An Insight Into Progressive Economics

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A basic contention of reality connected economists is that higher minimum wages will lead to fewer jobs on offer at those now higher wages. We’re told, endlessly, from the progressive side, that this isn’t true.

And yet when we come to discuss other aspects of progressive economics, say the effects upon productivity of higher wages, we’re assured that minimum wage story is in fact true. For, higher wages lead to increases in productivity thought capital investment in machinery. This is the same statement as higher wages lead to fewer jobs. For higher productivity is the use of less labour, that’s the definition of it.

And yes, this really is what we get told:

Plus, higher wage growth creates incentives for companies to upgrade their production processes because higher wage costs motivate firms to modernise machinery. Wage growth speeds up technological progress. A 10% wage increase typically leads to 3-4% higher productivity.

It’s an exceptionally cute trick, isn’t it? Higher wages don’t cause job losses except higher wages do create job losses. Because higher wages don’t mean substitution away from labour and toward capital except higher wages lead to substitution of capital for labour.

Progressives, if they didn’t have double standards they wouldn’t have any standards at all.

This article is part of a short series published in conjunction with the Progressive Economy Forum, in which economists put forward viable alternatives to austerity.

Hey, maybe they should start just with viable logic?

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The Mole
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The Mole

I guess sometimes the increased productivity won’t result in job losses – if the elasticity of the curves means they can produce more (from the same number of people) and make a larger profit instead. The total number of jobs may stay the same if growth happens – perhaps as new different jobs with no net job losses, but that might not be much comfort to the lower skilled workers who weren’t worth the higher salaries.

literate3
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literate3

That is demand-pull inflation not cost-push inflation. A company that has more demand than it can satisfy will look for ways to increase productivity to meet demand and will already be paying more than the minimum wage in order to attract workers. A company that is paying the minimum wage is doing so because it is not economic to replace workers with machines on those terms and demand can be fully satisfied at that point; if minimum wages are increased then there is the possibility (in the Grauniad’s alternate universe) to cut profits paid out to the greedy capitalists and… Read more »

The Mole
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The Mole

There will be some (though I agree probably a few not the lots that the left would argue) companies who may not have done the rational investment yet -perhaps due to the costs of shutting down to upgrade, effort and short turn costs of getting loans, or just the time and effort needed to research and select the machinery or par for the design.

I’m not arguing that on average job cuts will occur (as that is quite obvious), just that on some occasions increased productivity might be increased output (at lower unit cost) whilst retaining the same number of staff.

literate3
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literate3

OK – but I just don’t see how a rise in the Minimum Wage can cause this.

The Mole
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The Mole

Simplest example would be the rise causes the business owner to look again at their costs and realise that the choice they have is to reduce the number of workers and reduce output, invest in machinery with (roughly) the same output and reduce workers, or invest in machine with more output with the same number of workers.

literate3
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literate3

OK – but I still think that 99.9% of the time if option 3 worked they should already have done it.

The Mole
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The Mole

I totally agree there – but people often don’t get round to doing things they should, particularly if they involve hard choices.
I’d also agree that 99% of the time option 3 isn’t going to be relevant/feasible anyway, but the point remains sometimes on rare occasions increased productivity may not come at reduced labour.

TD
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TD

Most minimum wage earners are working for smaller businesses, sometimes quite small businesses. While some might indeed look at replacing labor with machinery, that does require an upfront investment, often financed. That’ll be a struggle for some business owners. What could just as easily happen is that the budding entrepreneur decides not to start a business or doesn’t expand. A restaurant owner might bite the bullet, stay open, and pay more, but he also decides he ain’t opening a second joint across town.

Diogenes
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Diogenes

Socialist economists can believe any number of things at the same time – eg Simon Wrong-Lewis will tell us the US tariffs will make the USA poorer but that the UK staying inside the EU tariff boundary makes us richer. Krugman is much the same