The Minimum Wage Debate- part 2

minimumwage

A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy expresses their support for a minimum wage increase. While on the surface, an increase in the minimum wage (or a minimum wage at all) would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cited for these two gentlemen’s support of a minimum wage increase. In this second part of the 3-part series, I will address the second point in their article. Note: You can read Part 1 at http://thelion.us/the-minmum-wage-debate-part-1/

Their second point is:

Two, it’s good for women. Women account for roughly two-thirds of workers whose incomes would rise by increasing the minimum wage to $10.10 an hour. These women currently work 40 hours a week to make just $14,500 a year. These women are our daughters, sisters and mothers who are often the only breadwinners in their families. Our country is in a stronger position when women are in a stronger economic position. We need to make that a reality.

First, this is a political statement and not a statement on how a minimum wage increase is economically viable or makes economic sense. It seems to me that no matter if the wage earner is a woman or man, black or white, born in the US or an immigrant, the same economic dynamics apply. Why is it a fact (as they imply) that “our country is in a stronger position when women are in a stronger economic position“. Does it matter who is entrenched in this low wage dilemma? No, it doesn’t. This seems to be a classic example of identity politics, where arguments are made concerning specific social groups in order to advance a political position. And I understand that this is probably the very intent of the writers of this article (two politicians) and therefore of great expectation. But, there is no value in solving the problem of the low wage dilemma by making this point. Higher wages are good for men, college students, and every other political identity group, not just for women.

Second, the statement that “these women are our daughters, sisters and mothers who are often the only breadwinners in their families” again has nothing to do with the economic viability of an arbitrary raised minimum wage. This is more of a commentary statement of our current society. The assumption is that these women are working because they have to, forced by family dynamics not only to earn an income to supplement another income, but also to act as the breadwinners. And as breadwinners, they are working a minimum wage job. If that is not a sad commentary of our society, I don’t know what is. But, what is the connection between this heart-stringed statement and the economic impact of a raised minimum wage?




Third, since there is no economic reasoning in this second point of the article, I will offer one. The thought that keeps coming to my mind is why are people (women in this case) working minimum wage jobs, while having to act as the breadwinner of the family. I can understand that there will be some people in this dilemma, but the article claims that “women account for roughly two-thirds of workers (that are working minimum wage jobs)” and that they “are often the only breadwinners in their families“. The implication is that there are many women in this position. Why are so many women relying on minimum wage jobs as the sole source of income to raise a family? Minimum wage jobs are not intended to be jobs expected to support a family. Why should business owners be burdened with the social responsibility of making bad up for past and current decisions of their employees. Businesses that employee workers at minimum wage do so for a reason. First, they are in an industry where the work is generally un-skilled labor and the workforce is easily expendable or replaceable. In other words, if their fry cook, making $7.25 an hour quits today, the business owner can reasonably expect to hire another person replace him the next day (or in a short period of time) for $7.25 an hour, without expending many resources. Second (as mentioned in part 1), businesses generally do not have stash of cash sitting around waiting to be spent. The capacity to absorb an arbitrarily raised payroll expense is something that has to be carefully considered by the business owner, and often times the requires measures that produce unintended consequences.

In the third and final rebuttal of the article written by Gov. Peter Shumlin and Gov. Dan Malloy, I will talk about the minimum wage I general, and how the minimum wage actually works contrary to unskilled laborers, in ways that you probably have never considered.

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.

The Minimum Wage Debate- part 1

minimumwage

A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy, expresses their support for a minimum wage increase. While the argument may be made that an increase in the minimum wage would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cites as to why these two gentlemen support a minimum wage increase. In this 3-part series, I will address each point that they make in their article.

Their first point is:

One, it (raising the minimum wage) makes good economic sense. The federal minimum wage is currently $7.25 an hour. Adjusted for inflation, that’s lower than it was in 1968. Raising the minimum wage to $10.10 an hour nationally will provide 28 million Americans with more money to spend and to invest, increasing economic activity and growth. In fact, recent studies conclude that raising the minimum wage makes workers more productive and therefore helps businesses retain profitability — a conclusion affirmed by Gap Inc.’s recent decision to raise the minimum wage for its employees to $10.10 an hour.

