Oligopolisticexpialidocious or The Case for a Minimum Wage

     Technically the title should read Oligopsonisticexpialidocious but it doesn't quite have the same ring. In any case, what the hell does it mean? Well, an Oligopoly is a market which consists of a small number of large firms (similar to a monopoly which only has one). And an Oligopsony is a market which consists of a small number of powerful buyers (it might be better to read about the similar monopsony).  Now, you're probably asking what it has to do with the minimum wage. It is an interesting relationship which I chose to bring up because of the constant rhetoric about how minimum wages destroy jobs. Now, notwithstanding the fact that the minimum wage has declined in real terms since the 70's, what the hell does the minimum wage have to do
unemployment?
     The argument is rather straightforward. If there is a minimum wage then any worker who produces less value than the minimum wage will be fired as they cost more than they are worth, this will inevitably lead to unemployment (I have simplified it slightly). The argument holds and is the basis of almost all opposition to minimum wages. Indeed one has to ask why anyone supports the minimum wage if it leads to unemployment, well the answer is it doesn't, not necessarily.
     Hang on a sec! You just said it did! Well, let's go back to our previous argument and ask what if people are not being paid an amount equal to the extra value they add (marginal revenue product/MRP)? Under a perfectly competitive system this wouldn't be the case, markets would clear until the wage equal the MRP of the worker. However, do we have a perfectly competitive market? The answer is no, well kinda.

     Under perfect conditions, there is no cost to the worker in changing job and any cut in wage means they will simply move company. It also assumes that workers are indifferent between jobs (clearly not the case). These conditions (among others) result in a measure of market power moving towards the employer.  As a result we see less people employed than in a competitive system and these people are employed at a lower wage than would prevail under competitive conditions. The graph from wiki illustrates this well (but it is somewhat complicated).

     -The axes L and w refer to the quantity of labour employed and the wage paid (respectively).
    -The red line is the marginal revenue product of an extra worker. (i.e. the extra value an additional worker would add to the firm).
   - The blue line is the supply of labour. (i.e. the amount of labour forthcoming at each wage level).
   -The green line is the marginal cost of labour (how much it costs the firm to hire an additional person).

    Now under a perfectly competitive system we expect the firm to produce at level C with wages w' and L' labour employed. At this point the wage of the employee is equal to the MRP (as mentioned above). If however the employer enjoys some monopsonistic (or oligopsonistic) power then this is not the case. Instead the firm does not have to worry about workers being siphoned away by competition and so does not have to raise wages to keep employees. In this case the firm maximises its profits by employing more labour until MC (the extra cost of a worker) is equal to MRP (the extra value of a worker). This occurs at point A and leads to a wage w and employment L. Both w and L are below the equilibrium in the competitive system. i.e. less people and lower wages.

    Now, back to the minimum wage. Under these conditions a minimum wage set between w and w' above not only leads to an increase in wages but also an increase in employment! This is an amazing result and can actually be used to test the prevelance of monopsony in a market. Now, if there does exist monopsony (due to a lack of knowledge, job-search frictions etc.) then there certainly is a case for the minimum wage. As to what it should be set at? That is a difficult question and must rely on emprical observation. The main thing is however, that the minimum does not always lead to unemployment and may in fact increase both employment and wages. For anyone interested in this, I strongly recommend this paper. It is reader-friendly and explains the whole situation far better than I can.

Federal Taxes In Perspective

   There has been an irritating new propaganda trick from the Right in America (pushed by groups such as the Heritage Foundation). Well, I say new but it has been around for a while. It essentially runs as follows: The top 1% pays X% in income taxes, while the bottom 50% pays Y% (with Y<<X). For example:


"Top 1% pay more income tax than bottom 90%!"


"The top 1 percent of tax returns paid 38 percent of all federal income taxes"


"Top 0.1 Percent pays more income tax than bottom 80 percent"

   
    Well....you get the idea. While I do not question the accuracy of these figures (I will take them as true) I will endeavour to put them into context. First off, let's compare what these tax figures are like compared to incomes (right).
    Now, it seems that much of the difference in tax paid is accounted for by income differences but it still seems that the federal income tax is reasonably progressive (not a bad thing). So it would seem the right has a point, however the point is exaggerated due to the fact they don't mention shares of income and that progressive taxes are not necessarily a bad thing.

     You might suspect there is more however (you'd be right). Let's have a look at ALL taxes not just federal income taxes. Other taxes (e.g. sales taxes) tend to be much more regressive (poorer people spend a higher percentage on goods/services), so how do they change the picture. Well, here are the figures:

    

    
     As you can see they paint an interesting picture. The total tax liability of each income groups is roughly identical to their income share with some element of progressiveness. This radically changes the policy implications however. If we were to change the federal tax system (as is suggested by the right) then we may very well end up with a system that is regressive (not a good thing at all). The point to take away from this is (apart from the data manipulation of the right) is the fact that the tax system is not highly 'unfair' to the rich.

