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distrep_front, In Praise of Low Wages:I think supporters of free markets too often defend low wages in an almost apologetic fashion: "You know, Wal-Mart's wages really aren't that low," or "Yeah, it would be great if cashiers could make $25 per hour, but it would drive prices through the roof." But there's nothing to apologize for. Low wages are good. Wages are prices, and prices are signals. Just as an above-market price for milk will give inaccurate signals to dairy farmers and result in a misallocation of farmland, paying above-market wages will give inaccurate signals to workers and result in a misallocation of human capital.If relative wages in different professions reflect the relative value those professions produce for the world, people will be properly incented to learn the right professions. If we boost the wages in low-wage professions relative to other professions, that changes the incentives. Specifically, it reduces the benefits of training and education.
Manning a checkout line is a low-skill job. It requires minimal training and can be done by virtually anyone*. As such, it's a good part-time job for students, and maybe a good full-time job for someone with a mild mental handicap. But it's really not a valid career choice for an adult of normal intelligence. The fact that it pays low wages is the market's way of telling would-be career cashiers to learn a marketable skill and get a real job that creates more value. At $25 per hour, that signal would be lost, and many people would be content to spend their lives scanning groceries or working in some other low-skill job rather than put in the effort necessary to learn a more valuable skill.
This is no accident. Interfering in the market always produces distortions. I'm not saying these distortions are always bad, but they always exist.
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Comments
Professions are paid given what their perceived value to the individual and society at large is. The word 'perceived' should throw up a red flag, for human perception is notoriously faulty, and history has done its best to illustrate that fact.
Wages in a free market would only be fair if professions were paid at their actual value rather than their perceived value. To fail to make this distinction displays a certain level of idiocy I despise in those who fall in love and sing the praises of a particular system to the degree that they are blinded to the obvious.
My question is, how can you delineate between actual value and perceived value if humans are not involved in the process? What else is going to decide? What is the alternative to prices and markets that is better?
I'm actually asking a question. I am interested in the answer.
I retract my statement. Based on the replies you have given to others, you have no idea what you're talking about. I apologize.
Edited at 2008-08-29 01:34 pm (UTC)
It's funny you should think I have no idea what I'm talking about, as I've come to think the same thing about most of the people I've been replying to in this post.
I'm not an economist by trade, but at the same time, I'm not foolish enough to place blind faith in the ability of the free market to solve everything.
That's the shirking of responsibility - 'oh, it's too hard to figure this out, let's just let a roll of the dice decide'. Or even worse 'The free market adjusts everything perfectly'.
You're right, I'm not an economist. From the eyes of a mathematician though, the solutions implied here by others involve rampant ignorance and stupidity.
I'm sure such words won't help in anyone giving a thought out reply, but in truth, none of us are here to have our opinions changed. We all believe we know what is true and what is not, and none of it is subject to the possibility of error.
Seriously though, I love people that say things and don't back them up. To me, you're some random internet person. I have no knowledge of your authority or understanding of any given subject. It effectively doesn't exist until you prove it.
So if you say something like 'you have no idea what you're talking about', you need to offer proof of that. Eg, 'You say X, which is completely stupid because of reasons Y and Z', where Y and Z are some fact from a reputable source.
If Alan Greenspan says 'You have no idea what you're talking about', I would probably take time to rethink my premise. If a random internet person says that... Asking them to back it up isn't too much, hopefully.
1. It will be interesting and enlightening to you if you pay attention.
2. You won't feel the need to argue against someone you are antagonistically organized against, even though they are correct.
3. I will have no knowledge of the exact point in time when you realize I am completely correct, thusly robbing me of the enjoyment one experiences when this occurs. You can carry out the rest of your life knowing that you know important things that one ought to know, and I will be none the wiser.
And so, it is your move. Good luck with your life.
For you to be correct, you'd have to have made a statement, eg something other than a simple ad hominem.
I haven't claimed I was correct, or infallible in any way, shape or form. What I've said was 'wow, this is an incredibly stupid way of doing things, because of X'.
Yet rather than say 'ah, well, this actually *does* work because of Y', you've made the grade-school equivalent mistake of saying 'well, gosh, you've got cooties'.
