Originally Posted by PopinFRESH
Not quite. Minimum wage is a price floor.
Labor being left to establish equilibrium would result in the wage being P3 and the amount of people willing to work for that wage and the amount of jobs employers are willing to offer at that wage are equal (30). Setting the minimum wage at P4, which is higher than the natural wage, would result in More people wanting to work for that wage (Qs), however the amount of jobs employers are willing to provide at that wage is reduced (Qd). In this example that would mean 40 people would be willing to work for the price at P4, but employers would only offer 20 positions. So you would have surplus labor, also known as unemployment. The only instance this would not hold true is if the price floor (minimum wage) is below the natural price at equilibrium, at which point the minimum wage is pointless. Businesses would not be thrilled at seeing their revenue rising exponentially because so is their expense. Their profit would not be rising, and those people now making $100/hr can't buy any more iDevices than they could previously making $8/hr because the price of an iPhone after paying $100/hr for labor would would be $100,000 (I'm not willing to do the actual math to illustrate the point. The point is that Apple would face either shutting their doors because it would not be cost effective to produce the devices with the added expense (not a likely scenario), or increasing the price of the product to match the increase in marginal cost, thus making the device more expensive. This is also known as inflation.
This is standard textbook, but it’s wrong. Labour isn’t like other commodities, as in mass markets labour is also your demand. There can be a demand famine if the price of labour is cut. And companies employ on demand for their products, not just labour costs.
To see this imagine a factory A which produces 100,000 widgets a week, employing 100 employees. To simplify the mathematics all employees are equally good and all produce 1000 widgets.
There is a recession, and the company A subsequently can sell only 50,000 widgets a week. So it only needs 50 workers. It therefore lays off 50 workers. Now, according to standard theory the company would employ 100 workers again if the existing employees would half their wages. However if you look at the demand side, you can see that this sacrifice just wouldn’t work. If the workers take a wage cut the company will just make more profit with the same 50 workers. It doesn’t need 100 workers. Full stop.
It gets worse, lets say the reason this company is in trouble is because other companies had to lay off workers, and those workers are now not buying this companies products at the same rate, because they took wage cuts or were unemployed. Similarly the 50 newly unemployed from Company A and the 50 who have taken wage cuts were buying other companies products, but now can’t; you can see a positive reducing feedback loop happens.
If all the workers across all factories assume the standard theory is correct and continue to drop their wages to “clear the market”, a continual feedback makes everybody including the employed poorer, everybody dropping their wages or getting made redundant, companies firing people,demand reduced everywhere else, workers reducing their wages to compensate - being standard theory aware - and on, and on. Until everybody is made redundant..
Edited by asdasd - 3/24/14 at 3:46pm