Minimum Wage - Time For Reduction To Boost Economy?

freemarketeer

Hi,

Just wanted to get a debate going on this topic, as I think it's missing from the mainstream dialogue on Ireland's economy. It seems like a reduction in the minimum wage (along with next year's welfare cuts) could reduce costs and prices throughout the economy and have a knock-on effect that would encourage economy activity.

Given the high level of unemployment: how many jobs are made unviable because the employer can't pay less than €8.65 an hour, but can't create the job otherwise because it would be unprofitable? There is also the risk that employers will start laying off workers at minimum wage, that they would have been able to keep on if they could pay (say) €7.00 an hour.

Cut the minimum wage and jobs will be created that will go to the most vulnerable unemployed people in society, those suffering most in the current climate and in desperate need of work. Thoughts?

PS: I wrote a more developed post about this at my blog, http://thefreemarketeers.wordpress.com/2009/04/23/minimum-wage-maximum-unemployment/

lmtduffy

freemarketeer wrote: »

Hi,

Just wanted to get a debate going on this topic, as I think it's missing from the mainstream dialogue on Ireland's economy. It seems like a reduction in the minimum wage (along with next year's welfare cuts) could reduce costs and prices throughout the economy and have a knock-on effect that would encourage economy activity.

Given the high level of unemployment: how many jobs are made unviable because the employer can't pay less than €8.65 an hour, but can't create the job otherwise because it would be unprofitable? There is also the risk that employers will start laying off workers at minimum wage, that they would have been able to keep on if they could pay (say) €7.00 an hour.

This is all very well in theory, but you also have to consider would the amount of extra people working outweigh the loss of €1.65 per hour worked to the economy.

And also if you reduce minimum wage youd expect prices to fall with that but is it likely that the producers will drop their prices appropriately, as not many producers set their prices to target those on minimum wage, they aim for people on bigger salaries so its possible this will just result in a loss of purchasing power to those on minimum. But you could argue that the drop in minimum would cause a relative drop in wages through out the economy, but these kinds of assumptions which you may agree with can be seen as part of the problem in the first place, in that business is rarely altruistic.

Cut the minimum wage and jobs will be created that will go to the most vulnerable unemployed people in society, those suffering most in the current climate and in desperate need of work. Thoughts?

PS: I wrote a more developed post about this at my blog, http://thefreemarketeers.wordpress.com/2009/04/23/minimum-wage-maximum-unemployment/

And no cutting the minimum wage will not create jobs for the most vulnerable unemployed people in society, if your regular skilled unemployed person is finding it hard to find a job in this climate how is paying people less gonna help anyone but the employers.

freemarketeer

The idea is indeed that prices will fall. You reduce the costs of unskilled labour. In the current climate, these savings will be passed onto consumers - they are in control at the moment, because there is such scarce custom. Prices are cut to increase revenue, regardless of who these products are aimed at.

Businesses will be better able to produce competitively-priced goods and services also, in this event. Higher wages will be allowed to fall, because you reduce the cost of goods/services produced using unskilled labour - a major determinant of wage demands. This boosts the opportunities available to Irish-based companies in the medium-term.

You don't actually "lost €1.65 per hour worked in the economy". That's wrong on so many levels. This money is simply in the pockets of employers, who pass the savings onto consumers. Sure, the workers in question have less buying power but there are more jobs available for them!

Your argument is predicated on the assumption that reduced costs increase profits. That might be true sometimes, but clearly not under the status quo. Just look around at all the sales! Businesses are desperate for business.

Also, it doesn't matter who the jobs go to. It's better to have two people employed and paid one euro, than one person employed and paid two euro. Because there is more 'stuff' being produced in the economy.

eamonnm79

freemarketeer wrote: »

The idea is indeed that prices will fall. You reduce the costs of unskilled labour. In the current climate, these savings will be passed onto consumers - they are in control at the moment, because there is such scarce custom. Prices are cut to increase revenue, regardless of who these products are aimed at.

Businesses will be better able to produce competitively-priced goods and services also, in this event. Higher wages will be allowed to fall, because you reduce the cost of goods/services produced using unskilled labour - a major determinant of wage demands. This boosts the opportunities available to Irish-based companies in the medium-term.

You don't actually "lost €1.65 per hour worked in the economy". That's wrong on so many levels. This money is simply in the pockets of employers, who pass the savings onto consumers. Sure, the workers in question have less buying power but there are more jobs available for them!

Your argument is predicated on the assumption that reduced costs increase profits. That might be true sometimes, but clearly not under the status quo. Just look around at all the sales! Businesses are desperate for business.

Also, it doesn't matter who the jobs go to. It's better to have two people employed and paid one euro, than one person employed and paid two euro. Because there is more 'stuff' being produced in the economy.

Have you been in Mars for the last year. Friedmans Ideals that you are propping up have been in use in many parts of the western world for the last 30 years. Not only are they completely uncivilised but they have also shown, very spectacularly, to be a bad idea.

freemarketeer

eamonnm79: You want to back that up using argumentation? Feel free to actually defeat my arguments using reason and analysis of the policy's impact. Otherwise, your remarks aren't helpful.

lmtduffy

freemarketeer wrote: »

The idea is indeed that prices will fall. You reduce the costs of unskilled labour. In the current climate, these savings will be passed onto consumers - they are in control at the moment, because there is such scarce custom. Prices are cut to increase revenue, regardless of who these products are aimed at.

or producers might keep the extra profit for them selves, as they produce more for less.

Businesses will be better able to produce competitively-priced goods and services also, in this event. Higher wages will be allowed to fall, because you reduce the cost of goods/services produced using unskilled labour - a major determinant of wage demands. This boosts the opportunities available to Irish-based companies in the medium-term.

why would higher wages fall just because they can afford to live on less does not mean that their work is worth less.
And Its not very clear what you think will boost or what are these opportunities available or what you mean by the medium term.

You don't actually "lost €1.65 per hour worked in the economy". That's wrong on so many levels. This money is simply in the pockets of employers, who pass the savings onto consumers. Sure, the workers in question have less buying power but there are more jobs available for them!