For completion I also include the total effective tax rates of income groups (right). For more info I recommend Citizens for Tax Justice and in particular this report which has more up to date figures which show much the same picture.

The Poor and Democracy

   Given the constant tripe espoused by the right-wing in America about the poor voting for benefits. I thought it was time to hit back. What pushed me was this recent article "Registering the Poor to vote is Un-American" which contains a choice quote:

  "Why are left-wing activist groups so keen on 
registering the poor to vote?

Because they know the poor can be counted on

to vote themselves more benefits by electing

redistributionist politicians.  Welfare recipients are

particularly open to demagoguery and bribery."

This essentially sums up the Republican attitude to the poor and democracy. Given that it is a particular talking point and given that it is true that poorer demographics vote for less right-wing candidates (I am loathe to call the Democrats left-wing as, at best, they approach centre), it would make for an interesting investigation to determine whether or not this position is true. Well first off the figures on welfare and its effectiveness in America are telling. It is not, however, what I want to focus on and so I'll just give you the figure above which is a chart showing average monthly welfare benefits in 2006 dollars.

     Instead I want to ask whether or not the poor, by weight of numbers, have a strong influence on policy decisions and despite the nominal notion of democracy the answer would seem to be no. I refer the reader to this paper by Martin Gilens of Princeton University: Inequality and Democratic Reponsiveness in the United States.

Abstract:

"In this paper, I examine the extent to which the link between public preferences and government policy is biased toward the preferences of high-income Americans. Using an original data set of almost 2,000 survey questions on proposed policy changes between 1981 and 2002, I find a moderately strong relationship between what the public wants and what the government does, albeit with a strong bias toward the status quo. But I also find that when Americans with different income levels differ in their policy preferences, actual policy outcomes strongly reflect the preferences of the most affluent but bear little relationship to the preferences of poor or middle income Americans....."


  The graphs alone are most telling of the impact of wealth on democratic power:

     The 10th percentile (those richer than or equal to exactly 10 percent of people) have essentially no influence on democratic decisions whereas the 90th percentile (those richer than or equal to 90 percent of people) can greatly impact policy decisions. Even the 50th percentile (those richer than 50 percent of people) have nowhere near the influence of the top 10 percent. Now that we have tested this empirically (something Republicans loath) the evidence is fairly clear, the idea that the poor have a disproportionate impact on democracy due to weight of numbers is clearly incorrect and instead we see that the idea that big business and the wealthy having an unfair stake in democracy is true.

  Can we expect the Republicans, among others, to drop this notion of 'mob rule' and voting for benefits? Not very likely. It makes for good (if wholly incorrect) politics. The only time the poor have any reasonable say (in proportion to their numbers) is when the issues are of high salience (or the rich agree).

   Unfortunately I don't think that this political sleight of hand and its accompanying red scare elements (highly evident in the American Thinker article) will be leaving American politics anytime soon. Instead, I imagine it will be used as a stick to beat the poor and reduce their power even further, both through technocratic developments and by using this idea of the poor voting for money as a rhetorical device. Time will tell.

The London Riots Revisted

     I wanted to revisit an earlier post of mine: A Predictable Mess. Essentially, I was tying together the rising income inequality and austerity in Britain to the London Riots. Two articles in the Guardian aroused my interest. First was this piece: England Rioters: Young, Poor and Unemployed. Which has some interesting information on the demographics of the rioters (as suggested by the headline). Of worth was the following:

"A Liverpool University urban planning lecturer, Alex Singleton, analysed the Guardian's preliminary data by overlaying the addresses of defendants with the poverty indicators mapped by England's Indices of Multiple Deprivation, which breaks the country into small geographical areas.

   He found that the majority of people who have appeared in court live in poor neighbourhoods, with 41% of suspects living in one of the top 10% of most deprived places in the country. The data also shows that 66% of neighbourhoods where the accused live got poorer between 2007 and 2010."

Another article: England's rioters: did many 'pillars of the community' take part? has perhaps the most shocking statistic:

"Only a small proportion of people appearing in court charged with offences committed during the riots are listed as being in work or in full-time education, according to an analysis of most of the defendants whose cases have been heard so far. Research carried out by the Guardian of around 1,000 cases going through the magistrates courts shows that just 8.6% of defendants have jobs or are students." [Emphasis mine]


Meanwhile, as Cameron talks of 'zero tolerance', it would be useful to check some of the research on this question. I refer the reader to one paper Redistribution and Civil Unrest.

Abstract:

"Recurrent episodes of civil unrest significantly reduce the potential for economic growth and poverty reduction. Yet the economics literature offers little understanding on what triggers social unrest and how to prevent it. We analyse theoretically the merits of redistributive policies in the onset and reduction of civil unrest and compare it with more direct policies such as the use of police. We present empirical evidence for a panel of Indian states, where conflict, redistributive policies and policing are treated as endogenous variables. Our empirical results show, in the medium-term, redistributive policies are an effective means to reduce civil unrest, as they affect directly important causes of social conflict, notably poverty. Policing is at best a short-term strategy. In the long-term, it may trigger further social discontent."

