Low Wages Cause Unemployment

Discussion in 'Economics & Trade' started by Anders Hoveland, Apr 21, 2012.

  1. Anders Hoveland

    Anders Hoveland Banned

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    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.
     
  2. Reiver

    Reiver New Member

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    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
     
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  3. Til the Last Drop

    Til the Last Drop Well-Known Member Past Donor

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    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.
     
  4. jor

    jor New Member

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

    Anders Hoveland Banned

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    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.


    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.
     
  6. Reiver

    Reiver New Member

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    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)
     
  7. Reiver

    Reiver New Member

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    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.

    No its not. It very exact. In contrast you've just abused terms. Non-active does not and should not mean unemployed.
     
  8. Archer0915

    Archer0915 New Member

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

    jor New Member

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    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.
     
  10. Til the Last Drop

    Til the Last Drop Well-Known Member Past Donor

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    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.
     
  11. Reiver

    Reiver New Member

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    You've simply ignored the three aspects mentioned. We know that underpayment increases as we move down the wage distribution (i.e. the minimum wage actually reduces market failure). We also know that minimum wages have been found to increase productivity levels. We also know that there are macroeconomic limits to wage reductions: given the negative demand effects can actually harm enterprise. We also know that, due to job search frictions and the adoption of reservation wage strategies, a minimum wage can actually increase wages and employment levels
     
  12. Anders Hoveland

    Anders Hoveland Banned

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    You are ignoring the obvious question. Why are the unemployed not gaining the skills to fill these vacancies?
    Perhaps because the wages/working conditions for these skilled jobs are not very good, relative to the cost, training, and time it takes to get this training.
    "Demand" can be a misleading concept. To try to quantify it, it is a product of how much these jobs pay individually and the quantity of jobs demanded. Demand might be very high, but this does not necessarily mean the demand of any particular individual is very high.

    You are talking about "skill mismatches", but you are expecting the unemployed to go through all this difficult and expensive training, only to work in an overworked job, that does not even pay enough for the workers to afford a house! An obvious example of these is nursing. There is no "shortage" of nurses. No one wants to go into this profession because they hear about how nurses are overworked, underpaid, and underappreciated by the hospitals. And now the hospitals are only hiring experienced nurses. If there really was some desperate shortage, the hospitals would be training new nurses, which they are not really doing.

    And your conception of "skill mismatch" is relative. There are not enough doctors in Africa (because no one can afford medical treatment). I guess that means there is a "skill mismatch"! (sarcasm)
    If you have any examples of a good paying job, that does not require more than four years of training, where the working conditions are good, and where there is a shortage of workers, please let me know. Or jobs that require more education and training, but have excellent incomes to compensate potential workers for everything they had to go through. It is not really realistic to expect everyone to become physicians when physicians do not really have wonderful incomes.
    It almost seem that many economists want the government to train all the workers, because there is not enough demand in the private workforce to incentivise the employer to train his own employees. But the problem with schools is that the training is almost always not actually real work experience that is applicable to the job. Many potential employees have gone through expensive 2-year long training programs, only to find that they had to relearn everything on the job again. Apparently these training programs are more about credentialism, and weeding out the less motivated, than actually providing useful training.
     
  13. Reiver

    Reiver New Member

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    Haven't ignored anything. Skills mismatches are typically the result of either market failure (i.e. insufficient training due to contracting problems) or supply side problems (e.g. home ownership; finance sector limitations for human capital investment etc.). They certainly cannot be used to support your previous comment. We simply do not have 'more vacancies' than unemployed. Its even more nonsensical as, using your corrupted measure (where you're referring to 'non-active' potential workers), we'd have a massive excess supply problem

    More drivel! Its easily calculated. We just have to refer to the methods employed to calculate hard to fill vancanies
     
  14. Archer0915

    Archer0915 New Member

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    I agree and we need to eliminate the min. wage.
     
  15. Til the Last Drop

    Til the Last Drop Well-Known Member Past Donor

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    I must say, that if we are going to allow free trade and fiat currency to dictate you have to have an education to get a job, higher learning and/or skills should be free. People shouldn't have to accumulate a mountain of debt for a middle class job. That would eliminate a lot of the problems with higher education, making people take ridiculous courses to earn their degree. To keep them there longer and gouge their easy to get debt. But one must also recognize that a lot of the mechanized jobs people claim they can't find the workers for, the college degree is worthless and the person must still be trained. Take for instance the rail road. For a century the railroad has had workers with zero college, all know their job. But now college grads have gotten a lock on the human resource divisions, and will only hire those with a diploma. I don't know if you could call academic nepotism, or what. But all the guys from the old days say the kids out of college, most of whom have never worked a real job, are worthless as tits on a bull. Hell, I'm a line cook and it took years to get as good as I am. We won't even look at culinary arts grads because college simply taught them recipes and they have no clue how to work. I remember one place that tried to hire a guy, paid him minimum because they knew he would be worthless but had a spot to fill, and he had trouble with a hamburger. No joke. "This is new for me, in school one guy does the bun, another the pickles, another the tomatoes". All I could say was "here partner, you do everything". Slow as molasses in January. Tits on a bull. And owes 40k to make minimum. Sad.
     
  16. Hoosier8

    Hoosier8 Banned Donor

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    If low wages cause unemployment then it follows that high wages create jobs. Does that make any sense whatsoever?
     
  17. Reiver

    Reiver New Member

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    Nearly! It follows that increases in wages can create jobs. We just need monopsony power for that to occur (and that only needs job search frictions)
     
  18. Til the Last Drop

    Til the Last Drop Well-Known Member Past Donor

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    Actually, yes. Over half of our great economy relies on frivolous spending. That spending only occurs when people have recreational money. When you pay people only enough to show up the next day, because you have them by the balls, pretty soon the entire economy shrinks around you. Because you weren't the 1st to think you're clever and do the same.
     
  19. Anders Hoveland

    Anders Hoveland Banned

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    I disagree. I do not think all these people should be made to be desperate to work for minimum wage under poor working conditions. It seems like many conservatives believe the answer to dealing with unemployment and crime is to just increase the punishments. And if the poor already live under horrible conditions in their daily lives, the punishments should just be made even worse! I was talking about this with a woman, about how things were so bad in Mexico that many of the Mexicans would rather be in a prison in the USA than free in Mexico. Her opinion was that the solution to this problem was to just make things so bad in American prisons that no more Mexicans would want to migrate!

    No, I believe the poor and low-wage workers struggling to survive should be treated with more consideration, not despised. It seems many people resent the fact that poor people exist, and almost wish they would just die. Then they put all the blame on the poor themselves.

    But we do need to stop incentivising people not to work. Unemployment benefits need to be designed so that they will not all go away when someone obtains a minimum wage job. And the unemployed should be able to get a job, without fear that they will permanently lose all their assistance if they later become unemployed or decide they do not want to work in the job.
     
  20. Til the Last Drop

    Til the Last Drop Well-Known Member Past Donor

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    Actually, yes. Over half of our great economy relies on frivolous spending. That spending only occurs when people have recreational money. When you pay people only enough to show up the next day, because you have them by the balls, pretty soon the entire economy shrinks around you. Because you weren't the 1st to think you're clever and do the same.
     

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