Thread: Low Wages Cause Unemployment

I am just going to state the obvious here and state that low wages cause unemployment.
More people would be willing to work, and low-wage workers would be willing to work more productively if they were paid more.
Much of the "unemployment" problem in certain countries (especially the USA) is not that workers cannot find a job, but simply that they are unwilling to do the jobs available at the wages being offered. The extreme of this is homelessness. Many of the homeless could obtain an unpleasant minimum wage job, but it might not be enough to even pay for a decent place to sleep, so the homeless just give up on life. Another psychological aspect of this is that unemployment may not be entirely a choice. Low wages and exploitation in the workplace can become so discouraging that some workers can become depressed or rageful to the point that they are actually unable to be functional in the workplace, even if they tried. This may be difficult to understand for many of us who have decent paying jobs that are not too unpleasant.

There is also an economic model that postulates that higher wages will lead to more consumer demand, and thus will indirectly create more jobs, and put further upward pressure on wages. While higher wages could potentially lead to higher prices, labor is only one component of price, the other being capital. Indeed, in some situations a change in the cost of labor will not significantly affect prices. In regions where land is expensive, the main factor is the maximum rents that land owners can charge. There is a limit to what consumers are willing to pay, and the land owner will seek to raise his rents to as high as the tenant business owners, but ultimately the consumer, will pay. If the workers at those businesses demand more money, the land owner will have to reduce his rents, because consumers will not be willing to pay more. The burden of increasing labor costs is felt by the land owner, not the consumer. This would only apply in regions where the cost of land is very expensive.

Now, of course, higher wages are only shifting the wealth around. But more equal distribution of income usually leads to higher demand. One wealthy person with all the money is not going to spend as much as if that money were divided up amongst 10 people.

We hear all the time about a "shortage" of skilled laborers. But when workers in a certain occupation have to go through years of training, then are not paid very much, can we really be surprised that so many people are unwilling to do these types of jobs? Here is an example: If physicians are only being paid slightly above the median salary in the wider workforce, not many people are going to be willing to go through 10 years of school and training to become physicians. Does this mean there is a "shortage" of physicians? No. A real shortage, assuming it is operating in a free market, would put upward pressure on wages, to the point that there would be enough incentive to attract more new physicians. In the physician workforce, such a shortage can actually exist for an extended period of time because there is a lag time in training. Of course, there are always more desperate potential workers in other countries, willing to obtain education and training and work for far lower wages.

Now, in "classical economics", students are essentially taught just the opposite, that lower wages increase employment! This is very misleading. The idea seems to be that more desperate workers are willing to work harder as they struggle to pay for the basics of housing and a car, or that lower wages help decrease price. But as I already mentioned, price is also caused by the cost of capital. Even part of the cost of labor itself is actually indirectly the cost of capital. All these workers need a place to live. Higher land cost will mean the worker has to be paid more to pay his rent. Higher fuel costs will mean he has to be paid more to commute from the affordable area where he lives to his place of employment, if he cannot afford to live closer. Desperate workers are also willing to work more for less. This higher productivity can lead to reduced demand for labor, and thus unemployment. Sort of the "crisis of capital" described by Marx.

So I hope our countries can focus on increasing wages, not just on decreasing unemployment.

Originally Posted by Anders Hoveland

I am just going to state the obvious here and state that low wages cause unemployment.
More people would be willing to work...

This doesn't make sense. One has to be actively seeking work to be unemployed. If you're not willing to work then you have effectively left the labour force. You should be referring to employment rates

Originally Posted by Anders Hoveland

I am just going to state the obvious here and state that low wages cause unemployment.
More people would be willing to work, and low-wage workers would be willing to work more productively if they were paid more.
Much of the "unemployment" problem in certain countries (especially the USA) is not that workers cannot find a job, but simply that they are unwilling to do the jobs available at the wages being offered. The extreme of this is homelessness. Many of the homeless could obtain an unpleasant minimum wage job, but it might not be enough to even pay for a decent place to sleep, so the homeless just give up on life. Another psychological aspect of this is that unemployment may not be entirely a choice. Low wages and exploitation in the workplace can become so discouraging that some workers can become depressed or rageful to the point that they are actually unable to be functional in the workplace, even if they tried. This may be difficult to understand for many of us who have decent paying jobs that are not too unpleasant.

There is also an economic model that postulates that higher wages will lead to more consumer demand, and thus will indirectly create more jobs, and put further upward pressure on wages. While higher wages could potentially lead to higher prices, labor is only one component of price, the other being capital. Indeed, in some situations a change in the cost of labor will not significantly affect prices. In regions where land is expensive, the main factor is the maximum rents that land owners can charge. There is a limit to what consumers are willing to pay, and the land owner will seek to raise his rents to as high as the tenant business owners, but ultimately the consumer, will pay. If the workers at those businesses demand more money, the land owner will have to reduce his rents, because consumers will not be willing to pay more. The burden of increasing labor costs is felt by the land owner, not the consumer. This would only apply in regions where the cost of land is very expensive.