Okay its not, that €1.65 less that will be spent in the economy, care to explain the many levels that is incorrect?

Yes simply in to the pockets of employers so who's to say its gonna be passed on to consumers?
And believe it or not many people have objections to lowering their purchase power in order to make life easier for the producer.

Your argument is predicated on the assumption that reduced costs increase profits. That might be true sometimes, but clearly not under the status quo. Just look around at all the sales! Businesses are desperate for business.

profits=benefits-costs?
how is this different in the status quo, what is the status quo your referring to?

Businesses are having sales as their realising they have to lower their prices as they have inflated them, of course they deserve to have things made easier for them now that they realise the market they had was inflated by themselves so its only right to lower the purchasing power of their customers and employees.

Also, it doesn't matter who the jobs go to. It's better to have two people employed and paid one euro, than one person employed and paid two euro. Because there is more 'stuff' being produced in the economy.

It matters when you make it out to have some false social benefit that it doesn't have as in your original post.

civildefence

The minimum wage should absolutely not be reduced. There is no question. It's the lowest earners who have to be protected from financial ruin in a recession, the people on the upper end of the scale are in a position to make sacrifices. This government doesn't seem to realise that you can't tax your way out of a recession. Though I won't be remotely surprised if they do try this one

freemarketeer

lmtduffy wrote: »

or producers might keep the extra profit for them selves, as they produce more for less.

They won't because business is scarce at the moment and competition amongst enterprise is fierce. They will pass the savings onto the consumer, or someone else will and that company will lose business.

lmtduffy wrote: »

why would higher wages fall just because they can afford to live on less does not mean that their work is worth less.

I don't know what you mean by asking what their work is 'worth'. If they can afford to live on less, they will object less to wage cuts. Their real wages have effectively risen.

lmtduffy wrote: »

And Its not very clear what you think will boost or what are these opportunities available or what you mean by the medium term.

Presumably an economics text-book can furnish you with the answer to the last question. The opportunities that I'm referring to are jobs. It's generally good when people are gainfully employed. Economic activity will be boosted, and the economy. See all the substantive arguments that I've given you for details.

lmtduffy wrote: »

Okay its not, that €1.65 less that will be spent in the economy, care to explain the many levels that is incorrect?

Because it's not as simple as that. You're ignoring the other effects entirely. You currently hire one person to work at €2. The minimum wage falls and you are then allowed hire two people at €1. In return, you produce more stuff. Your market increases because you can sell this stuff at more competitive prices (i.e. to people outside Ireland). The variable that you're ignorant of is the wage elasticity of labour demand. I suspect that it's quite elastic in the current climate.

lmtduffy wrote: »

Yes simply in to the pockets of employers so who's to say its gonna be passed on to consumers? And believe it or not many people have objections to lowering their purchase power in order to make life easier for the producer.

Maybe they will object. Everyone who benefits under the status quo objects to change. But I'm saying that this is in interests of the greater good.

lmtduffy wrote: »

profits=benefits-costs? how is this different in the status quo, what is the status quo your referring to?

The status quo I'm referring to is Ireland. Profits aren't necessarily reduced when costs fall. Sometimes, businesses reduce prices. They can still benefit if their costs fall more than their revenue. If they can under-cut their rivals and increase their revenue a lot, they make more profit and the consumer is better off as well.

lmtduffy wrote: »

Businesses are having sales as their realising they have to lower their prices as they have inflated them, of course they deserve to have things made easier for them now that they realise the market they had was inflated by themselves so its only right to lower the purchasing power of their customers and employees.

How do they inflate them? Prices are determined by profits, wages, all costs. Not just the decision of the entrepreneur to 'inflate wages'. That's paranoia. If someone rips off consumers, a competitor will come in and under-cut them.

lmtduffy wrote: »

It matters when you make it out to have some false social benefit that it doesn't have as in your original post.

More jobs for someone and rescuing our economy, making it more competitive so that we can sell our goods and services on the international market. That sounds like a real social benefit to me.

eamonnm79

freemarketeer wrote: »

eamonnm79: You want to back that up using argumentation? Feel free to actually defeat my arguments using reason and analysis of the policy's impact. Otherwise, your remarks aren't helpful.

Arguementation. Is that a word?
I agree that my remarks are not helpful to you, but they might be to people who have been awake in the last year.
If there is an arguement to be made I am happy to make it but there is none here.
I thought a comment made by someone who visited your free marketeer article put it better than I could. Plus its very very funny. However its only funny because it exposes how rediculous your arguements are.
As Naomi Klien said recently " what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology."

here's a reminder of the comments. Brilliant!

I hear whisperings in the ether that cutting the Irish minimum wage is being aired as a possibility (to avert the end of civilization). “It’s too high!”, the ether voices moan, “It’s making us uncompetitive”.

Most of you are, I’m sure, nodding along in full agreement. For too long now these toilet cleaners, burger makers, petrol station attendants (etc) have grown fat and merry off their extravagant wage. You see them every day skipping gaily into banks, without a care in the world – laughing in our very faces.

While the rest of us wander sadly around slightly depleted wine cellars and gaze wistfully at somewhat reduced Ferrero Rocher piles, these vile minimum-wagers turn cartwheels of joy in recession ravaged streets: reveling in the destruction they have wrought.

Who will stop them? Can anyone stop them?

The Volt

It's an old chestnut, 'low pay makes a good economy' look at Africa. It's a better question to ask would the people suggesting this be getting their wages dropped below the minimum wage.

O'Coonassa

freemarketeer wrote: »

Thoughts?

That's a crazy idea IMO. Do you believe in the 'invisible guiding hand'?

Bottle_of_Smoke

civildefence wrote: »

The minimum wage should absolutely not be reduced. There is no question. It's the lowest earners who have to be protected from financial ruin in a recession, the people on the upper end of the scale are in a position to make sacrifices. This government doesn't seem to realise that you can't tax your way out of a recession. Though I won't be remotely surprised if they do try this one

Perhaps not reducing it is not protecting them.

Lets say it means a hotel employing a hundred people needs to make some cuts. They could make a lot less cuts if minimum wage was €8. Therefore the staff are earning slightly less but aren't losing their jobs. It could even make the difference between that hotel going under and continuing to trade.

