Friday, April 04, 2008

The Minium Wage and Job Losses

The two great victories of 2006 election victories were the British retreat from Basra and a massive increase in the minimum wage.

Today we find Basra in flames, and we find ourselves suffering a drop in the number of jobs.

Both the goals of an end to war and a more equitable distribution of wealth are worthy. The problem is that the ways we try to achieve our worthy ends seems to be lacking.

The economy is so complex that no-one really knows the effects of wage and price controls. Such controls tend to be controlled by the groups that buy economic influence. Since government wage and price controls are determined by politics, they almost always are out of sync with the real economy.

I do not know if the government set minimum wage is too high or too low. Personally, I think the very existance of government set wages is problematic.

My criticism of minimum wage is not the set value of the wage, but the thinking behind the wage. Our current thinking about wages is that wages are somehow inelastic. Since wages are inelastic, we find that companies choose to lay off workers in down cycles rather than decrease salaries.

The mass lay off cycle, of course, tends to undermine wages. During the bust cycle, companies lay off their highest wage workers. At the beginning of the next boom, they hire on new workers at a low wage. It is idiotic. Wages tend to be flat during the boom (when labor is actually most valuable). The pressures to increase wages often happen at the height of the market when the market value of the labor is actually falling.

The expectation of inelastic wages is also the primary factor behind the consumer debt and credit crisis. Lenders make loans assuming that the borrowers income is a constant. The borrowers who were laid off get crunched.

It seems to me that the best path toward long term economic health would be to create financial instruments that make wages a bit more elastic. With elastic wages, companies would be less prone to lay off workers in economic down turns. Such a system would sychronize pressures to increase wages with the boom. Empoloyees who've shared the hardship of the bust with the company are in a better position to demand their portion of the next boom. (employees who've been laid off have no political power and are simply lucky to get employed during the next boom).

Workers who realize that their wages are not elastic are also less likely to borrow heavily and are more likely to save (which, of course, would increase their life time earnings).


Scott Hinrichs said...

As I read the post, thoughts were germanating in my head. Then you included my precise thoughts in the final paragraph.

Of course there would be the people that would choose to live imprudently when times were good, only to get whacked when times got tough. They would be the example to the rest of us to live more prudently.

That is, until do-gooders came along and demanded government intervention to try to force the economy to be more stable. All in the name of being compassionate, of course.

y-intercept said...

Our current system, where wages are inelastic and companies adjust to economic conditions with lay offs, does a better job of whacking people than one where people's income fell with the stock.

BTW, there is nothing wrong with living well when times are good. The problem with our present system is that it gives too many false signals. For example, lets say you had stock options, when times are good, your options might hit $50k. If you started living your life as if that money existed, then you would get scrunched when the market goes south.

If your wage had a fixed and elastic component, then you are more likely to be able to adjust your living with the market.