First, what do they mean by “good economic sense”? If the measure of good economic sense is how one group of people is affected, to the exclusion of all other groups, then one might have to agree with their assessment. Unfortunately, that is hardly ever the case. What is good for one group may not be good for another. In the full sense of the economy, raising the minimum wage is not “good economic sense” everyone involved.

Second, raising the minimum wage means that employers will be required to raise their overall payroll expense, which must come from some source that the business owner must identify. Most businesses do not have a stash of money that is un-used and ready for disposal. Most businesses, especially those who operate with low wage employees, have limited capital at their disposal. The capacity to pay this arbitrary increase in payroll expense must come from sources like increased prices, savings, or even from the reduction of other expenses, like payroll itself. For example, in order to increase the wages of 10 minimum wage employees, it may mean having to let one of those employees go to make up for the increased expense. Furthermore, an increase in the minimum wage may even be the difference in hiring an additional worker. A prudent business owner will make the necessary adjustments to reduce the impact of the arbitrary increase in expense on the bottom line. The same principle can be found in your own personal life. You bring home a certain amount of income each month. You also spend a certain amount in expenses each month. From month to month, you know how much you can spend as you compare it with the amount of income that you bring in. Let’s say as part of your monthly expenses, you find out that your electricity bill will double, because the electric company arbitrarily raises the cost of KwHs. This obviously makes the difference between your income and expenses smaller. And this causes you to react to the arbitrary change. You can either reduce your other expenses, spending less on entertainment, reducing your grocery spending or any other expenses that you can control. Or you can increase your income, finding another job or even a second job to make up for the increase in the electricity bill. Obviously, you can control your cost much faster and easier than you can find an extra job. You can start to see the pickle business owners are in when they are forced to arbitrarily increase their expenses.




Third, they make the statement that the increase in the minimum wage will increase the employees ability to spend and invest, increasing economic activity and growth. Again, this is to exclude all of the other players in the economy that are affected negatively by this arbitrary increase wage expense to businesses. Certainly, these employees will have more money at their disposal, but there are others that will never have the opportunity to earn a wage, either by being let go by the business (to make up for the increase in payroll expense) or by never being hired in the first place. Additionally, the lost earnings of the business due to the arbitrary increase in payroll expense limits businesses ability to expand and grow their businesses, removing the potential opportunities for other parties connected to these businesses (employees, customers, suppliers, etc.) to benefit. Unfortunately, these politicians never consider the effect on the other side of the coin. Politicians generally know that their voters only consider what the current workers are benefiting from with more income, but they never consider the impact on people who are never hired in the first place, jobs that never have the opportunity to be seen as lost, because they are prevented to be created. As with most politically charged economic issues, these one-sided considerations cause politicians to make bad economic decisions that affect our economy adversely. This idea is very prevalent in and outside of politics, and even by some well-intentioned people. I have written about this very principle in my article Invisible Unemployment.

So, the unintended consequences that are involved in the raising of minimum wages are now easier to see: lost jobs and stunted economic growth. This may sound like a pro-business, anti-worker article when in fact, it is actually both pro-business and pro-worker at the same time. In the amazingly efficient realm of capitalism (when it is allowed to be efficient), jobs are a “by-product” of business. Providing jobs is not the sole reason for businesses to operate. Businesses operate to supply the demand needs of a certain segment of consumers. And while I say that jobs are a by-product of business, that is not to say that they are unnecessary or even a waste (and some would define by-product). They are a necessary function of business, but just not the primary reason for businesses to exist. When politicians make economic decisions with the mindset that providing jobs is the primary function of business (while, they may never actually say it, but act in such a way to make you believe it), or that they arbitrarily

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.