Overall there'd be more jobs in the economy.

I think a reduction is a good idea. Wouldn't support it going down to €7 as thats taking €62 a week off someone already on sh*t wages. However if it were €8 it would only be taking €24.38, thats still €127K per annum for a hotel with 100 staff. I did debt collection for medium sized businesses previously, and even half that figure could make a huge difference.

A stumbling block would be we'd have to reduce social welfare proportionately(approx €15)

jimmycrackcorm

O'Coonassa wrote: »

That's a crazy idea IMO. Do you believe in the 'invisible guiding hand'?

As long as it isn't the same 'invisible guiding hand' of light financial regulation that has led to the banking crisis. Perhaps bankers studied Adam Smith's theories and missed the point about maximizing self-interest as only being a short-term interest...

johnnyskeleton

I dont think that there are jobs out there waiting to come to the country when the Chinese and Polish etc are much more competitive. Even at €5 oh we still couldn't compete for new jobs.

The only way that drastic cuts in the minimum wage could make a difference is if it would stop jobs that are already in the country from being cut. However, from the reports from dell, luftansa etc it seems that Irish people would rather lose their jobs than take a paycut. Also, most of the job losses have some connection to the property crash - builders, estate agents, architects, solicitos, furniture shops and general slump in demand as a result of the loss of revenue and hole in the public finances. It makes no difference to a cabinet maker whether his employees earn €8.65 of €5 per hour if he can't sell his cabinets for anywhere near break even point, so in that regard jobs are going to be lost in unsustainable industries no matter what the minimum wage is.

Cutting the minimum wage should be a long term aspiration, and it should be reduced in real terms over a few years rather than in nominal terms in any given year. To cut it now will just mean more profits for businesses, increased hardship for employees and further deflation for the economy. It will not increase jobs or improve competitiveness in the short term.

johnnyskeleton

Bottle_of_Smoke wrote: »

Perhaps not reducing it is not protecting them.

Lets say it means a hotel employing a hundred people needs to make some cuts. They could make a lot less cuts if minimum wage was €8. Therefore the staff are earning slightly less but aren't losing their jobs. It could even make the difference between that hotel going under and continuing to trade.

Overall there'd be more jobs in the economy.

I think a reduction is a good idea. Wouldn't support it going down to €7 as thats taking €62 a week off someone already on sh*t wages. However if it were €8 it would only be taking €24.38, thats still €127K per annum for a hotel with 100 staff. I did debt collection for medium sized businesses previously, and even half that figure could make a huge difference.

A stumbling block would be we'd have to reduce social welfare proportionately(approx €15)

In the long term this hotel might reduce wages, reduce prices and keep the same level of staff and customers. In the short term, they are losing customers so even if the minimum wage was cut, they should still cut employees because they are surplus to requirements.

Bottle_of_Smoke

johnnyskeleton wrote: »

In the long term this hotel might reduce wages, reduce prices and keep the same level of staff and customers. In the short term, they are losing customers so even if the minimum wage was cut, they should still cut employees because they are surplus to requirements.

Its not always that black and white, by cutting staff they could lose even more customers. If they're considering cutting anyway, which they would be in your scenario, it wouldn't have as much appeal if the wage bill is cut by 2.5K a week.

It would also allow someone who has a steady supply of customers to employ more in the hopes it could improve their customer base.

freemarketeer

eamonnm79 wrote: »

Arguementation. Is that a word?

Yes, if you spelt it correctly. As I did.

eamonnm79 wrote: »

If there is an arguement to be made I am happy to make it but there is none here.

So you admit that you can't back up your position using reasoned argument? In most places, that would mean you've lost the argument.

eamonnm79 wrote: »

As Naomi Klien said recently " what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology."

Oh, Naomi Klein said something. That must make it true! You cannot just state that free market economics are debunk after the hiccup of the financial crisis, which was the result of a confluence of factors.

freemarketeer

Voltwad wrote: »

It's an old chestnut, 'low pay makes a good economy' look at Africa.

True.

Voltwad wrote: »

It's an old chestnut, 'good weather makes a good holiday destination' look at Palestine.

Wow, I just saw the flaw in your argument. You can't look at one factor in isolation. Deflation would make our goods and services competitive as exports. That's the only way for Ireland to get out of this recession. Stop distracting people with comments about Africa.

Voltwad wrote: »

It's a better question to ask would the people suggesting this be getting their wages dropped below the minimum wage.

No, that's a stupid question. What would that prove?

freemarketeer

O'Coonassa wrote: »

Do you believe in the 'invisible guiding hand'?

Yeah, but only after seeing it drag hundreds of millions of people out of poverty for the last fifty years. Advancing human welfare beyond levels which our grandparents would have thought possible. Allowing the satisfaction of human needs, and making headway towards eliminating extreme poverty where it continues to subsist.

freemarketeer

johnnyskeleton wrote: »

I dont think that there are jobs out there waiting to come to the country when the Chinese and Polish etc are much more competitive. Even at €5 oh we still couldn't compete for new jobs.

You're forgetting that Ireland has a comparative advantage in many other respects. For example, decent education.

freemarketeer

johnnyskeleton wrote: »

In the long term this hotel might reduce wages, reduce prices and keep the same level of staff and customers. In the short term, they are losing customers so even if the minimum wage was cut, they should still cut employees because they are surplus to requirements.

Yeah, but on the aggregate over the entire economy, there would be fewer lay-offs. That's the point.

Permabear

This post has been deleted.

johnnyskeleton

freemarketeer wrote: »

You're forgetting that Ireland has a comparative advantage in many other respects. For example, decent education.

