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More Inflation
First oil, then rice and wheat, and now the cost of hiring low-skilled labor is up by 12% in just one day. Shocking.
Hat tip to Don Boudreaux.
Posted by Alex Tabarrok on July 24, 2008 at 11:13 AM in Economics | Permalink
Comments
I fell this one is a necessary inflation. It had stayed 5.15 for over a decade when all other prices went up. Its not shocking, its a good move.
Posted by: Brad at Jul 24, 2008 11:43:31 AM
What speculators can we scapegoat for this travesty? Oh, wait...
Posted by: Thelonious_Nick at Jul 24, 2008 11:46:03 AM
please. with rational expectations, the effect of this increase has already been felt at the time of the legislation. there is no new information here. inflation will not increase because of this anticipated increase in wages. unless you are advocate of (very) sticky prices. or perhaps you like mankiw, reis - sticky information, which is a nice model, but much less plausible in a scenario like this with a well-known government-mandated wage increase. or maybe the rational expectations assumption is greatly violated. i'll not go there in this comment... but i sympathize.
Posted by: samson at Jul 24, 2008 11:51:24 AM
Any recent estimates as to how many people in NON-TIPPED positions are actually working for minimum wage?
Posted by: Sean at Jul 24, 2008 12:00:31 PM
I remember when my wife managed a pizza restaurant for the owner. The owner staunchly refused to pay more than the federal minimum wage, even though the average entry wage in that city was higher than the minimum. She tried, but could not convince the owner to pay more. Thus, she was only able to hire those who had been fired elsewhere. Her job became much easier (and the quality of the product increased) after she was able to higher a better class of worker.
Posted by: Craig at Jul 24, 2008 12:01:15 PM
Hmm. I thought a change in relative price levels was not necessarily inflationary.
Posted by: Bernard Yomtov at Jul 24, 2008 12:10:44 PM
It is no surprise that the teen unemployment rate is up so much this summer. I hear the McDonald's near
me hired 1 less person this summer and expected everyone else to work 12% harder. Go figure.
Posted by: Jay at Jul 24, 2008 12:10:48 PM
In flexible California you can check the illegal day-labor rates to see how they have changed this past year ... or if they change in response to this event.
(I've never hired an illegal, but I think I've heard that they are at $10/hr. here.)
Posted by: odograph at Jul 24, 2008 12:23:25 PM
At a magnanimous $6.55 per hour, the recipients will not be likely to experience much in the way of wage competition from many CEO applicants. Are you looking to apply for one of these jobs?
Plus, this is not a sudden price or inflationary rise, but a planned government intervention.
Posted by: Steve at Jul 24, 2008 12:23:29 PM
Come on, we report inflation statistics at annual rates! That's 4,380 percent!
Posted by: adam at Jul 24, 2008 12:25:19 PM
While it may sound like illegals are less expensive than minimum wage workers, that is not the case. Once you load in Taxes and Insurance for your minimum wage workers cost you well over 10/hr.
Of course, YMMV.
Posted by: Marcus at Jul 24, 2008 1:09:06 PM
adam, if we assume that the 12 percent is compounded daily, then this is actually a 9.48162512 × 10^19 percent annual minimum wage increase.
revised calculation: [(1+.12)^(365.25)-1] × 100 = 9.48162512 × 10^19
Posted by: not adam at Jul 24, 2008 1:10:56 PM
Yes, but TFA says that he rate had been unchanged for over 10 years. What cost $5.15 in 1997 would cost $6.74 in 2007. So really the minimum wage is lagging behind the inflation rate and even with the current increase is lower than it was the last time it was raised.
@Marcus: "Once you load in Taxes and Insurance for your minimum wage workers cost you well over 10/hr." But those taxes pay for things we like to have. If you don't like taxes, move to a third world country. Lower taxes, less regulation. You'll love it there!
Posted by: david at Jul 24, 2008 1:27:21 PM
Don’t confuse price increases with inflation. Increases in price are a RESULT of inflation, not inflation itself. So, how do I know that these prices are (or, are not) the result inflation, not market fluctuations?
I think it is a cheap way out to call something “inflation” in place of market mechanics.
Posted by: P. Blank at Jul 24, 2008 2:04:59 PM
If you don't like taxes, move to a third world country. Lower taxes, less regulation.
You should take a peek at the World Bank's Doing Busines Report--it shows regulatory burdens across countries (measured as # of procedures required to open a business, # of days the procedures require, and license costs as a pct of per capita income). The findings show that in many third world countries there are extremely burdensome regulations.
Posted by: Frank at Jul 24, 2008 2:24:45 PM
Yes, I guess the approximation used to go from quarterly rates to annual rates (x4) is not very good when you're talking about a 12 percent daily change...
