A solution for unemployment and under-employment

Unemployment is an issue are politicians have consistently failed to solve, but here is a realistic solution to the unemployment that plagues the US.

The first step is to repeal minimum wage. Minimum wage doesn't create living wage jobs, it only destroys low wage jobs. This will cure unemployment. This is not, however, enough to cure underemployment, as this will just create low wage jobs. The second step in this plan is to subsidize low wage jobs (on the worker's side) so that they pay a living wage.

This isn't free. However, it is affordable. At least more affordable than the current plan. The current plan is to pay people to be unemployed. If we repeal minimum wage, it will be much easier to find a job, so we can make large cuts to unemployment benefits safely to help pay for this plan. To pay for the rest of the plan we can increase income taxes on those who make more than 47,000$ a year, the national average income.

This is what some will call "redistribution of wealth". A bad word in modern politics. My response to this criticism is "so what?". We already redistribute wealth, as I've said we pay people to be unemployed, and this money comes from the middle and upper class. That is redistribution of wealth. With this plan we at least have people working and earning their welfare instead of sitting unemployed, at home, in front of their television.

So what do you think?

 

Getting rid of the minimum wage makes no sense! The labour market is characterised by monopsonistic power, whereby firms fae an upward sloping labour and therefore have wage making power. The minimum wage therefore can redistribute economic rent from employer to employee and also increase employment. Eliminating it will increase inefficient wage differentials

 

Number of Americans seeking unemployment benefits fell only slightly last week...

Leading indicators, unemployment report show weakness
20 Sept.`12 WASHINGTON (AP) -- A key measure of economic activity declined in August for the second time in three months, suggesting the economy remains weak.

See also:

BLS: Obama Unemployment Rate Above 8% Longer Than Any Other President Since 1948
September 18, 2012 – Excluding January 2009, the month when Barack Obama was inaugurated, unemployment has stayed above 8 percent, which is longer than under any other administration since the Bureau of Labor Statistics (BLS) started measuring the monthly jobless rate: Over 8 percent for 43 months during Obama compared to a total of 39 months above 8 percent between 1948 and 2008.

 

It would only help employ more teenagers and unskilled laborers.

A large majority of the unemployed have skills they want to ply but can't. The under-employed, by definition, are in that category as well.

 

my feeling is that we should be trying to shrink down the work force..by this I mean we should be trying to make it so people retire earlier..instead of making social security age go up we should be lowering to 60 for min.and62 for max benefits...social security has 2.9 trillion cash on hand right now and 11 trillion dollars owed to it by the us in bonds..they should allow people to retire and maybe let the first 20k or 25k be tax free..this would create jobs for the younger generation..businesses like to employ older people because they are dependable and hard working..older people work because they lost money on their 401 k plans or just dont make enough to get by right now

 

That's not true, what this policy does is put more money in the hands of the unskilled, gives them a guaranteed, stable, financial foundation. With a stable financial foundation unskilled workers can save up enough to get educated/skilled. That helps create more skilled workers.

This will also help keep jobs in the US since manufacturers can pay their workers competitively with the global labor market.

 

This would only work if you also slice all the safety nets. Otherwise you'd be in a situation you already see sometimes, where getting a low paying job leaves you with less than staying in the net. Maybe you meant to imply that.

I'm not sure if the numbers balance out on that. Removing the minimum wage will drop at least the lower end of wages by some amount, so the new costs have to cover that along with the costs of the new jobs.

The other issues is that you could create unintended consequences in motivating companies to produce low wage jobs instead of increasing productivity. i.e. if a company will make more profit having twelve workers do a job instead of a single worker with a machine, they will do that. This behavior would lower unemployment, true, but the effect is to replace one taxpayer with twelve sponges and the new result is not good for society.

Somewhat similarly you might convince some people who might have otherwise worked hard, applied themselves, and become great engineers or doctors to just work a low stress minmum wage job and play video games. For them they may actually be happier that way if their "living wage" is high enough. But again you've converted a taxpayer into a sponge.

That's only true if the labour market is indeed monopsonic AND they have to pay everyone the same wage for some reason, plus some other details about the particular curves themselves. The combination only occuring is specific circumstances.

And in any case the "living wage" subsidy to the workers proposed by the OP presumably means an employer could drive their wages to zero without affecting worker demand for those jobs because their final wage remains unchanged.