I don't think that holds true any more. Poland, China and India are producing graduates on an industrial scale, but more importantly, they are just as good if not better than Irish graduates. Ireland's attraction in the 90s was our cheap well-educated english speaking workforce. We still retain the latter two criteria but are no longer cheap. Other countries in the meantime have gained the latter two criteria but have retained their comparative cheapness. Also, if jobs move to Poland, there's a good chance Irish employees will move with them and accept a lower pay grade (which is still higher than the Polish wages and thus affords them a higher standard of living). I think Ireland's adavantages of the 1990s are diminished and have been overtaken by those in other countries. Meanwhile, the really high end stuff that we could (nay should) have been aiming for never materialised, because there was no incentive to students to do harder courses to get harder, lower paid wages, when they could do easy stuff, like property developers or estate agents. Equally, our colleges have been focussed on churning graduates out, to compete with Eastern Europe & China etc no doubt, but this was the wrong way to go about it. Now, we can neither compete with cheaper countries or countries with higher skill levels. We have fallen between two stools.

freemarketeer wrote: »

Yeah, but on the aggregate over the entire economy, there would be fewer lay-offs. That's the point.

And it's a point I disagree with, as you can see from my point above. I'm not saying it wouldn't stop any job losses, but just that the way things are going i.e. the fallout from the property & construction bubble, the main job losses come from the loss of demand. So the jobs that would be saved IMO would not outweigh the damaging effects of people having less take home pay. Companies are not going to keep more workers on if they don't need them, even at a lower rate of pay. Let's look at two examples:

1. Furniture factory employs 100 staff and makes 10,000 items of furniture per annum. These items are sold at €500 each and each employee is paid €20k (let's say that's the minimum wage) each can make up to 100 items per year, and the marginal cost of producing each item (raw materials) is €50. The company has turnover of €5m, let's say €2m overheads, €2m wage bill and €500k on raw materials (500k operating profit). Due to the housing bust, only 7,000 items of furniture are sold (for this example, let's say that if the price was dropped, still only 7k items would be sold). The turnover of the company is now only €3.5m. The costs of the company are €2m overheads, €250k raw materials plus wages of €2m, which is a €.75m loss. They can probably get their overheads down a bit, so let's say €.25m, and they will remain in business with an operating profit as low as €100k for a few years, so they need to make up €600k from the wage bill. This could be to reduce minimum wage by 30% from €20k to €14k and everyone keeps their job, 30% of the workforce are made redundant but they all stay at €20k or some combination of the two.

Here, your argument is that if the minimum wage was cut, the employer would keep everyone in work and could still make a profit, which makes sense on paper. However in relality what happens is that when the minimum wage is cut by 30%, the employer is still employing 30 people more than he needs. So he can either employ them and make €100k operating profit, or he can get rid of them and get his profits back up to €520k. So, in an industry which has experienced a drop in demand at constant price, a cut in minimum wage will not stop job losses.

2. A potatoe farmer employs 10 staff and produces 100,000 bags of potatoes every year, which sell at €4 each. His overheads are low, say €100k and his staff earn minimum wage (again, let's say €20k). So his total revenue is €400k, costs of €300k, operating profit of €100k. Now, while people still want potatoes, they are demanding that they only pay €3 per bag, which would leave the farmer with a loss of €50k p.a.. He can't cut overheads, and is not perpared to farm the land without earning a profit. In this scenario, if those ten staff are absolutely essential, the farmer's choice is to cut their wages or else refuse to drop his prices.

3. A third scenario could be where not just basic demand, but aggregate demand (i.e. demand at a price) falls, but in such cases the businesses' survival will not be determined by wage factors.

The first scenario shows that in industries where basic demand has fallen i.e. people simply don't want the goods or services anymore, job losses are the only way to reduce costs, and a cut in minimum wage will not stop job lossess. The second scenario shows that in industries where basic demand has not changed, just people can't afford the higher price anymore, cuts in the minimum wage could make a difference. So which are we in now? Well, both is the answer, but the vast majority of job losses have been in construction, property, services etc sectors and its mostly because people are not interested in buying houses, furniture, new cars etc at ANY price. There is also a lot of price pressure on food, clothes etc, and those are areas where a cut in the minimum wage could lead to a reduction in prices which might help save jobs but it is not guaranteed to do so.

I agree that in the long term we should be aiming to get our cost base down, as we have allowed it to spiral out of control relative to other EU countries. Hopefully, in 10/20 years time, similar jobs in every country in the eurozone will earn more or less the same and have more or less the same standard of living, thus removing the beggar thy neighbour policies we have pursued. But a cut in the minimum wage will not stem the tide of job losses at this moment in time. It might have done if it was implemented a few years ago, but not now.

Permabear

This post has been deleted.

O'Coonassa

freemarketeer wrote: »

Yeah, but only after seeing it drag hundreds of millions of people out of poverty for the last fifty years.

AFAIK there's more people living in absolute poverty now than at any time in the past and the distribution of wealth is more unequal now than at any time in the past. I find it really hard to belive in invisible things that were dreamed up by religous nutters.

freemarketeer

O'Coonassa wrote: »

I find it really hard to belive in invisible things that were dreamed up by religous nutters.

Yeah.. I don't know what you're mentioning religious nutters for..

O'Coonassa wrote: »

AFAIK there's more people living in absolute poverty now than at any time in the past and the distribution of wealth is more unequal now than at any time in the past.

Distribution of wealth can be irrelevant, if the alternative system would make everyone equally poor. Also, you're just wrong about the numbers of people living in extreme poverty. See hundreds of millions of people in China and India for proof that the market economy works, and brings people out of poverty.

freemarketeer

johnnyskeleton wrote: »

And it's a point I disagree with, as you can see from my point above. I'm not saying it wouldn't stop any job losses, but just that the way things are going.

All you've proven there is that the country is snookered either way? What matters is relative movement. We make Ireland relatively cheaper to operate in, and we make it relatively more attractive.

Your other examples confuse matters by attempting to analyse the impact of changes in several exogenous factors at once. Also, you look at individual industries in isolation. You ignore the possibility of job creation, or the possibility that goods and service can be made cost-effective through wage reduction. In short, your analysis is incomplete. You haven't beaten the thesis of my argument by throwing imagined examples around.

I'm not saying that this measure would be a panacea, just that it might prevent some job losses in some circumstances. Also, you're ignoring what I proved earlier - that savings will be passed onto consumers due to the competitive environment. Therefore, you're forgetting that minimum wage workers are consumers too. Also, what about the welfare of all other consumers?

johnnyskeleton wrote: »

But a cut in the minimum wage will not stem the tide of job losses at this moment in time. It might have done if it was implemented a few years ago, but not now.

