Good morning! With the time playing in my favour, I could put together some of the mailings of yesterday and constructed my own story to be ready when you wake up : ). I first introduce a different argument in between the debate over labour productivity & mark-up over costs, and latter I go into Doug's last night question. (Relevant pieces of original messages are reproduced in between). ************* Jim: Tavis writes>> I really don't get this. A rise in wages would be inflationary if (1) it caused firms to raise mark-ups over labor costs; (2) it created a rise in prices from a rise in consumer demand.<< The second makes sense, but not the first. With _constant_ mark-ups over unit labor costs and constant labor productivity, a rise in the minimum wage would spur price inflation (unless the over-all wage structure compressed, so that the economy-wide average wage stayed constant or fell). ************ Tavis: Sorry y'all. Jim's right. Cheers, ************ Jim: > As Tavis notes, labor productivity isn't constant, so this > inflationary scenario doesn't wash. In fact, as others have > noted, higher wages may stimulate technological change and more > capital-intensive production, so that labor productivity growth > would accelerate. This, as Tavis notes, also helps with the > demand-side scenario (case 2). > ******************* I do not _completely_ buy this. It can be, but it is not necessary for *our argument* ( "minimum wage increases do not necessarily lead to inflation"). Let me put it in this way. First, assume excess capacity and free the Keynesian multiplier: A wage increase will lead to higher income and higher consumption, in the same period (therefore more rapid than any increase in productivity due to technical change). Then you have that *at an aggregate level* firms will sell more *with the same installed capacity*. Or I am getting wrong the Keynesian perspective here?? Second, there is a certain degree of business concentration, and oligopolies are capable to charge a mark-up over production costs. But, why the mark-up needs to be a *fixed* mark-up over production costs??? One need not bite here... In the Post-Kaleckian -Structuralist (Post-Keynesian? ) literature, that seems to be still under discussion. Lance Taylor, for example, develops most of his models by assuming that the oligopolistic firm seeks to assure a fixed `profit rate', while the mark-up may vary...; his point, which I find quite sensible, is that capitalists maximize the remuneration on their own factor of production (i.e. capital); if I am right, this is quite Marxian as well. In practice, what matters at the end is that despite cost fluctuations and mark-up variations, the profit obtained over any unit of capital must be fixed. To get that, true, prices can move up, but it can also be that you get your profits by increasing sales for the same amount of invested capacity... Putting it into a couple of equations: P.X_o = C_o.( 1 + m_o ) P is price, C nominal costs, m mark-up rate. A `_o' as a suffix means initial values As to my first point, even if m_o is "fixed", an increase of C_o because of wages will only indicate that the product P.X_o will be higher. Now, the price level can be fixed if the cost increase was matched by an increase of the real (ex-post) product X (from X_o to X_1 ). One possibility is the mentioned increase of productivity through technological change; but another one is the increase of sales by a higher ex-ante demand, with the same technology, just taking advantage of the excess capacity. In analytical terms, X = f(C) so that P.X_1 = C_1.( 1 + m_o ). In aggregate terms, using Doug's statistics, it looks quite possible that an increase of 1US$ per hour allows for an increase of 0.1% in GDP... But still, we can question whether m_o will stay being "m_o" (i.e. whether the mark-up over costs is kept fixed from a capitalist point of view). My point is that this is not necessary; if capitalists are concerned with their rate of profits over their factor of production (capital), an increase of labour costs can very well live together with an `deterioration' of the mark-up rate, and they will still `accumulate' as much as they wanted!. >From above, capitalist profits are = m_o.C_o and the profit rate, defined as profits over capital stock, is R = m_o.C_o / K (K is fixed because there is excess capacity) Now, if R is to be kept constant, an increase of costs can allow a decrease of the mark-up (i.e. m = f(C) ) so that: R = m_1. C_1 / K; and moreover, there is no inflation... and every body is happy!: capitalists, workers, and the Central bank!! (well not..., there are still those in the developing world, whose salaries, social services, and employment possibilites are sharply declining while prices keep rising..., but that has more to do with the `confusion' in the IMF/WB, the story of yesterday...) ************ At 7:47 PM 10/9/96, Gerald Levy wrote: >Did anyone yet mention the degree of concentration in markets where >firms typically pay workers the minimum wage? As has been remarked >previously, most minimum wage workers are in their service sector but >many of these markets are highly concentrated and dominated by >oligopolies. Consider the fast food industry and the likes of >McDonalds, Burger King, Wendys, etc.. Now, certainly if wages were to >go up, this would increase each firm's costs of production, ceteris >paribus. Yet, these are hardly competitive markets in the normal >sense of the term and the oligopolies have a high mark-up over costs. >So my guess is that if the minimum wage was increased, ****************** Doug wrote: But Jerry's quoted posting is pretty standard left-wing economic thought, and the Wall Street Journal story pretty standard business journalism. My impression is that the business journalists are closer to the truth - that competition today is more intense than it was 20 or 30 years ago, the days of price leadership and polite cartels. But monopolistic/oligopolistic theories still prevail on what's left of the left these days. Who's right? ************ Maggie: So, the answer to your student is that there are several results which could be construed from minimum wage, depending on which set of assumptions you prefer. ******************* Also to Doug (thanks Maggie, sometimes it is difficult to answer that guy :-) ). IMHO, all depends what the capitalists look at: if they perceive that the US economy (and their plants) are near full capacity, and that (maybe) other costs than labour are getting out of hands, they may make a net profit by moving abroad. Other assumption is that they start considering buying British beef (it is getting *really* cheap here around, you can imagine why...). Salud, Alex > Alex Izurieta E-mail: [EMAIL PROTECTED] Institute of Social Studies P.O. Box 29776 2502 LT The Hague Tel. 31-70-4260480 Fax. 31-70-4260755
