Tuesday, July 21, 2015

it’s always been an inapplicable model to apply to any kind of retail or service sector. the reason is that labour demand is relatively inelastic, because commodity demand is relatively inelastic. at the end of the day, employers make decisions based on what they need to run their business, not what they can pay out.

suppose a big company like a walmart has x workers. if it could survive with x – y workers, it would. it wouldn’t keep those extra y workers just because it can afford it – it would lay them off to maximize revenue. so, you have to assume that the business is already hiring the bare minimum number of people that it can to carry out it’s operations. increasing the salary of those x workers doesn’t all of a sudden mean that the business requires less workers. it actually follows that laying off workers is consequently an impossibility, unless they want to downscale operations altogether – for example closing departments. but, they would only do that if those departments were not profitable, anyways.

rather, the realistic choice that a big company like a walmart needs to make in the face of a minimum wage hike is whether it wants to eat the loss or raise prices. the logic that follows is that minimum wage increases do not create unemployment so much as they fuel inflation.

in some cases, that inflation may then lead to job losses as small companies become uncompetitive. but, this is a consequence of the efficiency of the economies of scale and something that should not be fought against. the demand will then move to larger companies, who will need to hire workers to compensate for the increase in demand. arguing that workers should eat low wages so their bosses can remain in the bourgeois class isn't an argument that anybody should sympathize with.

so, the real issue is inflation, the real concern regarding inflation leading to job losses is for small businesses and it's something that will balance itself out in the long run.


a better argument against wage increases is consequently that it's a waste of time because inflation just eats into it. but, as pollin notes, this is acknowledging a problem without taking steps to address it.

the proper solution is to index the minimum wage to inflation. this may seem politically unpalatable, but the government of ontario has recently done this - and at inflation-adjusted levels that are actually historically high. there wasn't even any really serious pressure. it was an economic decision, to spur demand. see, that's how you actually create jobs - you give people more money to spend. canadian liberals are a different breed than american democrats. they actually take liberal economics seriously, rather than merely provide lip service to it. but, it demonstrates it's not an impossible policy.

tying inflation to the cpi [the bread basket of necessary goods] should act as a disincentive for companies that make items in the cpi to reflexively boost prices as a reaction to the mandated wage increases, as it's just an unending cycle. but, it may have the effect of increasing the prices of luxury goods. that's a shift in prices. but it has another positive impact - it's a carbon tax, by stealth. regardless, what we want is the price of necessities to not run away and if that means the price of luxuries needs to go up a bit then it's a reasonable offset.