Juan_Bottom wrote:How did raising the minimum wage effect the business' profits or ability to function? Some of that sounded like an expose on greed.
PLAYER57832 wrote:I would not go so far as to say "greed", but yeah.. you are able to stay in business.
I think his point was that he hired fewer and some worked fewer hours. Research shows that this does happen, but in the short term only. AFter a couple of years businesses need to hire, and do... regardless of the wage. Also, by that time, the impact of the higher wage equalling more purchases evens out.
Well, it depends, fellas. One example: Substitution Effects
Minimum wage laws raise the price of (a) low-skilled workers.* This in turn lowers the relative
price between (a) and (b) hiring high-skilled workers (e.g. union members) and between (a) and (c) purchasing physical capital. This substitution effect results in businesses hiring less low-skilled workers while hiring more high-skilled workers and/or purchasing physical capital to replace those workers.
Depending on how each business perceives the relative tradeoff among the above decisions, then they will respond accordingly. Some businesses opt for more physical labor and hire/maintain less low-skilled workers. Some businesses opt for more high-skilled lowers and less low-skilled workers. Usually, it's a mix involving all three.
Some may argue that the minimum wage law induces businesses to become more efficient, so they would still hire the same amount of low-skill workers. I don't deny this possibility; however, if the business is already in a competitive environment, then this incentive to become more efficient is already prevalent, so the minimum wage's inducement effects would be negligible--especially if the competitor's also face the effects of the minimum wage law. Besides, since the gap between the prices of (a) and (b) and (a) and (c) is reduced, then the opportunity cost of (b) and (c) becomes higher, thus creating a stronger incentive for businesses to opt for (b) and (c) to the loss of (a).
This is one negative effect of minimum wage law which occurs over time.
If the minimum wage law was increased completely perfectly in line with the rising prices of all goods for particular businesses in particular places over time, then the substitution effect may be mitigated--presuming that no change in relative prices has occurred after controlling for inflation. However, this isn't the case because (1) the federal government pegs the minimum wage to the Consumer Price Index (which does not reflect the italicized conditions at all), (2) the government experiences time-lags, (3) the government faces the knowledge problem (what is the right price? dunno lol)., and (4) other influences (e.g. labor unions, well-intended yet uninformed voters, etc.) on politicians divert them from the italicized goal because political process is hardly a perfect substitute for the market process in adjusting prices.
(Substitution effects is only one explanation as to why raising the minimum wage to $20 per hour would result in increased unemployment for low-skilled workers--while high-skilled workers (e.g. union members) and the owners physical capital would significantly profit from it). Hey, does anyone see a connection between politicians funded by labor unions and then their support of a minimum wage?
A decent introduction to minimum wage:http://www.econlib.org/library/Enc/MinimumWages.html
Note: studies which show that no or little unemployment occurring from minimum wage fail to control for all relevant variables (e.g. failing to compare places which are similar enough in institutions (rules of the game), internships, other State's minimum wage laws, and more). Then there's problems with the definition of Unemployment (U3). Then, the time-series is also usually superior in illuminating the effects of minimum wage over time too, so without it, then there's more reason to doubt the (good?) intentions of the statistician.
*of course, some low-skilled workers may be exempt from minimum wage laws, e.g. those on government assistance, interns, government employees, etc.