I don't mind being wrong, as I'd prefer to be right. But if you claim someone is wrong, you have to show why, otherwise your accusation is worthless.
If you say 'get an economics textbook', I'd reply 'get a math textbook and get back to me'. That statement is one removed from being completely worthless.
What brings up the topic of socialism?
How do we know that a job produces little value? Because the market pays little for it.
Why does the market pay little for a particular job? Because the job produces little value.
Obviously, if the market is always right, then there can be no such thing as discrimination, exploitation, or overpaid union workers. Yet there is a fair amount of evidence for such things.
It would be better to say, from a market perspective, that a job pays little because our society has produced a surplus of people who want that job--- whether it is cashiering or teaching English literature. No employee captures the full value of his or her job. Many get paid even for destroying value. ;) So I think it is fair to ask whether wages are too low (or too high) without being hit over the head with a non-falsifiable free-market excuse.
Why does the market pay little for a particular job? Because it didn't need to pay more to find a qualified job seeker willing to accept the wage.
You seem to have hit the nail on the head; people aren't paid for how much value they bring to society via working at their job, they're paid what the lowest bidder bids for the job, essentially. That's obviously a bit of a problem, as people don't often learn from mistakes, especially as a whole.
Ie, if Joe Smith will take the job for $5 a week, then finds out that's not a sustainable decision, then what he learns won't be passed on.
A lot of these arguments seem to depend on people learning perfectly which, in real life, seems to be extremely rare.
Yes, they are. The labor market is the method of valuation. If some profession brings more value than they are paid, then more are hired, and more, and more, until you reach equality (value produced dropped because you don't need that many, wage increases because less supply in the labor pool).
Your whole argument is that the market doesn't correctly value the "value to society" in your subjective judgment. Let me know when you figure out the "value to society" equation, with your panel of "experts", and you can start price and wage fixing. Sounds like a "grand plan".
Take janitors. They are paid fairly little in comparison to most trades. Why? Because anyone can push a broom, right? But what happens if you lost your janitors en masse? Suddenly, the perceived value of janitors changes!
But if the original value was correctly determined by the market, as you argue, what's wrong with it now?
The market changed. Ah. Fascinating.
Repeat after me - 'do not place blind faith in the power of the market to make everything right'. That's what you appear to be doing. If you have reservations about such, I apologize and withdraw my accusation.
Homework assignment: look up the concept of marginalism, specifically the diamond/water paradox. As someone else menioned up thread. all of your profound insights are dealt with in a typical intro to micro course.
And no one here is placing blind faith in the power of the market to make everything right. What we are doing is making a relative comparison; the market is much more likely to reach desirable conclusions regarding the relative value of goods and services than any other information aggregator. See Hayek's The Use of Knowledge in Society (http://www.econlib.org/Library/Essays/hykKnw1.html).
- Micha
"the market is much more likely to reach desirable conclusions regarding the relative value of goods and services than any other information aggregator"
'Much more likely' is a far cry from 'best way of determining, period', as many here seem to be suggesting.
The biggest problem from what I've seen is favoring short term good over long term good. Layoffs might be a perfect example of that.
Subjective value and marginalism are the two bedrock theories of modern microeconomics, so it's just a little bit ridiculous to have you expound and pontificate with claims like "The assumption that the free market is omniscient, or even right, is perhaps the most dangerous assumption any economist could make" when you clearly have no idea what you are talking about.
- Micha
Honestly, I don't see much of a difference between these two formulations, other than style. It's sort of like the critic of atheism who says, "Oh, yeah, how can you be so sure that God doesn't exist? What is your evidence for God's nonexistence?"
But, of course, the atheist responds, atheism does not claim with absolute certainty that God does not exist, period; merely that, all things considered, God's nonexistence is much more likely than the alternative.
- Micha
Sure it's easy. Sure, on the surface, it's unbiased. Given that it's an aggregate of individual decisions, it's less prone to favor the interests of one individual over another.
Does that mean we should always view it as the best solution to things like wages and salary?
As a factor in determining wages and salaries, I can understand. But as the only factor? As the best factor?