Could it slow the tide though? Logically, yes. What's the difference between now and a few years ago? There are other factors causing job losses? But we only need to look at the impact of this policy, ceteris paribus.

lmtduffy

freemarketeer wrote: »

They won't because business is scarce at the moment and competition amongst enterprise is fierce. They will pass the savings onto the consumer, or someone else will and that company will lose business.

or the competing firms may as often happens ease competition to ensure mutual survival, rather than lowering their prices against each other they will stagnate where they keep a preferred level of profit, these are called cartels.

I don't know what you mean by asking what their work is 'worth'. If they can afford to live on less, they will object less to wage cuts. Their real wages have effectively risen.

as in the value of what they produce is still worth the same, they would object to being payed less then their work is valued. Things do not fall so easily into equilibrium as you imagine. Im not saying these difficulties are impossible to overcome Im just filling in the reality of your model.

Presumably an economics text-book can furnish you with the answer to the last question. The opportunities that I'm referring to are jobs. It's generally good when people are gainfully employed. Economic activity will be boosted, and the economy. See all the substantive arguments that I've given you for details.

yes and lowers the quality of life of those living on the least amount at the same time, there are alternatives.

How about hose on higher wages and the employer take wage cuts as they have the higher disposable income and will their quality of life will remain relatively good.

Because it's not as simple as that. You're ignoring the other effects entirely. You currently hire one person to work at €2. The minimum wage falls and you are then allowed hire two people at €1. In return, you produce more stuff. Your market increases because you can sell this stuff at more competitive prices (i.e. to people outside Ireland). The variable that you're ignorant of is the wage elasticity of labour demand. I suspect that it's quite elastic in the current climate.

yes you produce more stuff no one wants, "its not as simple as that",if you want to maintain the business through a recession those with higher wages should take the hit to maintain it, not those on the lowest. And on the topic of wage elasticity I think you will find that it is more elastic the higher the wage, or we're you ignorant of that?

Maybe they will object. Everyone who benefits under the status quo objects to change. But I'm saying that this is in interests of the greater good.


The status quo I'm referring to is Ireland. Profits aren't necessarily reduced when costs fall. Sometimes, businesses reduce prices. They can still benefit if their costs fall more than their revenue. If they can under-cut their rivals and increase their revenue a lot, they make more profit and the consumer is better off as well.

The interest of the greater good I thought would be that those who can afford a wage cut take it, rather than those who are living on the minimum.

How do they inflate them? Prices are determined by profits, wages, all costs. Not just the decision of the entrepreneur to 'inflate wages'. That's paranoia. If someone rips off consumers, a competitor will come in and under-cut them.

or they will stagnate where its comfortable for them, have you ever notice that businesses often charge the same prices if their in the same market?

More jobs for someone and rescuing our economy, making it more competitive so that we can sell our goods and services on the international market. That sounds like a real social benefit to me.

yes it is but your means of achieving this that are inequitable, the minimum should not be dropped when the higher wages can.

Marshy

I'd definitely support a reduction to the minimum wage.

Negative inflation has occured for the first few months of the year and it's only right imo that businesses are allowed become more competitive with greater freedom with wages rates. The current figure just isn't viable for a lot of businesses.

lmtduffy

Bottle_of_Smoke wrote: »

Perhaps not reducing it is not protecting them.

Lets say it means a hotel employing a hundred people needs to make some cuts. They could make a lot less cuts if minimum wage was €8. Therefore the staff are earning slightly less but aren't losing their jobs. It could even make the difference between that hotel going under and continuing to trade.

maybe the employer and other high payed staff could all cut their wages to the minimum first?

Overall there'd be more jobs in the economy.

I think a reduction is a good idea. Wouldn't support it going down to €7 as thats taking €62 a week off someone already on sh*t wages. However if it were €8 it would only be taking €24.38, thats still €127K per annum for a hotel with 100 staff. I did debt collection for medium sized businesses previously, and even half that figure could make a huge difference.

A stumbling block would be we'd have to reduce social welfare proportionately(approx €15)

yes but their are more equitable ways of creating more jobs and of cutting costs without lowering the standard of living for those on the minimum.

A welfare cut is another story altogether,

lmtduffy

freemarketeer wrote: »

Yeah, but only after seeing it drag hundreds of millions of people out of poverty for the last fifty years. Advancing human welfare beyond levels which our grandparents would have thought possible. Allowing the satisfaction of human needs, and making headway towards eliminating extreme poverty where it continues to subsist.

yes that what the free market did, or maybe it was people forming unions, fighting for safe working conditions, a living wage and workers rights whilst attempting to harness businesses for their own as well as societies good.

Honestly have you ever looked outside of a neoclassical text book.

lmtduffy

donegalfella wrote: »

This post has been deleted.

and who benefits form all this? the producer.
It does not discriminate against them it ensures that regardless of the opportunities they have not had that they can live as part of society.

The only chances theyd have are what the employer gives them, which is not going to be anything that doesn't benefit the producer.

The argument for a state-mandated minimum wage rests on the presumption that market wages are somehow immoral, as if, but for the grace of the state, we would live in some Dickensian dystopia where the vile capitalist would happily pay his workers €0.01 per hour so that he could pocket billions. This is nothing but a caricature.

yes they are immoral as they are stuck into a cycle of boom and bust and employers like to have their cake and eat it too, they like to overcharge during the boom and cut wages during the bust.

The only thread of logic in the free market is that it is more efficient, but if you look at history that is not good enough for most people, as most people value the quality of their life and of others more than economic efficiency.

That is why the free market has constantly been built upon and why it is seen as distasteful to the majority of society.

O'Coonassa

freemarketeer wrote: »

Yeah.. I don't know what you're mentioning religious nutters for..

