Connect with us


Do Current Wages Disprove the Econ 101 Case Against Minimum Wage?

Over the past year, we have seen wages rise considerably, especially in low-skilled jobs.  According to the Bureau of Labor Statistics, the average wage…

Share this article:



This article was originally published by EconLog

Over the past year, we have seen wages rise considerably, especially in low-skilled jobs.  According to the Bureau of Labor Statistics, the average wage for a non-management employee of a limited-service (e.g., fast-food) restaurant has risen by $1.22 per hour over the past 12 months from $12.04/hr. to $13.26/hr.  That is an increase of 10.1%!  Many places are even higher.  In my current little slice of Heaven (Cape Cod, Massachusetts), the local Five Guys Burgers and Fries offers $16/hr.

During the past few years, as minimum wage activists have been advocating for a $15 minimum wage, many economists (myself included) argued that such a wage increase would cause a substantial loss of jobs.  Yet, even at wages above $16, many firms struggle to find workers.  These data present us with a conundrum: how can we explain an increase in wages without decreasing employment?  Were minimum wage activists right all along that increasing the minimum wage would not lead to unemployment and that firms were simply choosing to underpay workers?


Let’s see what the Economic Way of Thinking has to say.

The problem with drawing the conclusion that minimum wage hikes wouldn’t have an effect is reasoning from a price change.  Prices, including the price of labor (wage), are not arbitrarily determined.  In the case of wages, wages are determined by the marginal revenue product of labor.  In other words, the wage is equal to the contribution that the marginal employee makes to the company’s revenue on the margin.  Thus, wages can increase in two ways: 1) increasing the productivity of labor (i.e., increasing the amount one worker can produce) or 2) increasing the revenue earned by selling one more unit.

So, what is going on in the current market?  Partly, we have a shift in the supply of labor, as extended and increased unemployment insurance has kept some workers out of the labor force.  Employers have had to offer higher wages to lure workers from their alternative options.  But, to make these wages possible, employers also need to have more productive workers (quantity supplied must align with quantity demanded).

For employers, the current source of increase in the marginal revenue product of labor is from price increases.  Over the same period (the past 12 months), we have seen general inflation.  In fact, fast-food prices have risen by nearly the same amount as wages: 9.1%, according to the Bureau of Labor Statistics (CPI calculation).  So, employees are more productive because they can now produce more revenue for the firm; the demand curve has shifted out.  Thus, their higher wages are achievable without the need for layoffs.

But wages cannot rise infinitely.  If the marginal revenue product per worker is less than the wage, then the worker will not be hired (or fired, as the case may be).  And, likewise, firms cannot simply pass 100% of price increases onto customers.  So, we are seeing a situation as we have now: firms remain understaffed despite unusually high wages.  So, firms find other margins to adjust along to bring quantity supplied back into alignment with quantity demanded.  These margins include: operating reduced hours, increased automation, reduced offerings, etc.  The Law of Demand remains in effect.

So, the answer to the fallacy expressed above (that firms always could have paid a $15 wage) is that the situation has changed.  Ceteris is never paribus; we must be cautious before overturning a scientific law.



Commodities and Cryptos: Oil slumps, Gold rebounds, Bitcoin plunges

Oil Crude prices are sharply lower after Evergrande debt default fears triggered a flight-to-safety that sent the dollar higher.  Evergrande’s woes…

Share this article:


Crude prices are sharply lower after Evergrande debt default fears triggered a flight-to-safety that sent the dollar higher.  Evergrande’s woes are threatening the outlook for the world’s second largest economy and making some investors question China’s growth outlook and whether it is safe to invest there.  In addition to risk aversion flows pumping up the dollar, some investors are anticipating further hawkish signals that the Fed will set up a formal November taper announcement on Wednesday. 

Complicating the move in crude prices is the surge to record highs for UK gas futures.  Europe does not have enough gas and the energy problem could intensify if the early weeks of winter are cold. 

The US Gulf of Mexico production continues to recover from hurricane season, with now only 18.3% of offshore production being shut-in.  The oil market will still be heavily in deficit early in winter and if more demand comes that way, energy traders will buy any dip they get with crude prices. 


Gold’s rout is taking a break as investors run to safety over concerns Evergrande’s debt default concerns could spillover.  Gold got a boost as Treasury yields plunged, with the 10-year yield falling 5.4 basis points to 1.307%. 

Gold’s rally could have been much higher if not for the reports that Senator Manchin may be thinking of suggesting Congress take a “strategic pause” until 2022 before voting on the $3.5 trillion social-spending package.  Considering stocks are about to have their worst day since October, it is very disappointing that gold prices are only up around $10.  Gold may continue to stabilize leading up to the FOMC decision, with the next move likely being further downside.  Gold could struggle until the Fed finally starts tapering asset purchase.  It is then that it may start acting more like an inflation hedge.    


A retest of the September low came far too easily for Bitcoin.  The fallout from the Evergrande is putting a tremendous dent in risk appetite that is sending everything lower. Cryptocurrencies, despite all the volatility, have been the best performing asset of the year, so it should not surprise Wall Street they are the first asset sold in the beginning of China-driven market selloff.    