Now, of course, higher wages are only shifting the wealth around. But more equal distribution of income usually leads to higher demand. One wealthy person with all the money is not going to spend as much as if that money were divided up amongst 10 people.

We hear all the time about a "shortage" of skilled laborers. But when workers in a certain occupation have to go through years of training, then are not paid very much, can we really be surprised that so many people are unwilling to do these types of jobs? Here is an example: If physicians are only being paid slightly above the median salary in the wider workforce, not many people are going to be willing to go through 10 years of school and training to become physicians. Does this mean there is a "shortage" of physicians? No. A real shortage, assuming it is operating in a free market, would put upward pressure on wages, to the point that there would be enough incentive to attract more new physicians. In the physician workforce, such a shortage can actually exist for an extended period of time because there is a lag time in training. Of course, there are always more desperate potential workers in other countries, willing to obtain education and training and work for far lower wages.

Now, in "classical economics", students are essentially taught just the opposite, that lower wages increase employment! This is very misleading. The idea seems to be that more desperate workers are willing to work harder as they struggle to pay for the basics of housing and a car, or that lower wages help decrease price. But as I already mentioned, price is also caused by the cost of capital. Even part of the cost of labor itself is actually indirectly the cost of capital. All these workers need a place to live. Higher land cost will mean the worker has to be paid more to pay his rent. Higher fuel costs will mean he has to be paid more to commute from the affordable area where he lives to his place of employment, if he cannot afford to live closer. Desperate workers are also willing to work more for less. This higher productivity can lead to reduced demand for labor, and thus unemployment. Sort of the "crisis of capital" described by Marx.

So I hope our countries can focus on increasing wages, not just on decreasing unemployment.

Before the outsourcing wave came, there was plenty of jobs. The housing bubble gave the impression that jobs had returned, but when it popped the businesses that shut down caused even more unemployment. Now to stay in business, every business left is steady increasing their prices as demand shrinks, so not only is it an employers market where the wages are the same as 10 years ago, but inflation has made it to where those wages are (*)(*)(*)(*) near worthless. I got more for money when I was kid washing dishes than I do now as a line cook making twice as much. They say people make more money as inflation increases, but it is an outright lie. I would just like to add, taxes. As demand shrinks, not only are businesses raising their prices, but government is increasing taxes on the middle class on down. They do it sneaky, like for certain products, gas, smokes, etc. Pretty soon will be anything with sugar. And not just the fed and state governments, locally. I live in southeast Idaho, the only place in Idaho that consistently votes democrat locally. Because of this, any prospective company looking to set up shop in the area gets quoted unreal taxes to come and they pick someplace else to go. Has made it to where we only lose businesses, not gain any. The only thing keeping us afloat is the fact Pocatello is a college town and the SS and retirement checks of the baby boomers. When the boomers die, not to mention if the college loan bubble pops, we will be in for seriously hard times. And the rest of Idaho is actually doing pretty good. I know some say, "well why don't you move". When you work for scraps, and the cost of living is higher in any direction, you simply can't afford to.

People can't get a job if the employer can't afford to hire them...

Originally Posted by Reiver

This doesn't make sense. One has to be actively seeking work to be unemployed. If you're not willing to work then you have effectively left the labour force. You should be referring to employment rates

Actually it is your response that does not make sense. What exactly does "actively seeking work" mean? Essentially anyone could go get an unpleasant minimum wage job without any trouble. What if they are only willing to work for an unreasonable salary? What if they are unwilling to relocate? What about those who are not really motivated to find a job, but go through the motions of looking for a job, even though they are only applying to places they know they will not be hired at? The concept of "unemployment", at least the one being used by economists, is very ambiguous. It would be much simpler if "unemployment" just meant not working. Trying to deterimine whether an individual is not working by "choice" is NOT a simple question. At what lengths do they have to go to get and keep this job? Just because someone is "employed" does not necessarily mean they can afford to put a roof over their head and provide for their family.

Originally Posted by Til the Last Drop

Before the outsourcing wave came, there was plenty of jobs. The housing bubble gave the impression that jobs had returned, but when it popped the businesses that shut down caused even more unemployment.

...we will be in for seriously hard times. And the rest of Idaho is actually doing pretty good. I know some say, "well why don't you move". When you work for scraps, and the cost of living is higher in any direction, you simply can't afford to.

Agreed. One cannot understand the phenomena of unemployment without understanding the varying costs of living in different regions. Unemployed people often stay unemployed rather than moving to where the jobs are because they cannot afford to live near these jobs.

Originally Posted by jor

People can't get a job if the employer can't afford to hire them...

But three aspects have to be taken into account. First, workers are typically paid below what they should receive according to productivity criteria. Second, there are negative macroeconomic effects from lower wages. Third, the evidence suggests that wages and productivity are related (such that an increase in wages does not necessarily increase unit labour costs)

Originally Posted by Anders Hoveland

Actually it is your response that does not make sense. What exactly does "actively seeking work" mean? Essentially anyone could go get an unpleasant minimum wage job without any trouble.