...actually I can't think of why the OPs plan wouldn't result in exactly that. I suppose employers would then compete for workers based on workplace conditions? I'm not seeing their plan working out well.

But it would make unemployment plumet...

 

Despite getting all the attention, unemployment is just the tip of the iceberg. The much more serious problem are the growing number of people trapped in low wage jobs.

The other thing that economists often neglect is that low wages cause unemployment. Many of the unemployed are just discouraged and not motivated enough to get the training or do the work available for such low wages.

Minimum wage laws can put an upward pressure on wages for lower level jobs. It can also potentially lead to jobs dissappearing because it may not be profitable for the employer to pay higher wages, or the consumers might not all be willing to pay higher prices. But from a macroeconomic perspective, there is also the potential for increased lower level wages to lead to increased consumer demand for labor-intensive products/services, and thus increase employment. It really depends on the exact situation, and therein lies the controversy.

 

Traditional monopsony is based on dropping the perfect competition assumption of 'many buyers of labour'. That's terribly old-hatted stuff. We now know that monopsonistic power is derived when we drop numerous other painfully silly assumptions. For example, once we admit asymmetric information we can understand the nature of the labour frictions generated. This form of monopsony, referring to job search, ensures that dynamic monopsony is indeed the norm.

Your reference to 'paying everyone the same wage' made zero sense. The existence of monopsonistic power destroys the 'law of one price". We instead will automatically see inefficient wage differentials (independent of human capital and compensating differentials) that a minimum wage can reduce

 

I do intend to cut safety nets.

If you look at things now, replacing a worker with a machine with 12 workers is already happening. Manufacturing jobs are moving out of the country. With this plan we will have 12 workers here instead of 12 workers abroad (as well as 12 unemployment benefits sponges here). If this plan works well enough, there might not be enough labor available to have 12 cheap workers because there are so many jobs.

As for worrying about sponges, we already have millions of them. With this plan we will make sponges work and employers will help pay for them.

There is definitely a reasonable fear that this plan could cause people to lose their drive to get a skilled job. What this plan does is it taxes high paying jobs, so it does make people want them less (although if we can eliminate unemployment benefits, skilled jobs won't need a large tax). There are, However, tools to help with this. If we see this trend, we could subsidize education, and (and only if we see this trend, as this is quite punishing) we could define "living wage" to mean to just cover necessities, not enough to buy an expensive Xbox or nice things.

I actually thought of this but didn't want to make my thread too long, so I cut it. To avoid this problem we need to make the worker want the highest paying job. How I propose to do this is by having the total income increase based on how much the employer is paying them. Like if an employer payed 6$ an hour to a worker, we could subsidize it by 4$, and if an employer payed 3 dollars an hour, we could subsidize it by 6$. Thus the worker will want the job that pays 10$ an hour instead of the one that pays 9$ an hour.

Thank you for your feedback, it's high quality and reasonable.

Also, please don't use too much economic vocabulary, I don't have an economic degree (but I definitely want one).

 

But what do you think of the entire plan?

 

No it wouldn't. It would create substantial inefficiencies that woud ultimately lead to greater underemployment (which is nothing more than hidden unemployment). The elimination of the minimum wage makes so sense. The attempt at subsidies would lead to a myriad of tax issues. However, interfering with the labour market with this poorly thought out nonsense will only ensure redistribution effects to employers to the detriment of the allocative power of the invisible hand. The op is based on nothing more than ignorance of minimum wage effects and the stupidity involved in directly encouraging low skilled employment

 

In simple English, what inefficiencies will be created?

 

Simple English? Simple Economics. You've started with a bogus view of minimum wage effects (given monopsony, they are required for efficiency). You've then asked for a particularly silly subsidisation of low wages (which will encourage resources into low skilled labour and further inflame underemployment). Like all of your ideas, it is poorly thought out as you start with no understanding of the labour market

 

Well, nobody in America is starving to death unless they're essentially avoiding our current safety nets.

Actually, aside from the issues mentioned in that post, you might have another issue here. The sort of unemployed, and what motivation they have to work. There are a lot of kids with liberal arts degrees having a pretty decent life with an Xbox and whatnot in their parents basement. They may not be interested in working for almost no money.

I wonder if there is some info on who the unemployed are. Lets see what I can find.