Scarce Resources, which have Alternative Uses

trees
One of the most fundamental axioms to understand about economics is that resources are scarce. This means that there is no infinite abundance of resources in any market. There is only a limited amount (no matter how large that amount is) of any resource used to manufacture all goods and provide all services. There is nothing that is infinitely available and ready for our disposal. This truth explains why people have to make economic decisions and make other arrangements in response to the scarcity of these resources. In addition to resources being scarce, they also have alternative uses, which adds to the need to make wise economic decisions, lest there be waste. These ideas of scarcity and alternative usage is why the great economist Thomas Sowell himself defines economics as the study of scarce resources, which have alternative uses.

When I talk about scarcity, it is in the attempt to explain that of all the abundant raw materials, manufactured products or natural resources that are available on a world-wide scale, there is still some finite amount that can be used up until there is no more. This is scarcity on a macro level (globally). To further the point, if scarcity exists on a macro level, then it obviously exists on a micro level (locally). Because there is only a limited amount of all resources, human beings are forced into making wise economic decisions, both in manufacturing (on the supply side) and in consumption (on the demand side).




Take the example of trees. On a world-wide scale, trees are very abundant. No time soon is the world going to run out tress as a natural resource. However, if man were to begin a large-scale, world-wide effort in manufacturing that required a lot of wood in the process, it may eventually dwindle the supply of trees to a point that would affect the global access to this natural resource. For the foreseeable future, that is not likely to happen. On the other hand, this is likely to happen on a local scale. While there may be an abundance of trees globally, there are places in the world where trees are very scarce.

Take another example. Let’s say there is a small town and in that small town there is a small forest of trees that is currently not in use, other than to be enjoyed by the community in the form of camping and other recreational uses. The mayor of that small town understands that these are the only trees that the town “owns” and that they need to be very prudent about how they “use” these trees. You can start to see how scarcity is already a factor to be reckoned with. The mayor and most of the citizens of that town know that these trees are important, even if nothing is done with them at all. They are already being used and the economic decision may very well be just to keep using them as they are currently being used.

Along comes a man who proposed that the town use some of the trees that it already owns to construct a pavilion to enhance the recreational enjoyment of the forest area. Now, the mayor is presented with another economic decision that he and the citizens will need make prudently, because there is trade-off to be considered in this situation. If the trees are used for the pavilion project, then there are less trees available for the original recreational purpose. And it is because of the fact that the trees are not infinitely available for their disposal that this decision is necessary. The trees are scarce, in the sense that if they keep continuing to use them up, there will no longer be any trees at all for their use (short of planting new trees for use decades later).

As you can image, there are a number of decisions that can be made here by the mayor and the citizens. They may decide to do nothing at all, because they enjoy the trees more than they would enjoy the pavilion without the missing trees, knowing that they do not have an infinite amount of trees at their disposal and preserving the trees seem more important to them. Another economic decision that they can make is to go forward with the construction, because the added recreational opportunity of the pavilion is enough to make up for the missing trees, understanding the idea of scarcity. And maybe another decision that they can make is to keep the trees that they have and build the pavilion anyways. This economic decision would require buying wood from other sources (another town, perhaps) and using funds that they would otherwise be used for other purposes.

No matter the decision, each one involves factoring in the fact that the resources in question are not infinite and therefore, requires wisdom to avoid waste. After all, if the town had an infinite number of trees at its disposal, then each decision could be made strictly on the basis of preference. This is hardly, if never the case because of the idea of scarcity.

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Is the Affordable Care Act affordable?

Affordable Care Act

As the debate rolls on about the Affordable Care Act (ACA), there are some fundamental problems with the legislation that causes it, at its foundation, to be contrary to what its name desires to achieve. Instead of working to reduce healthcare costs, if nothing changes, it will prove to keep healthcare costs higher in the long run. The problem comes in the form of fundamental supply and demand.

First, I am not concerned in this article in getting involved in the discussion of why there are a limited amount of suppliers. We can look at that topic at another time. As we see the market reacting to this legislation, we see more and more healthcare providers opting out of participating in this program. I will explain how this decrease in service participation will affect cost in the long run. Second, the word “affordable” is very subjective and changes from person to person. Instead of debating whether or not healthcare services will be more affordable under the ACA, I will address how prices will be affected. Each individual will determine on their own whether or not the services are affordable or not.