That's a fallacy! Even if we had perfect mobility its nonsense to suggest that vacancies exceeds the number of those seeking work. Indeed, a bigger problem is 'hard to fill' vacancies created by skills mismatches.

The concept of "unemployment", at least the one being used by economists, is very ambiguous.

No its not. It very exact. In contrast you've just abused terms. Non-active does not and should not mean unemployed.

Originally Posted by Anders Hoveland

I am just going to state the obvious here and state that low wages cause unemployment.
More people would be willing to work, and low-wage workers would be willing to work more productively if they were paid more.
Much of the "unemployment" problem in certain countries (especially the USA) is not that workers cannot find a job, but simply that they are unwilling to do the jobs available at the wages being offered. The extreme of this is homelessness. Many of the homeless could obtain an unpleasant minimum wage job, but it might not be enough to even pay for a decent place to sleep, so the homeless just give up on life. Another psychological aspect of this is that unemployment may not be entirely a choice. Low wages and exploitation in the workplace can become so discouraging that some workers can become depressed or rageful to the point that they are actually unable to be functional in the workplace, even if they tried. This may be difficult to understand for many of us who have decent paying jobs that are not too unpleasant.

There is also an economic model that postulates that higher wages will lead to more consumer demand, and thus will indirectly create more jobs, and put further upward pressure on wages. While higher wages could potentially lead to higher prices, labor is only one component of price, the other being capital. Indeed, in some situations a change in the cost of labor will not significantly affect prices. In regions where land is expensive, the main factor is the maximum rents that land owners can charge. There is a limit to what consumers are willing to pay, and the land owner will seek to raise his rents to as high as the tenant business owners, but ultimately the consumer, will pay. If the workers at those businesses demand more money, the land owner will have to reduce his rents, because consumers will not be willing to pay more. The burden of increasing labor costs is felt by the land owner, not the consumer. This would only apply in regions where the cost of land is very expensive.

Now, of course, higher wages are only shifting the wealth around. But more equal distribution of income usually leads to higher demand. One wealthy person with all the money is not going to spend as much as if that money were divided up amongst 10 people.

We hear all the time about a "shortage" of skilled laborers. But when workers in a certain occupation have to go through years of training, then are not paid very much, can we really be surprised that so many people are unwilling to do these types of jobs? Here is an example: If physicians are only being paid slightly above the median salary in the wider workforce, not many people are going to be willing to go through 10 years of school and training to become physicians. Does this mean there is a "shortage" of physicians? No. A real shortage, assuming it is operating in a free market, would put upward pressure on wages, to the point that there would be enough incentive to attract more new physicians. In the physician workforce, such a shortage can actually exist for an extended period of time because there is a lag time in training. Of course, there are always more desperate potential workers in other countries, willing to obtain education and training and work for far lower wages.

Now, in "classical economics", students are essentially taught just the opposite, that lower wages increase employment! This is very misleading. The idea seems to be that more desperate workers are willing to work harder as they struggle to pay for the basics of housing and a car, or that lower wages help decrease price. But as I already mentioned, price is also caused by the cost of capital. Even part of the cost of labor itself is actually indirectly the cost of capital. All these workers need a place to live. Higher land cost will mean the worker has to be paid more to pay his rent. Higher fuel costs will mean he has to be paid more to commute from the affordable area where he lives to his place of employment, if he cannot afford to live closer. Desperate workers are also willing to work more for less. This higher productivity can lead to reduced demand for labor, and thus unemployment. Sort of the "crisis of capital" described by Marx.

So I hope our countries can focus on increasing wages, not just on decreasing unemployment.

And that is why we need to limit all social programs.

Originally Posted by Reiver

But three aspects have to be taken into account. First, workers are typically paid below what they should receive according to productivity criteria. Second, there are negative macroeconomic effects from lower wages. Third, the evidence suggests that wages and productivity are related (such that an increase in wages does not necessarily increase unit labour costs)

If the company is forced to pay lets say $10 (since that is an easy number) for minimum wage but the employee only provides $9 in productivity there is no point in keeping the employee since they are causing the company to lose money. Wage laws harm the unskilled worker.

Originally Posted by Archer0915

And that is why we need to limit all social programs.

It is not just that though, Archer. We need to cut taxes and regulations by a good 80%. We need to bring back protectionism to make up most of the difference for infrastructure spending and military. We need to bring back sound money. To eliminate the social programs without doing the rest would be to hand this nation over to corporations on a silver platter. You must remember taxes and regulations keep small guys from being able to compete. That means the average worker has no chance at joining the owner class. Corporatism via politicians for sale is destroying us. Basically, we need a genuine state. We never want the side of socialism that is the state controlling production, but we need the side of socialism that is workers in control of the state. Globalism has made enemies of the rich.