Friday, April 5, 2013
The black hole theory of the minimum wage
The black hole theory of the minimum wage:
Physicists theorize that inside a black hole the laws of physics breakdown. When the minimum wage falls far enough below what the market would bear the laws of supply and demand breakdown. Doubling today's federal minimum wage should lead to a disproportionate explosion of demand for the goods of minimum to median wage paying employers.
If we cut today's minimum to median wages in half that wouldn't help McDonald's or Wal-Mart, would it? This wage cut has already taken place when we would have to triple today's minimum wage to catch up with doubled productivity since 1968 (and almost quadruple the early 2007 minimum wage -- the median wage stagnated while productivity doubled too).
Elizabeth Warren: Minimum Wage Would Be $22 An Hour If It Had Kept Up With Productivity
Doubling today's minimum wage to $15 an hour would add 50% to Wal-Mart wages but only 5% to Wal-Mart prices – 100% to McDonald's wages but 33% to McDonald's prices. $15 an hour being the median wage half the workforce would get raises percentage multiples of pass through price increases.
This win-win effect could not go on forever. At $30,000 a year consumers will buy a lot more fast food and retail items than they will at $15,000 a year – hugely pent-up demand. Going from a $30,000 year minimum wage to $40,000 would raise prices (3% at Wal-Mart; 11% at McDonald's) but not much to demand – though some people would have more money to spend -- a wash? Somewhere in between is the edge of the black hole.
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The other day I was thinking that all the studies done on the minimum wage are about marginal increases when the minimum wage has shrunk one third while productivity has doubled -- making all the studies irrelevant to what might happen if any real catch up were attempted to what the minimum wage might conceivably be: doubled to add 43% to LJB'S 1968, $10.50/hr minimum -- tripled to catch up with doubling of productivity since 1968 if you ask Elizabeth Warren. Lawyers get paid twice as much in a doubly productive economy -- not because they doubled productivity but because the labor market can bear more.
Even the big anti-minimum wage book by Neumark and Wascher seems to admit upfront (haven't read the whole thing yet) that the results of the studies are close and could be upset by unseen factors.
So I came up with a thought experiment of what might happen if we doubled or tripled the minimum wage which is what we should desire to do -- and came up with this doozy.