Adam Smith. AFAIK he thought the 'great architect of the Universe' had everything under control. The only invisible hand is human greed IMO.

freemarketeer wrote: »

Distribution of wealth can be irrelevant, if the alternative system would make everyone equally poor. Also, you're just wrong about the numbers of people living in extreme poverty. See hundreds of millions of people in China and India for proof that the market economy works, and brings people out of poverty.

There was less than a billion people on Earth when the system you believe in got going. The numbers living in absolute poverty have undoubtedly increased under it.

johnnyskeleton

freemarketeer wrote: »

All you've proven there is that the country is snookered either way? What matters is relative movement. We make Ireland relatively cheaper to operate in, and we make it relatively more attractive.

Over the long term yes, but you can't cut the minimum wage by so much overnight and expect everything to be peachy. Yes, the country is snookered either way AND THERE IS NO QUICK FIX. Any solution to the problems has to be over a number of years whereby we allow the orderly winding up of unsustainable businesses, the orderly deflation of assets, the orderly reduction of costs and wages, and at the same time preparation for new industries. A drop in the minimum wage from €8.65 to €7 does not make us significantly more attractive than countries which offer the same positives but with wages at around €1-2 per hour (or in some places, per day), and it would create a lot of hardship at the bottom end of the economy. It would have to go hand in hand with an equal or greater decrease in social welfare (as otherwise people on social welfare would be better off than people on minimum wage).

freemarketeer wrote: »

Your other examples confuse matters by attempting to analyse the impact of changes in several exogenous factors at once. Also, you look at individual industries in isolation. You ignore the possibility of job creation, or the possibility that goods and service can be made cost-effective through wage reduction. In short, your analysis is incomplete. You haven't beaten the thesis of my argument by throwing imagined examples around.

I dealt with the unlikeliness of job creation in my other posts and above. Our cost base is several times that of competing countries. I also stated earlier that a reduction in the minimum wage could lead to cheaper prices but that's beside the point. You argued that a reduction could mean 1) more jobs and 2) a boost to the economy. I argued that it wouldn't mean more jobs and at best would stem the tide of job losses (but will not stop the majority of job losses). I didn't directly address the effect on the economy, but in the short term it would make things worse because it would take even more money out of the pockets of the employees without necessarily leading to reduced prices (prices drop due to competition - lower costs ceterus paribus means more profit). But I don't have to prove you wrong, you have to prove it yourself. Show us some examples of how jobs would be created because of the proposed reduction. What jobs in what sectors?

freemarketeer wrote: »

I'm not saying that this measure would be a panacea, just that it might prevent some job losses in some circumstances. Also, you're ignoring what I proved earlier - that savings will be passed onto consumers due to the competitive environment. Therefore, you're forgetting that minimum wage workers are consumers too. Also, what about the welfare of all other consumers?

You're shifting the goalposts now from job creation to effectively my point which was that it would at best stem the tide of job losses in some areas. You didn't prove any such thing earlier, you at best asserted that savings might be passed on to consumers, but that has nothing to do with your original post which was that a reduction in minimum wage would lead to job creation and a (short term) boost to the economy. If you want to go down the path of minimum wage workers are consumers too, then any such decrease should be in line with deflation and social welfare decreases otherwise it would be a disaster.

freemarketeer wrote: »

Could it slow the tide though? Logically, yes. What's the difference between now and a few years ago? There are other factors causing job losses? But we only need to look at the impact of this policy, ceteris paribus.

It could slow the tide, but it definately would cause a lot of hardship and would have the effect of taking money out of the consumtion economy. The difference between now and a few years ago is that our economy and exchequer could handle a costs reduction policy a few years ago, but in the middle of a recession it's the paradox of thrift. Not spending now only worsens our problems, but we have no other choice. However, decreasing spending even further is a step towards oblivion. Yes there are other factors causing job losses which at the moment dwarf the minimum wage being high.

freemarketeer

lmtduffy wrote: »

or the competing firms may as often happens ease competition to ensure mutual survival, rather than lowering their prices against each other they will stagnate where they keep a preferred level of profit, these are called cartels.

How come there are price wars between supermarkets at the moment?

lmtduffy wrote: »

How about hose on higher wages and the employer take wage cuts?

How about we just find a big pile of money? Or we discover gold in the Wicklow mountains? How exactly are you suggesting that this is achieved? People on high wages are already taking pay cuts, and taxation increases.

lmtduffy wrote: »

or they will stagnate where its comfortable for them, have you ever notice that businesses often charge the same prices if their in the same market?

Hmm.. It's almost like they are operating in the same market, producing the same goods using very similar componenets. Wait! That's the reason why, not your paranoia.

freemarketeer

lmtduffy wrote: »

maybe the employer and other high payed staff could all cut their wages to the minimum first?

Good idea, except it won't happen in REALITY. The reality is that the low-skilled staff will get laid off when they are done imposing wage cuts on higher-earners.

You need a mechanism by which you intend to achieve your magical new equilibrium with everyone on the minimum wage. It's called communism?

freemarketeer

lmtduffy wrote: »

yes that what the free market did, or maybe it was people forming unions, fighting for safe working conditions, a living wage and workers rights.

That is the working of the free market! It's so funny how people forget that. Allowing determination of wages, working conditions, etc. through the price mechanism is exactly what the market does. Don't kid yourself into thinking that the legislation came first. Bargaining power of workers increased. The market solved for new conditions. The legislation entrenched these conditions for all, to the detriment of the worker that was willing to compete - work for less, take risks, not wear a safety harness, etc.

freemarketeer

lmtduffy wrote: »

The only thread of logic in the free market is that it is more efficient, but if you look at history that is not good enough for most people, as most people value the quality of their life and of others more than economic efficiency.

