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20. Re: Morning Metaverse Mar 5, 2014, 15:34 Scottish Martial Arts
 
Pigeon wrote on Mar 5, 2014, 14:57:
The biggest problem I think that would occur are massive layoffs as companies try to avoid that initial hit.

I guess my thought on this aspect of a minimum wage hike is that the layoffs probably won't be as massive as the Chamber of Commerce, or other business lobbyists, would like to make us think, and that the benefits of a higher minimum wage would outweigh the immediate employment costs. Standard microeconomic models make it pretty clear that price floors lead to surpluses, or in the case of labor markets, a minimum wage SHOULD lead to surplus labor, i.e. unemployment increases. That said the standard micro-economic models make a lot of assumptions in their predictions, primarily that employers are A) already operating at 100% maximum efficiency and B) are completely rational in all decision making. Those are big assumptions to make. What if an employer's operations are less than maximally efficient? Well than he could still maintain his bottom line in light of a minimum wage hike without cutting payroll if he addressed those non-labor inefficiencies, say by using cheaper raw materials, or not wasting as much raw material. Likewise, let's say he is operating at 100% efficiency, and the minimum wage hike is cutting into his bottom line: is his first response to layoff employees, some of whom he may have grown to like and value as people, and not just economic producers in his employ? Perhaps his sense of responsibility to his employees, an emotional and non-economically rational factor, makes him choose to take a cut to profits rather than do harm to someone he cares about.

Furthermore, the problem with all economic models is it is very difficult to conduct experiments. In chemistry, you come up with a model, make predictions using that model, and then you conduct experiments to see if the results of the experiment match the predictions of the model. If the results don't match the predictions, then the model is wrong. That's how science works. In economics however, you can't conduct an experiment because of the ethical dimensions -- what if your experiment ruins the livelihood of thousands of people? What this means is models may make sense on a logical level, but there is always a question mark of whether they reflect reality. The standard microeconomic models are pretty darn clear that higher minimum wage leads to higher unemployment, but without repeated experimental verification how do you know if the model itself is accurate? Well, the close that you can come in economics is to look for natural experiments, i.e. in the case of the minimum wage, try to find two different jurisdictions with relatively similar economic situations, but where one raises the minimum wage and one does not. If unemployment rises dramatically in the former, as your model predicts, then there is more credence to your model. If not, then your model may have some problems. Here's the thing: the natural experiment evidence on the minimum wage suggests that while there is some increase in unemployment, it is relatively marginal, particularly when compared to the gains you get in terms of, say, getting people out of poverty.

Economics is all about trade-offs. Certainly raising the minimum wage will have some negative consequences. The question is will the benefits outweigh the costs? My sense at any rate -- and partly this judgement is colored from having to work minimum wage for a while despite being a college educated adult, i.e. not a high school kid on his first summer job -- is that there will be more people who will be better off than will be hurt.
 
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