From: Shane Henry Mage <shmage-AT-pipeline.com>
Date: Thu, 14 Mar 1996 00:09:54 -0500
To: marxism-AT-jefferson.village.Virginia.EDU
Cc: shmage-AT-pipeline.com
Subject: Re: Re: Minimum Wage


Mike Dean wrote (inter alia): 
 
>   It seems to make sense to me that an increase in the minimum wage WOULD

>create unemployment, or higher prices, or a little of both.  How is the 
>capitalist expected to keep profits high if s/he must pay her/his workers 
>more than s/he previously had to?  
 
This question has so far been answered in various more-or-less satisfactory
ways, but none of these postings has shown awareness that *from the
standpoint of standard economic theory* imposing or raising a minimum wage
*must increase employment* in certain labor-market situations. 
 
The point is that in an oligopsony (shared monopsony) situation--ie., one
in which a small socially coherent group of employers faces a large,
ununionised, atomized group of job-seekers,  the cost relevant to an
employer's decision to increase, decrease, or maintain a given level of
employment is *not* the hourly wage but *the marginal cost* of labor-power
of a given level of skill and experience.  The oligopsonist makes surplus
profits by paying workers less than the value of their  marginal (revenue)
product.  The obverse of this fact is that to attract additional units of
standardised labor power the oligopsonistic employer must raise the wage of
its entire labor force--thus the increase in cost for each additional
worker is the wage of that worker *plus* the wage increase needed to
attract that additional worker multiplied by the *total already-employed
labor force*.  Imagine an employer with 400 employees, employed at a wage
of, say, $4.35 per hour.  Suppose that to hire a 401st employee it had to
increase the wage to $4.36. Thus the cost per hour of that employee would
be $8.36--a penny for each of the previous employees plus $4.36 for the new
hire.  If employment was previously at equilibrium at 400, this implies
that the marginal (revenue) product per employee was then very slightly
less than $8.36--say $8.35.   
 
Now look what happens if the minimum wage is raised from $4.35  to, say,
$6.35.  From the point of view of the employer, the marginal cost of labor
power is now $6.35, a wage at which it can hire a considerable number of
additional workers *without having to raise the wages of previous
employees*.  Its gross profit has fallen, by $800 per hour.  But it has
also become *profitable* to hire more workers, and to go on hiring right up
to the point at which the marginal (revenue) product per employee has
fallen to $6.35.  
 
Thus, under the assumption of labor-market oligopsony, it is an
unassailable theoretical conclusion that an increase in the minimum wage
will *decrease* unemployment, not cause it.  In the real world, is that a
warranted assumption?  I would argue that, precisely in the case of the
lowest-paid, ununionised, minimum-wage workers, the imbalance of bargaining
power between members of the chamber of commerce and poor, unskilled,
workers is so great that the assumption of oligopsony is the only realistic
one.  Increasing the minimum wage raises employment for low-paid workers. 
 
Why, despite this established analytic truth, does every undergraduate
textbook and every "respected" commentator insist that an increase in the
minimum wage tends to cause unemployment?  To ask this question is to
answer it. 
 
By the way, the inflation concern is nothing but a scarecrow.  Capitalists
always set prices as high as they can be profitably set.  Increasing wages
does not change demand--it only shifts purchasing power from capitalists to
workers.   Capital accomplishes inflation by  manipulating the credit
system to increase effective 
demand through purely financial means in order to redistribute wealth both
>from labor to capital and within the capitalist class. 
 
Shane Mage 
 
"It should be understood that war is the common condition, that strife is
justice, and that all things come to pass through the compulsion of
strife."  Herakleitos of Ephesus, fr. 80


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