Increased efficiency in production leads to better quality of life. The poorest people in Ireland are better off than people working in the third world. Because the market mechanism brought production to Ireland, employment, and prosperity. I'm not arguing this line with you any more.

eamonnm79

And it's a point I disagree with, as you can see from my point above. I'm not saying it wouldn't stop any job losses, but just that the way things are going i.e. the fallout from the property & construction bubble, the main job losses come from the loss of demand. So the jobs that would be saved IMO would not outweigh the damaging effects of people having less take home pay. Companies are not going to keep more workers on if they don't need them, even at a lower rate of pay. Let's look at two examples:

1. Furniture factory employs 100 staff and makes 10,000 items of furniture per annum. These items are sold at €500 each and each employee is paid €20k (let's say that's the minimum wage) each can make up to 100 items per year, and the marginal cost of producing each item (raw materials) is €50. The company has turnover of €5m, let's say €2m overheads, €2m wage bill and €500k on raw materials (500k operating profit). Due to the housing bust, only 7,000 items of furniture are sold (for this example, let's say that if the price was dropped, still only 7k items would be sold). The turnover of the company is now only €3.5m. The costs of the company are €2m overheads, €250k raw materials plus wages of €2m, which is a €.75m loss. They can probably get their overheads down a bit, so let's say €.25m, and they will remain in business with an operating profit as low as €100k for a few years, so they need to make up €600k from the wage bill. This could be to reduce minimum wage by 30% from €20k to €14k and everyone keeps their job, 30% of the workforce are made redundant but they all stay at €20k or some combination of the two.

Here, your argument is that if the minimum wage was cut, the employer would keep everyone in work and could still make a profit, which makes sense on paper. However in relality what happens is that when the minimum wage is cut by 30%, the employer is still employing 30 people more than he needs. So he can either employ them and make €100k operating profit, or he can get rid of them and get his profits back up to €520k. So, in an industry which has experienced a drop in demand at constant price, a cut in minimum wage will not stop job losses.

2. A potatoe farmer employs 10 staff and produces 100,000 bags of potatoes every year, which sell at €4 each. His overheads are low, say €100k and his staff earn minimum wage (again, let's say €20k). So his total revenue is €400k, costs of €300k, operating profit of €100k. Now, while people still want potatoes, they are demanding that they only pay €3 per bag, which would leave the farmer with a loss of €50k p.a.. He can't cut overheads, and is not perpared to farm the land without earning a profit. In this scenario, if those ten staff are absolutely essential, the farmer's choice is to cut their wages or else refuse to drop his prices.

3. A third scenario could be where not just basic demand, but aggregate demand (i.e. demand at a price) falls, but in such cases the businesses' survival will not be determined by wage factors.

The first scenario shows that in industries where basic demand has fallen i.e. people simply don't want the goods or services anymore, job losses are the only way to reduce costs, and a cut in minimum wage will not stop job lossess. The second scenario shows that in industries where basic demand has not changed, just people can't afford the higher price anymore, cuts in the minimum wage could make a difference. So which are we in now? Well, both is the answer, but the vast majority of job losses have been in construction, property, services etc sectors and its mostly because people are not interested in buying houses, furniture, new cars etc at ANY price. There is also a lot of price pressure on food, clothes etc, and those are areas where a cut in the minimum wage could lead to a reduction in prices which might help save jobs but it is not guaranteed to do so.

I agree that in the long term we should be aiming to get our cost base down, as we have allowed it to spiral out of control relative to other EU countries. Hopefully, in 10/20 years time, similar jobs in every country in the eurozone will earn more or less the same and have more or less the same standard of living, thus removing the beggar thy neighbour policies we have pursued. But a cut in the minimum wage will not stem the tide of job losses at this moment in time. It might have done if it was implemented a few years ago, but not now.

Jesus man that was brilliant, seriously, no messin, you should have put QED at the end. you explained a fairly complicated issue with a lot of clarity, and in simple english.

freemarketeer

johnnyskeleton wrote: »

A drop in the minimum wage from €8.65 to €7 does not make us significantly more attractive than countries which offer the same positives but with wages at around €1-2 per hour (or in some places, per day).

I'm not saying that we'll take business from these nations. I'm saying that it will have a knock-on effect that reduces wages throughout the economy, and makes us more competitive. That's where we start benefiting as a nation.

johnnyskeleton wrote: »

It would have to go hand in hand with an equal or greater decrease in social welfare (as otherwise people on social welfare would be better off than people on minimum wage).

That's happening anyway. It also goes without saying.

johnnyskeleton wrote: »

I also stated earlier that a reduction in the minimum wage could lead to cheaper prices but that's beside the point.

No, it's not. That's the whole point. Deflation is Ireland's only route out of the current situation, and into global competitiveness again. You need to start somewhere, and initiate it somewhere.

johnnyskeleton wrote: »

Prices drop due to competition - lower costs ceterus paribus means more profit.

There is existing competition. Why are there price wars between supermarkets? Aren't their goods a major determinant of spending by consumers?

johnnyskeleton wrote: »

Show us some examples of how jobs would be created because of the proposed reduction. What jobs in what sectors?

Wherever there are people being laid off, jobs may not be lost. Wherever the reduced cost passes savings onto consumers, they reduce their wage demands and jobs will not be lost. Wherever the savings are passed onto consumers and they have more money to spend, jobs will be created.

johnnyskeleton wrote: »

You're shifting the goalposts now from job creation to effectively my point which was that it would at best stem the tide of job losses in some areas.

There's no qualitative difference. Also, I'll allow the market to create the jobs better than me. It's generally quite good at that.

johnnyskeleton wrote: »

It could slow the tide, but it definately would cause a lot of hardship and would have the effect of taking money out of the consumtion economy.

That needs to be backed up. Consumers can afford to buy more, or buy as much for less. Benefit!

johnnyskeleton wrote: »

In the middle of a recession it's the paradox of thrift. Not spending now only worsens our problems, but we have no other choice.

That doesn't make much sense. Generating economic activity through a reduction in cost base at the lowest level of the economy will increase the amount of spending in real terms. There will be more buying and selling of goods and services.

eamonnm79

freemarketeer wrote: »

Increased efficiency in production leads to better quality of life. The poorest people in Ireland are better off than people working in the third world. Because the market mechanism brought production to Ireland, employment, and prosperity. I'm not arguing this line with you any more.

Actually the reason that the poorest people in Ireland, those on social welfare and those on the min wage are better off is because of the minimum wage and livable dole payments. I like to call it civilisation.

johnnyskeleton

I think we're at an impasse, but there are just a few final points I want to make.

freemarketeer wrote: »

No, it's not. That's the whole point. Deflation is Ireland's only route out of the current situation, and into global competitiveness again. You need to start somewhere, and initiate it somewhere.