Now this is interesting
http://www.pewtrusts.org/uploadedFi.../Economic_Mobility/PEW-Unemployment Final.pdf

So the unemployed does feature a lot of people with education (not neccesarily useful education), and what I didn't expect so much is that it includes a lot of people who are older.

This problem may have a bit of a different nature that what you're thinking. You can't cut a safety net comprised of a spouse that is still working.

 

Look, it's pretty obvious by now that you have an economic degree, but you have a serious problem with your economic priorities. Unemployment, then underemployment come first. Not this "Every job needs to be difficult and have high prerequisites" foolishness. High skill jobs are not the saving grace of the economy, if everyone had a high skill job they wouldn't pay more than the national average income.

Now you have some disagreements on how effective repealing minimum wage would be in reducing unemployment, saying it's pointless. Well look at these statistics:

Brunei: No minimum wage, 2.7% unemployment

Bahrain: No minimum wage, 3.7% unemployment

Liechtenstein: No minimum wage, 2.8% unemployment

Here's the effect minimum wage has on the unemployment of teenagers, a group of unskilled workers.



There is all the proof you need to prove minimum wage causes unemployment. Those nations are also in a downward trend in unemployment, so those statistics could be lower in a few years. Repealing minimum wage is the best thing to fight unemployment. Not pointless. However, I'm not considering under-employment in that claim.

Your problem with this plan is that it increases the amount of unskilled jobs. This goes back to your priorities. Why does it matter that the jobs being created are low skill? As I've said, giving everyone high skill jobs would equalize wages around the average national income, but you know what, if everyone had a low skill job, that would have the same effect.

When a high skill job is created and it pays a large amount, everyone else suffers. When a low skill job is created, everyone benefits financially but the worker suffers.

The other criticism is that taxing the high payed workers will reduce peoples drive for high paying jobs. However with this plan you can argue that we will save taxpayers (middle skilled/high skilled workers) money. Let me explain. Unemployment in the United States pays about 400$ a week (a rough estimate based on the max and min unemployment benefits in states). What this plan does is replace unemployment benefits with a subsidized job. The employer will at worst pay 3$ an hour on my estimate. With the subsidy, the total income from the job will be 450-550 dollars weekly, so 168$ (average work hours multiplied by three) will be covered by the employer, so it will cost 332$ a week at worst for taxpayers to subsidize the employment of a previously unemployed person when it would previously cost tax payers 400$ a week to taxpayers in unemployment benefits. These savings could be passed to high skill workers to encourage high skill jobs.

 

I'm actually looking at the math (look at the last paragraph of my previous post) and it looks like this plan will actually save us money, so that means you can encourage people to get high paying, high skill jobs by reducing taxes on them.

This plan will also create reasonably paying jobs!

So the only fear is "How will people react to these jobs?". That is something that I will have monitored if this plan is successfully put in place, and if your feared trend is seen, I would have the wage subsidies lowered to make the jobs less desirable.

Are you satisfied?

 

The problem with employment or lack of is/was the transition away from pensions into 401's. Before the 80's most Americans worked 20-30 years for an employer with the guarantee of a set % of monthly income by a formula of wages and years of service. It retired people 50 years old and made way for younger employees to fill the ranks.

That's not an option anymore, most college students will NEVER see a pension. So now you "risk" your OWN money ( maybe your company matches a % ) and hope you have enough to retire in your 60's. Add in the fall of the market in the late 2000's and you have a HUGE amount of people who were ready to retire, that can't afford it. Some work until they can't physically or until they recap their losses. In the meanwhile it clogs up the younger workers for the employment.

Middle class workers I think the pension is the way to go, it keeps jobs revolving ( on a pretty good time table ) for the next generation. 401's seem to work better on higher paying jobs or careers where individuals move from company to company for benefits and advancement. ( my 2 cents )

 

A naïve comment. Underemployment is merely a hidden form of unemployment. The only significant difference is focused on the origins of such human capital destruction. With unemployment we can focus on aspects such as efficiency wage analysis (with unemployment representing a disicipline device on the workforce such that their bargaining power is minimised). With underemployment we have to also consider firm hierarchy and how economic rents are further accentuated.

