Thursday, October 21, 2010

Surprising consequences of Minimum Wage

It is tempting to think that the minimum wage is a wonderful thing. It increases the size of our paychecks and helps alleviate poverty, right?! But, just because we say it is so, does it make it so? Proponents of the minimum wage often acknowledge the power of the market when it comes to price determination of products, but many fail to realize that the market powers are just as real when it comes to the price of labor... and when you artificially manipulate markets, there are always unintended consequences.

Many economic planners think they can solve a problem by legislating it away. People's paychecks too small? Minimum wage! Lack of health insurance? Make it illegal to be uninsured! Now Timothy Geithner has a problem with our huge trade deficit, and he is planning to go to the G-20 and legislate it away! All of this legislation is implemented with a fundamental misunderstanding of why the problems exist in the first place!

Tim Giethner seeks to set world 'guidelines' to achieve more 'balanced global growth'. He is worried about our 'unsustainable' trade deficit. To think that you can just declare what a nation's trade deficit is going to be through new magic guidelines is a fundamental misunderstanding of economics, and is protectionism at its worst. A trade deficit is a result of transactions and marketplace decisions. It is a symptom, not a cause. If you want to effect trade deficits, you do not mandate trade deficits. You looks at the policies that cause those trade deficits.... minimum wage rate anyone?!

Nations do not trade, people trade. The deficit or surplus is a snapshot of the aggregate of those transactions. If you want to lower our trade deficit and allow us to be more globally competitive, lower our minimum wage!! Reduce our subsidies, tariffs, welfare, unemployment... All of these are effecting our international trade. Now, before you call me absolutely heartless, hear me out!

As a result of global competition, businesses now have access to cheaper labor worldwide. As a result, the market value of the wage rate worldwide is reduced. Due to our minimum wage rate laws, our market is not able to adjust to these changes. When our wage markets cannot adjust to the market rates due to legislation, businesses move the jobs overseas, where the wages are less.

Do not worry... global competition does not mean that wages will fall forever, just until they reach a market equilibrium. The perks of free trade and globalization is that the prices of goods also fall. In America, we readily accept the lower priced goods, but resist the fall in wages. We have been fortunate to have created many higher wage jobs, mostly in the service sector that need local employees. We may have hit a wall in this direction as more people cut back on the luxuries of the service sector. You can only avoid reality for so long.

Our current minimum wage rate law is moving our jobs overseas, and therefore moving our production overseas. Since everything is produced overseas, the manufacturing industry here is dying. When industry moves over seas, everything is produced overseas. Because of this we have to import all our goods, resulting in a huge trade deficit. It is really that simple.

As long as we have people willing to work in these jobs, at the lower wages, which is debatable, the manufacturing in America would thrive. But our markets have not been given a chance. It may be the case that the jobs and industry would have left anyways, due to the American labor market not willing to supply their labor at lower market rates, but we will never know. This opportunity has been made illegal due to minimum wage legislation.

Two of the government market manipulations that create an unwillingness to work in these lower wage positions are unemployment benefits and welfare. These policies create an effective minimum wage, without actually having to create one. As long as people can receive a paycheck without working, it will be an option that will enter into their cost-benefit analysis before accepting a job. Example, if I know that I could make $200 a week on welfare or unemployment benefits, that would be a strong incentive not to take the job that would pay me $250 a week to make Levi's jean. I may be willing to give up that extra $50 for 40 hours of my time.

Another area effecting trade, which is much more obvious, are tariffs and national trade policy. Protectionist policies are very tempting in a recession, and I fear that this is where Geithner is tempted to go.


Geithner's Goal: Rebalanced World Economy

Mr. Geithner said the world sorely needs to agree on guidelines for exchange-rate policy. "Right now, there is no established sense of what's fair," he said.

He also said the U.S. is pressing the Group of 20 industrial and developing nations to adopt numerical gauges to judge whether individual trade surpluses or deficits are "sustainable," a way to measure progress towards the goal of more balanced global growth.

From my email

I just found your pro/con minimum wage arguments... love it!

I have one more for the pro side:

Trade deficit reduction- minimum wage laws cause jobs to move over seas seeking cheaper labor and causing the death of the manufacturing industry in the USA. Result: We do not produce anything in the states anymore and we must import most of our goods, resulting in a steep trade deficit. Global competition is driving down the dollar value of manufacturing jobs and the minimum wage laws are limiting how our employment market can respond to these changes.
[Article: The U.S. Trade deficit: are we trading away our future?]

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