If you cut wages before prices come down, it creates massive hardship for people. Starting somewhere doesn't mean start at the bottom where the most vulnerable are, but more importantly a cut in the minimum wage above the rate of deflation would have far reaching consequences not all of them good. Job creation is what is really needed, and we may not even bother trying to get the nickel and dime jobs because those that are not location specific can be done in other countries far cheaper. Instead, and I hate to sound like a government supporter here, what we need are high paying high quality jobs. If anything, Ireland discourages innovation. There is a very real chance that the US companies will start pulling out of Ireland. Cutting the minimum wage is not the answer but one thing we could do is try to foster indigenous entrepreneurs who will take over and compete with the US firms. This should be the main focus of government policy, and if it genuinely was (as opposed to the lip service of "the knowledge economy") then we might actually get through the recession in relatively good shape.

There is existing competition. Why are there price wars between supermarkets? Aren't their goods a major determinant of spending by consumers?

Interesting that you bring this up, because while I am totally in support of cheaper food, you will notice that Lidl/Aldi are cheaper but have less staff, shopping in Northern Ireland might mean less jobs here, and the move by Tesco to cheaper UK suppliers means that jobs are lost in Irish supply firms. I'm not sure that Lidl/Aldi would hire more staff if the minimum wage was cut, I don't think supermarkets in Ireland would drop their prices by 20% if the minimum wage was cut by 20%, and likewise the suppliers. In the long term, we should be aiming to have competitive prices, and by that time no doubt our minimum wage would be similar to that in all our major trading partners. But an overnight cut, assuming it were even possible without riots etc, will not cure the rot in Irish busniess, nor would it in my view significantly boost the economy.

In all this, I am not saying that costs and wages will not have to go down (although you seem to ascribe these views to me), but what I am saying is that now is the wrong time to do it, a large drop will be far too damaging, it will not achieve your stated objectives, it would be politically impossible and most importantly, it should not be done in a vaccuum but should only be done in line with reduced costs across the country (and that will take several years).

Wherever there are people being laid off, jobs may not be lost. Wherever the reduced cost passes savings onto consumers, they reduce their wage demands and jobs will not be lost. Wherever the savings are passed onto consumers and they have more money to spend, jobs will be created.

That needs to be backed up. Consumers can afford to buy more, or buy as much for less. Benefit!

I don't understand how you can hold both of these views. Wages and prices drop by an equal amount (otherwise it wouldn't fit in with your deflation policy) yet consumers have more money to spend thus creating more jobs? Surely that would be pulling yourself up by your own bootstraps.

That doesn't make much sense. Generating economic activity through a reduction in cost base at the lowest level of the economy will increase the amount of spending in real terms. There will be more buying and selling of goods and services.

At the moment, people are only spending what they need to spend. In a deflationary period, people save and reduce consumption. Also, the people whose wages are cut will buy even less because they can't afford it. The paradox of thrift means that during a recession, if you take money away from people (through wage cuts or tax) they will spend even less than you have taken away from them and so the overall economy suffers. Fairly basic economics I would have thought. But answer the question I asked before, in which areas are these increased goods and services going to come from, because it helps no one if jobs are created producing things that no one wants.

lmtduffy

freemarketeer wrote: »

How come there are price wars between supermarkets at the moment?


How about we just find a big pile of money? Or we discover gold in the Wicklow mountains? How exactly are you suggesting that this is achieved? People on high wages are already taking pay cuts, and taxation increases.


Hmm.. It's almost like they are operating in the same market, producing the same goods using very similar components. Wait! That's the reason why, not your paranoia.

Why weren't there price wars before the recession, because they were taking advantage of the market, and why are they letting go of staff and lowering prices now because its advantageous to them, you need to understand the controls that make these models work, such as the consumer being able to walk away or withdraw their labour if the prices or wages offered dont suit them does not exist in reality.

Yes those who can take cuts are to a degree but your suggesting those who cant take cuts all should and to top it that this would be of benefit to them.

So are you just contradict yourself blatantly above surely if "they are operating in the same market, producing the same goods using very similar components" they would compete as opposed to charge the same prices?

lmtduffy

freemarketeer wrote: »

Good idea, except it won't happen in REALITY. The reality is that the low-skilled staff will get laid off when they are done imposing wage cuts on higher-earners.

You need a mechanism by which you intend to achieve your magical new equilibrium with everyone on the minimum wage. It's called communism?

Im not suggesting communism at all, what Im saying is to apply your logic in an equitable manner would mean cutting all wages just so people have jobs despite the quality of life they can afford or the work they are doing, what Im saying is dont do that and dont use your insulated solution either.

lmtduffy

freemarketeer wrote: »

That is the working of the free market! It's so funny how people forget that. Allowing determination of wages, working conditions, etc. through the price mechanism is exactly what the market does. Don't kid yourself into thinking that the legislation came first. Bargaining power of workers increased. The market solved for new conditions. The legislation entrenched these conditions for all, to the detriment of the worker that was willing to compete - work for less, take risks, not wear a safety harness, etc.

The worker wiling to compete to there own detriment and to the employers benefit, honestly your sounding like a communist caricature of a capitalist now.

I dont think anyone begrudges legislation that protects them from exploitation.

And no the market did not do any of that workers fought for it and a number of privileged and uncaring people fought against it, and tried to justify themselves by claiming that this is how the market works and how it works best,

but what every one with a clue is telling you is, okay thats how the market works but its not how society works, and with out the rest of us you haven't a pot to piss in and you should remember that next time you try to say that workers on the minimum wage should loose out on purchasing power to keep a business a float for the employers.

lmtduffy

freemarketeer wrote: »

Increased efficiency in production leads to better quality of life. The poorest people in Ireland are better off than people working in the third world. Because the market mechanism brought production to Ireland, employment, and prosperity. I'm not arguing this line with you any more.

yes I agree but we draw the line where those on the minimum are expected to loose out to benefit those with a larger disposable income, in other words the more efficient the better but never inequitable.