Posted by: Adam at Jul 24, 2008 2:31:32 PM
David,
That may be true, but virtually zero of the taxes anyone pays actually benefits him/her in particular. Paying $1 more in taxes may conceivably provide everyone as a whole with $1 (or more) of public goods, but that gets shared over a lot of people. I hate to be pedantic, but if it were true that you should ignore the cost of taxes when making your decisions, then we don't need to levy taxes, as people would pay the same amount voluntarily.
Posted by: ryan at Jul 24, 2008 2:50:54 PM
I wonder what would happen if everything was indexed to inflation.
Posted by: Andrew at Jul 24, 2008 3:33:44 PM
P. Blank,
This statement is not correct: "Don’t confuse price increases with inflation. Increases in price are a RESULT of inflation, not inflation itself."
Actually, the rate of inflation is *defined* as a percentage change in prices, typically some summary measure of a number of prices, such as the CPI Index. It's simply a matter of definition. And in fact, a change in the overall level of prices, the rate of inflation, are generated by supply and demand (whether those two things are manipulated by governments, or otherwise). Though your's is an easy mistake to make; in fact, the causes and cost of inflation are poorly explained, if ever explained, in the popular press.
Posted by: soylentgreenispeople at Jul 24, 2008 4:51:19 PM
P. Blank,
This statement is not correct: "Don’t confuse price increases with inflation. Increases in price are a RESULT of inflation, not inflation itself."
Actually, the rate of inflation is *defined* as a percentage change in prices, typically some summary measure of a number of prices, such as the CPI Index. It's simply a matter of definition. And in fact, a change in the overall level of prices, the rate of inflation, are generated by supply and demand (whether those two things are manipulated by governments, or otherwise). Though your's is an easy mistake to make; in fact, the causes and cost of inflation are poorly explained, if ever explained, in the popular press.
Posted by: soylentgreenispeople at Jul 24, 2008 4:53:26 PM
Her job became much easier (and the quality of the product increased) after she was able to higher a better class of worker.
But what about those crappy worekers who worked there before? Either A) they're now unemployed, or B) they're working in other places, sonme of which used to pay slightly above minimum wage. A) isn't good, obviously, if the minimum wage increase causes unemployment. B) isn't good either, not for your wife's employer or those other businesses. The pizza restaurant owner is worse off because he is now being forced to pay a premium for better workers. Yeah, the food might be better now, but the owner would have rather sold crappy food for a lower cost. The other businesses that used to pay slightly above minimum wage are worse off because even though they're paying the same wages as before, their workers got worse.
Since it's probably a combination of A) and B), this means almost everyone is worse off: for a wage increase of crappy workers, some other crappy workers are now unemployed, minimum wage hirers are forced to pay higher salaries, slightly above minimum wage hirers are getting worse workers, and consumers get higher prices.
Posted by: Hei Lun Chan at Jul 24, 2008 6:54:46 PM
Very clear and very correct analysis by Hei Lun Chan @6:54. The only argument that can be made for minimum wage is that the less happy restaurant owners are more than offset by the happier low wage workers who remain employed. That is a normative issue no clear answer, but efficiency arguments for minimum wage are difficult to make in a competitive economy.
Posted by: liberalarts at Jul 24, 2008 7:40:58 PM
the minimum wage is dumb. Its irrelevant in high cost areas, where wages are already higher. It creates unemployment and encourages illegal labor elsewhere.
Its an abdication of financial responsibility as well. Lets help the lowest earners by forcing someone to give them money they haven't earned. At least when the government pays, the cost is distributed to all taxpayers (ok, to future generations because we'd be borrowing as usual)
Posted by: Alan Brown at Jul 25, 2008 3:46:51 AM
"forcing someone to give them money they haven't earned"
This is not correct. I am not a big fan of the MW, but the theory is that those who can't earn the higher MW lose their jobs. Those who remain are generating a marginal product in excess of the MW, or they in fact would be let go.
Posted by: liberalarts at Jul 25, 2008 2:03:08 PM
I noted the comment by Jay about unemployment being higher for young people because of basically an increase in the minimum wage leading MacDonald (!!!) to employ less people... HOW RIDICULOUS!! Let's cry for MacDonalds, don't we, if they had to cut their precious profits to contribute to a small improvement in their workers' life.. It is MacDonald that should be put on the spot for refusing what I consider still a poverty wage to its workers. Without them.. there is NO PROFIT at all MacDonald... I live in the UK and I am French...staff MacDonalds
Posted by: Emilie at Oct 9, 2008 8:43:58 AM