A poor attempt at making spurious conclusion. Minimum wage analysis fools into 3 forms: times series analysis to isolate the exogeneous wage increase by taking advantage of minimum wage rates over time; cross-sectional to isolate those effects by taking advantage of geographical differences; quasi natural experiment approaches to avoid specific econometric endongeneity problems. The analysis confirms what we'd expect from the existence of monopsony: reduction in inefficient wage differentials and small positive employment effects.

Again, your whole position is based on nothing more than ignorance and hot air

 

Government policy to encourage the retention of bad jobs? Why on Earth would anyone want that?

Also your plan to raise taxes on those making over a fixed amount is incredibly naive, $47k a year in some places is near poverty and to do so just to incentivize employers to hang on to jobs even if they're inefficient or unproductive is just plain dumb.

 

47k hasn't been middle class in over 3 decades. Especially when considering the majority who make that amount have families. They are just as poor as a single individual who makes less than 20k. Income taxes are wrong, period. But should never even be considered on people who make less than 6 figures in 2012 America.

 

Hurm, lets see.

Seriously. You're using those countries as an example of anything related to economic policy? Nobody is going to be fooled by that around here. What you've got there are tiny countries fueld in two cases by oil and in the other case by being a little tax haven nestled among high tax neighbors.

Aside from being examples of why it's great to have a huge amount of oil per capita or to be a little parisite nestled into the flesh of other nations they aren't useful for demonstrating anything. They'd have good economic numbers even with completely bass ackwards economic, government, and social systems (and it's generally felt that's exactly what's going on, unless you think that what we really need to do to get our economy going is to give up on this democracy thing and get ourselves a king.)

Again, seriously? You're just going to drop that graph and act like nothing else was going on in the economy during those years that might have an effect on employment? You're going to want many more years at the very least to even start convincing anybody you've got a point.

I'm going to go out on a limb here and guess that Riever is not convinced. I'm betting they'll say something like what I've got, except sprinkled with enough jargon it looks like they're playing mad libs, and followed up with a few mean spirited comments regardign yourself.

That's actually not true at all. Increased productivity means there is more to go around.

For example consider people working with a pickax in a coal mine to produce bucketfulls of coal each vs a relatively skilled crew using modern machines to generate tons of coal each.

Mitt Romeny is it you? Is this why you've been short on specifics?

(Sorry, I just found your tone there humorous )

By the way from other threads on stuff like this it does indeed look like minimum wage laws do increase unemployment among young unskilled workers. While there is usually something else going on in the economy, a general trend when looking over US history is that new minimum wage laws increase unemployment in that group. Unemployment then drops down in subsequent years as inflation effectively removes the minimum wage increase, and then eventually a law is passed raising the value back up again to continue the cycle.

As issue in this particular situation is that minimum wage laws only really help with the young unskilled set (and it is debatable if help is the right word as you're dropping wages for the rest in the process of adding those jobs.)

However right now the unemployed are made up of a lot of older or more "skilled" individuals.

Also I think an issue right now is that the minimum wage is increasingly only part of the issue under government policy, particularily with Obamacare coming in. This is because the employer looks at what they actually have to pay to have another worker, including payroll taxes and everything which is substantial compared to what the employee actually deposits in the bank.

 

I don't entirely disagree with you.

Except I suppose on the idea of a monopsony at a national level within a globalized economy with relatively low barriers to trade. While I could see having enough elasticity for an upward sloping labor supply curve, and I could see various monosponic like effects in various markets and regions, even in high paying jobs, I'm not buying that we're in the sort of situation where increasing the national minimum wage is going to add jobs.

 

You'd only have a point if we were referring to tradtional monopsony. We're not. Consider dynamic monopsony (based on the premise that there are labour market frictions created by the difficulties associated with finding alternative employment). That was originally used to try and understand the positive relationship between wages and firm size. It informs us that we can expect greater undepayment in apparently more competitive industries.

Its would be true to note that out-dated evidence supported the disemployment hypothesis (with Brown, Gilroy and Kohen providing 2 review articles linking minimum wages with teenage unemployment). More recent analysis, using techniques capable of avoiding endogeneity bias, generally supports the premise of small employment gains. The only debate is the source of that effect: an analysis into positive productivity effects, for example, provides an alternative explanation

 

I do not want to conflate voluntary unemployment and inherant frictional unemployment even if resulting from or resulting in underpayment, especially for higher paying jobs, with the relevant long term unemployment of low skilled laborers when the subject is minimum wages.