It seems we never learn....or at least the Conservatives don't.....assuming, that is, they genuinely want to solve the problems.

The Fallacy of the Broken Window Fallacy (Or as it is used on Mises)

    I was perusing the interwebs recently when I stumbled across this article on Mises: The Broken-Window Fallacy by Robert P. Murphy. Now I tend to avoid Mises.org and similar sites due to their general dogmatic propaganda but occasionally I like to see what particular mistakes they are peddling. This article struck me as worthy of a response because of how stunning the sleight of hand really is. I ask the reader to read the parable of the broken window either here or in Murphy's article.

     It all  seems reasonable enough until one thinks "wait! What does it mean if the shopkeeper were not going to spend those six francs!" Is there now an economic benefit because there are six francs more being spent than otherwise would be? Well, let us see what Murphy has to say on this matter:

"Specifically, Bastiat assumes that the shopkeeper would have spent his six francs somehow, and that the boy has merely forced him to spend the money on repairing the broken window. It is wrong to view the employment of the glazier as a net gain to the economy, because the shopkeeper (in the absence of the broken window) might have spent that six francs getting his shoes repaired, for example. In that case, the glazier's gain is exactly counterbalanced by the cobbler's loss.
Thus, if we assume that the workers in the community would have been "fully employed" had the boy not broken the window, then it's clear that the boy isn't "creating jobs" or "boosting total income." All he's done is to give more work/income to the glazier, at the expense of work/income for some other people in the community."

What I have underlined says it all really. So, Krugman (who I'm not overly fond of) argues that a destructive act will benefit the economy due to unemployed resources (capital and labour) and Murphy responds by saying that Krugman is wrong if we assume full employment. Did you get that? He assumed the argument away! Krugman's whole point was that there were unemployed resources which could be employed due to disaster and the response is to assume there are no unemployed resources??

Krugman: If and only if A then B.
Murphy: Not A therefore not B.

Did he miss the word 'if'? And if he did has he not seen the unemployment figures? And the cash at hand in major companies? (Apple has more cash at hand than the U.S. government).

Am I missing something here? Let us read on. Murphy moves on to make a reasonable point regarding the decrease in total wealth (which I will return to) and then quotes Krugman. Hurrying past this we find the next reference to idle/unemployed resources:

"One of [the Keynesian's] responses is to claim that the conservative/libertarian critics are ignoring the distinction between wealth and employment, and that they are unwittingly assuming that there is full employment (i.e., that there are no "idle resources")....

At this stage of the argument, I think there are two main answers. In the first place, we have to inquire why there are so many "idle resources" lying around? If it turns out that destructive government and central-bank policies are to blame — and not a sudden unwillingness for people to "spend enough" — then forced expenditures (due to a natural disaster or terrorist attack) won't actually fix the labor market. Mysteriously, the economy will suddenly become "worse than we realized," so that even in light of the new spending, unemployment is still too high. (This is what happened with the Obama stimulus package.) "


 So, now we have moved from assuming that there are no idle resources to assuming that if there are they must be a result of non-market forces. Now he does provide a link for this assertion but I've had my fill of rubbish today and may pick it up some other time.

 Other Points (Some Nitpicking)

For another point which I felt needed mentioning, I refer to this paragraph:

"At this point, one might think that the whole episode is a wash. Sure, the boy's vandalism doesn't help, but how does it hurt things? Is Bastiat implicitly arguing that it's better to give business to the cobbler, rather than the glazier? Where does he get off making that judgment?
 The answer involves the distinction between wealth versus income or employment. Just because "total income," or "total employment," or "total GDP" hasn't been changed by the boy's action — it's just that the composition has been rearranged — nonetheless the hooligan lad has objectively made the community poorer."

 This seems a more reasonable proposition. It is however odd in light of Austrian economics. Notice the phrase "nonetheless the hooligan lad has objectively made the community poorer". Objectively? Given that the Austrian school relies on 'revealed preference' and the subjectivity of utility in its every analysis, I find it odd to see the word objectively sneaked in here. How does the Austrian suppose to measure the utility gained or lost due to this act? Given that their analysis almost entirely relies on this utility or preference having to be 'revealed'. How do we know that the utility of the Glazer or indeed the utility of the new pane to the shopkeeper is lower than that which would have been otherwise? This is even more so the case if we assume that there are unemployed resources. Murphy refers in his article to the disutility of work: "Work is a necessary evil, not an end in itself." and later on at the end of an example where he states  "Sure, Jim caused some physical destruction of wealth, and that is a bad thing; however, let's not lose sight of the upside: the neighbor used more of his labor than would otherwise have been the case"?.  If we do indeed assume that there are no unemployed resources then his argument seems to hold up but if there are unemployed resources then we immediately see that his argument no longer holds. Furthermore, given the massively negative effects of long-term unemployment (this paper for example) this 'unecessary evil' is hardly so . Even though I could go on, I think I will wrap it up here as I have ranted for too long already.