I completely agree with these two statements, but the relevant question is: relative to what? If we are comparing the free market to an ideal, nonexistent system, run not by humans but by perfectly benevolent and all-knowing gods, then yes, the free market is a miserable failure. But compared to governments? It's precisely because governments are far more vulnerable to those who can game the system that the free market is preferred.
- Micha
Agreed.
Edited at 2008-08-30 10:10 pm (UTC)
Shouldn't the same apply to high wage jobs. Paying Bill Gates a Billion dollars a year, distorts what he is actually worth. His salary is NOT set by market forces.
But Bill Gates wealth comes from his stock in MSFT, which he got for founding the company. There, I don't think there is much distortion.
Some jobs have such an overabundance of supply (potential workers) that their pay would normally fall below that threshold. The micro negotiation of wages doesn't account for the macro value of providing people with opportunities to improve their value by learning new skills.
Again, just my opinion.
Well, there's the rub, though - high enough to provide them with the resources for self-improvement has seemed to often be well above low enough to provide sufficient motivation. Which lands us in the perfect failure modes of situations where people are getting paid sufficiently poorly to be motivated, but too poorly to do anything about it, and are thus stuck, and where they are being paid well enough to do something about it, but are not motivated to do so.
Yes, and it's all quite subjective, too. Let's say that I favor a higher minimum wage than my libertarian friends and a lower minimum wage than my socialist friends. ;-)
The Left would argue that health care should also be included.
The only drawback I can see of it is the potential for people to "abuse" it by living on the street and making money by renting out their roof, and selling their 3 meals and letting themselves survive on less food, and then pretend they don't have enough and whine that they need more help.
But as long as people realize they are making such choices and don't try to help them anymore, such corner-case people would not really mess up the system.
The overall health of the nation is probably the best priority - some things are cheaper in the long run in the 'ounce of prevention worth a pound of cure' sense. Universal housing, food, and basic health care might be something that could be pulled off without too much impact on the GDP. Maybe. Who knows.
If 5$/hr is the wage it takes for someone to be able to also take classes and improve their skills, by setting the minimum wage there you ensure that everyone who can get a job makes at least that much. But you cost the jobs of everyone who is so unskilled that they only make $4/hr or $3/hr.
Me, I want those people to have jobs. And I think they are the ones who are most in need of at least some resources.
If we set a $5/hour minimum wage, it does not follow that jobs which normally would only pay $4/hour suddenly are not performed. For example, the last minimum wage increase did not suddenly cause all minimum-wage supermarket employees to lose their jobs. Supermarkets still found it worthwhile to employ them (or most of them) at the higher price point.
I acknowledge, however, that an artificial minimum wage has lots of side effects, such as decreasing the efficiency of businesses employing minimum wage workers, eliminates some business from being practical, creating inflationary pressure, etc. These are compromises I'm willing to accept... to a point.
If you have data linking the minimum wage to unemployment, I'd love to see it.
But theoretically, it is pretty much a slam dunk. If you increase the price of something, consumption almost always goes down. The minimum wage increases the price of labor for those earning it, consumption (of minimum wage workers) is almost guaranteed to decrease.
To see a dramatic example, look at countries like France. Workers have long guaranteed vacations and are hard to fire - and unemployment is very high.
I don't dispute that increasing the minimum wage may causes some minimum wage workers to lose their jobs (certainly anyone employing them will need to cut something). I merely dispute your earlier statement that "all those whose labor isn't quite worth that wage get no jobs and no pay and no resources to learn better skills?" (emphasis mine)
To see a dramatic example, look at countries like France. Workers have long guaranteed vacations and are hard to fire - and unemployment is very high.
Unfortunately, other countries have so many other differences that it's difficult to draw meaningful comparisons, and socialist-leaning countries have no monopoly on high unemployment. ;-) The minimum wage in Brazil is a few hundred dollars per month, the government is generally hands-off (and in the favelas borders on non-existent), and unemployment is around 9.8%.
This assumes everyone has equal access to training and education. Which is the biggest heap of bullshit I've ever heard.
(Note that I am not saying that all union jobs are inflated in this way. I'm just saying it can be an indicator.)