Retail traders remain bullish, albeit many have capitulated in locking in some profit.  Some traders are anticipating a short pullback, while some lunatics are readying to buy more after tomorrow’s full moon.    

In El Salvador, President Bukele tweeted “We just bought the dip. 150 new coins!”  El Salvador’s total is now 700 coins and that enthusiasm has yet to be matched by other countries.   

If Bitcoin breaks below the $40,000 level, it could see momentum selling have it eventually return to the $30,000 to $40,000 range that it was in earlier this summer.  

Continue Reading


Asia’s Largest Insurer Hammered As Investors Sell First, Don’t Bother To Ask Questions

Asia’s Largest Insurer Hammered As Investors Sell First, Don’t Bother To Ask Questions

Few were surprised to see that the crash in Evergrande…

Share this article:

Asia's Largest Insurer Hammered As Investors Sell First, Don't Bother To Ask Questions

Few were surprised to see that the crash in Evergrande dragged down property names (one among then, Sinic Holdings, crashed 87% in minutes and was halted), banks exposed to the property developer (according to report there are over 120), with the contagion spreading to commodities directly linked to China's property sector (such as Iron Ore which plunged 10%), as well as FX of commodity-heavy countries, one ominous decline was that of Asia Pacific's largest insurer, Ping An (whose name literally and unironically means "safe and well"), which dropped 3%, following a 5% drop on Friday, and hitting a four year low on concerns about its property exposure.

The selling took place even though the company issued a statement Friday saying that its insurance funds have “zero exposure” to Evergrande and other real estate companies “that the market has been paying attention to.” Real estate accounts for about 4.9% of Ping An Insurance’s investments, versus an average 3.2% for peers, according to Bloomberg Intelligence.

“For real estate enterprises that the market has been paying attention to, PA insurance funds have zero exposure, neither equity or debt, including China Evergrande,” Ping An said in a statement as it rushed to reassure investors.

While it may have no exposure, Ping An does have RMB63.1bn or $9.8bn in exposure to Chinese real estate stocks across its RMB3.8TN ($590BN) of insurance funds, and took a $3.2BN hit in the first half of the year after the default of another developer, China Fortune Land Development. The insurer is also head of the creditor committee for China Fortune Land, which specialises in industrial parks in Hebei province and suffered from delayed local government payments. One of its restructuring advisers, Admiralty Harbour Capital, was hired by Evergrande this week.

At a time when any Evergrande counterparties or even rumored counterparties are immediately deemed radioactive, Ping An's plight demonstrates how acute and widespread the selloff could become in China if Beijing fails to intervene.

“I expect a lot of financial institutions could be hit by the worries” about Evergrande, said Zhou Chuanyi, a Singapore-based analyst at Lucror Analytics. "As long as a financial institution has exposure to developers, Evergrande should take quite a significant share of that."

Yet as the market waits for some response official response, hopeful that Beijing will step in, we discussed earlier that China's policymakers have instead sought to crack down on excessive leverage across its vast real estate sector over the past years, which makes up more than a quarter of the economy, imposing a firm threshold known as the "3 Red lines" which developers must adhere to, and which has meant most developers are limit to % or 5% debt growth at best. 

For now it remains unclear how far the contagion will spread, although if Beijing stubbornly refuses to intervene, expect much more pain as capital markets seek to force Beijing's hand by make it unpalatable for the CCP to suffer even more selling which could spark social unrest.

“The price action across several asset classes in Asia today is horrendous due to rising fears over Evergrande and a few other issues, but it could be an overreaction due to all of the market closures,” said Brian Quartarolo, portfolio manager at Pilgrim Partners Asia.

As discussed earlier, Xi faces a tricky balancing act as he tries to reduce property-sector leverage and make housing more affordable without doing too much short-term damage to the financial system and economy. Mounting concerns that he’ll miscalculate are spreading ever-further beyond China-focused property developers and their suppliers.

“It’s what the Chinese would describe as trying to get off a tiger,” said United First Partners research Justin Tang, best summarizing Beijing's lose-lose dilemma.

Tyler Durden Mon, 09/20/2021 - 15:28
Continue Reading


Summarizing China’s Short Term Economic Outlook

Wells Fargo Economics analyses the extent of the current slowdown, and contemplates the impact on regional economies. Here’s the heat map: Source: McKenna/Guo,…

Share this article:

Wells Fargo Economics analyses the extent of the current slowdown, and contemplates the impact on regional economies. Here’s the heat map:

Source: McKenna/Guo, “China Economic Gauge and Sensitivity”, Wells Fargo Economics, 20 Sep 2021, Figure 1.

From the report:

Our dashboard (Figure 1) suggests the short-term outlook for China’s economy is indeed deteriorating, consistent with the multiple downward revisions we have made to our GDP forecast over the past few months. Given the signals our gauge is showing, we believe easier monetary policy could be the next major policy move from the PBoC, and another RRR reduction could be imminent as authorities look to offset some of the deceleration.

This report is in line with the Goldman Sachs report (discussed here).

Wells Fargo highlights Singapore, South Korea and Chile as most sensitive to growth developments in China (on the basis of exports). Looking more broadly at “beta’s” of equity returns and currency values as well as export dependence, the list of at risk countries expands to include South Africa, Brazil and Russia as well.


Continue Reading