be paying more interest on that loan. The aggregate demand for goods will slump and when demand falls, prices fall thereby adjusting inflation.
[rhino]From what I have heard in our IRC channel, many Virians had the chance to experience this on their skin in the last year (not all of them "minimum wage" people).
[rhinoceros]
Heh, I used to think that it was a fairly common practice for the state to undertake this kind of redistribution of the burden for the low-income people. They don't exactly say "no raise, but you'll get a tax subsidy", but they have this scale:
Yearly income Rate Tax
--------------------------------------------------------
7,400 0 0
8 ,400 5 50
13,400 15 800
23,400 30 3,800
More 40 (More - 7,400) * 40%
There is pressure from the EU to move pretty much anything under VAT (which is 18% for most things), but it is easier said than done if the governments wants to remain in office.
[Mermaid]Ah..there ya go..VAT. There is no Value Added Tax concept in the US. Anyways, that table is the tax structure...what I meant was a way of increasing 'real' income by giving out tax subsidies instead of increasing the money wage. i.e. no increase in wages, but the tax bracket gets adjusted so that more people dont carry the extra burden of tax....so a tax subsidy would be increasing the number of people who pay zero tax from ..say 7400 to 13400..etc...so the state bears the cost of increasing real wages instead of the employers giving out increasing money wages which is intricately involved with other market forces..
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