The Role of Prices in a MarketMarket InterventionsLabour as a MarketMinimum Wage as an InterventionFor and Against Minimum Wage
Adam Smith is considered the founder of modern economics
1. Serve as an indication of the relative scarcity of a commodityAs long as the price is allowed to fluctuate and match the supply with demand, there will be neither surpluses nor shortages2. The prices provide the incentive to react to the informationProducer’s income = Sale Price – Production price.Higher prices provides him means and will to produce more.Lower prices alert him to switch labor and materials3.The last role, prices delivered the information, encouraged action, and of course there shall be a reward.Otherwise why take a risk? Why work hard?Chance: Frank Sinatara in India.
Interfering with market prices prevents the mechanism of prices from working. Ceiling prices create shortages. receiving in the process a taste of life in the Soviet Union.The true price of gasoline, which included both the cash paid and the time spent waiting in line, was often higher than it would have been if the price had not been controlled.Taxes on cigarettes to discourage consumption of cigarettes. That actually does work to an extent.
Stage yourself as a business owner, than as your work.Employers are stingy – they want to pay workers as little as possibleWorkers are greedy – want to be paid as much as possible-Demand for labor, like that for any good or service, isn’t fixed.
act of governmental benevolenceThe Road to Hell is paved with good intentions
Only few developed countries don’t have such laws:At some it is bargained by unions with no government intervention:
Even a diehard interventionist knows that workers would be hurt.
The *first* to be hurt- jobs are lost at worst, or at best longer hours are expected and perks are denied. remember:If employed, no matter thewage & productivity, it contributes more than unemployedExamples:- 2*7.25 > 14; 2*6.5 < 14;- The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration- Can you remember the last time an usher showed you to your seat in a dark movie theater- gas stations no longer hire teenagers to wash your windshield.
As their skills grow, so does their ability to earn higher wages. Low skill jobs : mainly taken by young, immigrants, unskilled eldersDisappearance of these jobs has broader economic and societal consequences:- remove the bottom rung from the employment ladder and many never have a chance to climb it.-
The public is completely unaware that it is the government intervention which has failed, and not the free market. Even informed citizen loses is confused, resigns himself to the fact that free enterprise has obviously failed, and that like it or not,urges further intervention
No magic here.
Free Markets and The Minimum Wage<br />Philosophy and Trade<br />Elad WIND, May 2010<br />1<br />
The Price System<br />Adam Smith in The Wealth of Nations: Prices emerge from voluntary transactions between buyers and sellers, each seeking his own interest such that everyone is better off.<br />Milton Friedman: “The price system works so well, so efficiently, that we are not aware of it most of the time. We never realize how well it functions until it is prevented from functioning, and even then we seldom recognize the source of the trouble”<br />The Invisible Hand <br />The price system is a mechanism that performs this task without central mechanism.<br />2<br />
The Role of Prices<br />Prices hold three inter-related functions:<br />Transmit Information<br />Incentive to adopt the least costly methods of production<br />Distribution of income<br />3<br />
Minimum Price Surplus<br />Price floor – set above the market equilibrium <br />Destroys the clearing and allocating function of prices<br />Consumers – faced a higher price for the same product, reduce purchases or even drop out of the market entirely. <br />Suppliers – guaranteed a higher price, increase production.<br />Surplus – a short run excess of supply is inevitable. An economic waste.<br />Even worse, fixed prices signals to engage inappropriate economic activity that tends to aggravate the original situation.<br />4<br />
Market Intervention Example<br />US gasoline ceiling price<br />President Nixon set maximum prices for gasoline in 1973<br />Quality Deteriorates<br />Dealers sold gas on a first-come-first-served basis<br />Drivers queued in long lines, a sight not to be seen until then.<br />Black Market Evolves<br />Gasoline was held for friends, preferred customers, the politically well connected and… those who were willing to pay a little cash on the side.<br />5<br />
The Labour Market<br />Uncomfortably, behaves like every market.<br />Wishes are tempered by the reality of competition. <br />When you get a clogged drain<br />Most of us will call plumbers <br />We hire the one who quotes us the lowest price. <br />When quotes are too high?<br />Most of us will grab a plunger and a wrench, and give it our best.<br />Labor markets is the combination of rational beings such as ourselves -high prices keep us at home.<br />6<br />
Minimum Wage Intervention <br />Governments set the minimum wage out of noble intentions:<br />Give low-skilled workers an advantage <br />Make life easier for the poor<br />US Fair Labor and Standards Act of 1938:to provide for “the maintenance of the minimum standard of living necessary for health, efficiency, and the general well-being of workers.”<br />7<br />
Min’ Wages in the Developed World<br />Countries w/o wage control:<br /> Brunei, Denmark, HK1, Norway, Singapore<br />Wage bargained by unions:<br /> Austria, Finland, Germany, Iceland, Italy, Sweden<br />Rates for example:<br /> FR: €8.82 / hour<br /> US: $7.25 / hour, Federal2<br />1 – Minimum wages apply only for foreign labor<br />2 – States and districts may set it higher <br />8<br />
Arguments For Minimum Wage<br />A subset of consumers do raise their income as a cause:The benefits of the poor outweigh the added unemployment.<br />Past experience: the unemployment effect is mostly on teenagers.<br />Protect adults from teenagers willing to work for less.<br />Uncontrolled businesses have the power to abuse the labor.<br />Assures a minimal income to survive and pay the bills.<br />To raise the living standards and spending power of individuals.<br />As a reflex: minimum wage law is seen as siding with labor, siding with the poor, the underdog <br />10<br />
Why not $100?<br />If minimum wage can be set arbitrarily, <br /> why stop at $7.50? Why not $100?<br />The principle remains at lower levels:<br />Wages are a function of productivity not whim<br />A minimum wage set above workers' productivity harms the intended beneficiaries<br />12<br />
Low Skilled Workers Are Hurt<br />"Don't give a beginner a chance."<br /> Low-skilled workers compete for employers’ dollars with:<br />Skilled workers<br />Capital investments in technology<br />A receptionist invest in an automated answering system <br />Fast-food served on paper and plastic hire dishwashers<br />13<br />
Bouncing Up the Ladder<br />Jobs are means to improve skills<br />Wages are tightly coupled with skill<br />High minimum wage prevents from getting entry-level jobs <br />Thus never develop the skills necessary<br />“As a display of our compassion, we’ve raised the minimum wage! You’re welcome.”<br />Minimum wage is set to support a family<br /><ul><li>Do young need to earn a wage as high?</li></ul>14<br />
Minimum Wage Abuses<br />Lobbies<br />Often unions and strong firms justify a raise in the min’ wage<br />Strong firms suffer less from a rise in costs<br />A bigger portion of a smaller pie.<br />Unions know: an increase in min wage will lead to further raises<br />Compensate for Inflation<br />Indexing of the minimum wage to the inflation <br />Retain real spending power <br />But, production costs raise again<br />Public pressure <br />“it’s time that the government did something”. <br />Public tends to blame market failure on the free market and <br />15<br />
To Conclude<br />Interferences with the price system lead to unintended and unexpected consequences.<br />The only way to increase wages is to increase worker productivity and to ease the inferred costs of running businesses<br />17<br />