In a free market, price (cost) is affected by certain factors, namely supply and demand. Assuming the demand for a product (or service) remains unchanged (constant), if the supply of that product decreases, the law of supply and demand tells us that the price of the product will eventually increase. And that’s easy to understand. When the amount of stuff consumers want to buy decreases, and the number of people that wanted to buy the same stuff does not change (demand remains constant), then those people (consumers) will be willing to pay a little more than they were previously willing to pay, when the product was more readily available. Manufacturers know this and more than willing to increase their price to accommodate the change in the supply as it relates to the unchanged demand.

Apply this to the ACA. The ACA seems to be heading towards reduced amount of doctors and healthcare providers being willing to “supply” their healthcare to the growing number of “wanters” (patients) that desire the same healthcare. As the supply of providers continues to decrease, assuming the number of patients at least stays the same or increases (which is very likely), the more those healthcare services will cost. That is, unless the government intervenes once again to put controls on certain, if not all prices for the healthcare. If that happens, there will prove to be some dangerous consequences in that scenario (read my article on The Danger of Price Controls).

The word or idea of “supply” in this scenario can also be explained by using the word “competition”, as they are closely related. You see, when there are two or more suppliers supplying the same or similar product to a set of consumers (“wanters”), then that is what causes the phenomenon of competition. The more the suppliers, the more the competition, and the better off the consumers become. In a competitive market (a lot of suppliers supplying the same or similar products), a decrease in price will naturally occur, without any government intervention to control prices. Let’s explain this in basic terms.

Let’s say you have one company that manufactures latex gloves for the entire medical industry. Now, if that were true, then that company could literally charge just about any price to its customers for latex gloves. This company knows that the customer has no other option but to buy latex gloves from them and as such, the company has no incentive to sell the latex gloves at a lower price. This is not a good situation for the customers. Enter in another company that manufactures the same, or similar latex gloves. To incentivize the existing consumers to buy from their company, this second company prices their latex gloves a little lower to attract business. When this happens, the first company becomes aware of this development and is then forced (by natural and fair competition) to reduce their price to a price that is closer, if not lower than what the second company charges. The first company (by the effect of competition) now has an incentive to lower their price of latex gloves. This can only be good for the customer. Now, these two companies could get together and agree to keep their prices the same, or similar in order to keep their desired share of customers. Despite being illegal to do this, you see how this cannot be good for the customer.

Enter in a third company that manufactures the same latex gloves and is uninterested in “fixing prices”, as the first two companies are. They set their price lower than the “fixed price” (but at a price that still provides a profit) to incentivize the existing consumers to buy latex gloves from their company. Again, you see how this can only good for the customer. This could go on and on until you have several companies competing for the same number of customers, driving the price lower and lower, ultimately to the benefit of the customer. And this happens naturally in free market, without any legislation to control prices.

Another by-product of competition in the free market is that is creates an incentive for the manufacturers to improve the quality of the product. Using the previous example, when there are several companies that are manufacturing latex gloves and they are competing for the same customers, it is not only in their interest to lower the price as much as they can (and still produce a profit) but also to make their product better, and more desirable. Not only does a lower-priced product (that is similar in quality to the other manufacturer’s product) cause customers to buy a company’s product, but a better quality product at even a higher price will cause some customers to buy their product.

Now let’s circle back around to the ACA. Again, I’m not interested in getting involved in the discussion about why there are a limited amount of suppliers of healthcare services as related to this legislation. That is another topic altogether. But, as we can see in the example of the latex gloves, a limited number of suppliers of products (in this case, services) will ultimately serve to keep the cost of healthcare high and reduce the quality over time. As in the example of the latex gloves, when there are a small number of suppliers of healthcare services, the incentive for those providers to reduce their costs (by the natural effect of competition) is reduced, in relation to what it would be if there were several suppliers involved. The incentive for these service providers to be efficient and to increase the quality of the healthcare that they provide is also reduced.

Many suppliers leads to more competition, which leads to lower customer prices, which leads to better quality of service and increased efficiency.

Please comment.