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Gerard
Jackson
Nottrampis
made comments about my post on wages and the fallacy behind union bargaining.
My thesis, as he called it, is an economic law. To wit: if you price the
services of any good above its market clearing price you will get a surplus.
And that also goes for labour. The Great Depression testifies to that fact.
Arindrajit
Dube is one of the 5 so-called economists that Nottrampis referred to. Now if
Dube’s ‘analysis’ were right then there would be no youth unemployment in
America. Yet when he published his study in 2010 youth unemployment had
averaged about 18 per cent for the year. It is now 2014 and he is still
peddling his snake-oil even though youth unemployment is still being reported
at crisis levels.
Last
March the Centre for American Progress (Soros-funded leftwing ‘think tank’
that loathes free markets) sponsored and published The Effects of Minimum Wages on SNAP Enrollments and
Expenditures by Rachel West and Michael Reich. According to
this pair of alleged economists, raising the minimum wage would cut federal
“spending by $4.6 billion” per annum. So not only would raising the minimum
wage reduce poverty and promote economic growth it would also eliminate the
deficit and perhaps even reduce federal spending. I have not read anything
this stupid on economics since Nancy Pelosi claimed that raising dole
payments would generate economic growth.
These
economists rest their argument on two stools, the first one being that the
wage rate must be indeterminate, meaning that an increase in the rate would
not have any effect on the demand for this kind of labour. The second stool
is based on the fallacy that consumption drives the economy. For obvious
reasons I shall focus entirely on the first stool. If the wage rate were
really indeterminate then there would be no youth unemployment problem in the
US. All able bodied youngsters who were willing to work would find it. Yet
when they published their so-called study youth unemployment rate registered
15.8 per cent, a fact that they studiously ignored.
Now for
a little history: In 1948 the U.S. minimum wage was 40 cents an hour and
applied to only a small portion of the workforce. The unemployment rate for
black and white teens age 16 to 17 averaged about 10 per cent. In 1950 a
Congressional decree raised minimum wage to 75 cents an hour and then in 1955
to $1 an hour. Further increases in the minimum wage not only saw youth
unemployment rise but not evenly. A yawning chasm appeared between black and
white unemployment rates so that by 1978 white youth unemployment stood at
about 15 to 20 per cent and an appalling 40 to 45 per cent for black
teenagers. By 1995 it was 15.6 percent for whites and 37 per cent for blacks.
The
callous indifference of these ‘economists’ to facts that contradict their
ideology brings us to the use and abuse of economic studies. The late
professor Orme W. Phelps was a firm believer in the benefits of the minimum
wage. He cited studies proving to his satisfaction that increasing the
minimum wage had no detrimental effects on the demand for labour*. (What is
really meant is the demand for a certain type of labour). In fact, he implied
the opposite. He approvingly cited The
Monthly Labor Review, September 1950, which based its
favourable findings on Southern sawmills where in 1949 69 per cent of workers
earned less than 75 cents per hour but after the minimum wage increase in
1950 the figure fell to 8.2 per cent. This fall was followed by a general
increase in investment and wage rates.
Hardly
able to contain himself Phelps described the report’s conclusions as “serene.
And no wonder. The report stated that
the
minimum wage increase had not, by December 1956, resulted in any substantial
changes in the economic situation of the nation as a whole, as measured in
terms of employment, [or] unemployment . . . .
What
Phelps omitted is that no sooner had Congress raised the minimum than the
Korean War exploded. To finance the war the US government resorted to a rapid
monetary expansion which in turn sparked off an inflationary boom that saw
prices rise and unemployment dive from 5.9 per cent in 1949 to 2.9 per cent
in 1953. It was the boom and not the increase in the minimum wage that
stimulated the Southern sawmills.
Reading
West and Reich immediately brought to mind Phelps’ book. At least Phelps
recognised the existence of marginal productivity theory whereas West and
Reich felt free to write about the minimum wage without once referring to any
economic theory of wage rate determination. In fact, they made no mention of
economics at all. Not only that, there was absolutely not a single mention of
the youth unemployment rate.
These
leftwing ‘economists’ and their allies in the phony media like to stress that
their statistical findings supports their destructive proposal but the fact
remains that the empirical evidence refutes them: It is called the
unemployment rate.
Nottrampis
says that Australian unions now have to take in to account a company’s
financial position. Whenever here stuff like that I think of Detroit. It is
the value of the workers’ output that is the crucial factor, not the
financial situation of any firm. If wage rates are pushed to the point where
they exceed the value of the workers’ product then unemployment will emerge.
Any
study that promotes a minimum wage without attempting to explain the youth
unemployment crisis is not only worthless it is downright dishonest.
Note: Nottrampis has posted two further
comment in which he says that “if wages are rising at 2% and inflation is 3%
you do not need to be Einstein to know what is going on and what it means for
a firm!… it means your company’s labour costs are declining!!” An Einstein
would be making a serious error in following this line of reasoning because
producer prices have been rising at about 4 per cent per annum.
1.
Consumer prices are not input prices.
2. Price movements are never uniform because money is not neutral.
3. During a boom input prices rise faster than consumer prices.
Aggregates
can be horribly misleading, particularly when it comes to prices. I shall
shortly do a post on what I call the tyranny of aggregates.
*Introduction to Labor Economics,
Robert E. Kreiger Publishing Company 4th edition, 1978. In 1978 white youth
unemployment stood at over 15 per cent and an appalling 40 per cent plus for
black teens. As a committed statist Phelps saw no reason why these shocking
figures should cause him to revise his views. It is now 2014 and we are still
getting the same destructive nonsense from leftists.
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