Comment 28360

By A Smith (anonymous) | Posted January 29, 2009 at 23:58:39

Ryan, assuming that the money supply is stable (no inflation that drives real wages down), when you increase nominal wages, you make labour more expensive relative to tools and automation. Therefore, if you are a smart business, when the government increases the cost of one input (labour), you employ less of it and switch to something else (machinery and automation). Even if this machinery costs more than using labour at free market rates (the optimum solution), it still is better than using labour at distorted prices.

Since all firms employ only the minimum inputs they have to, increasing the wage cost of labour ensures that firms will get rid of workers that can't produce the output that would justify the higher wage level. Companies will simply not pay people more than they are worth, it won't happen.

Here is something I found funny >> "Raising the minimum wage restores a price for labour that still allows employers to be profitable but leaves more money in the hands of workers. This, in turn, leads to more consumer purchases, which provides more revenue for employers and more overall growth in GDP."

First of all, the net profit margin of all businesses in aggregate is zero, so there is never a good time to raise their costs. All this will do is force more businesses into the red, because it does nothing to increase real output. Think about your peak oil scenario and then switch labour for oil. Therefore, by creating peak wages, you ensure that businesses will use less labour and more automation.

Secondly, just because you transfer money to employees and away from owners, does not mean the economy will produce more output (GDP). Output gains are driven by productivity and not simply consumption. In fact, without new business investment, there will be less innovation in the future.

The best reason not to set artificial prices for labour, however, is because it can only distort the optimum set of inputs it takes to produce the largest amount of goods and services. In doing this, the government ensures that capital will be wasted on unnecessary input costs, thus decreasing profits for further investments and increasing prices for consumers.

Think of it this way, if I can produce a car with $4000 in labour costs and $10,000 in others, this gives the consumer a car for $14,500. However, if I am forced to switch off of labour and into more automation, my new costs will be $3500 in labour and 10,800 in others. Therefore, to produce the same number of cars, it now costs me $14,300. If I want to keep the same return on investment, I must charge the customer $14,810. The net result of this scenario is that the economy produces goods and services less efficiently than it needs to (decreasing real wages) and more people would be out of a job.

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