Friday, April 11, 2014

Does Robert Reich need a refresher course in economics?

Could it be that Robert Reich [see Reich's bonafides below]* needs a refresher in economics? In his blog he tells us that the issue of a higher minimum wage is settled [much as global climate change is settled science]. 

One of his statements is that: “A $15/hour minimum is unlikely to result in higher prices because most businesses directly affected by it are in intense competition for consumers, and will take the raise out of profits rather than raise their prices.”

Let me see, if you are a business in a highly, “INTENSE”, competitive market then all you have to do is lower your profit margin and you can pay your minimum wage workers more.

The problem with this approach is that a business in a highly, intense, competitive market has already cut its profit margin as low as it can. Any of you folk that are running a business please tell me if I am wrong.

I learned in economics 101 that a highly intense, competitive market will, by its very nature, eliminate excess profits and in this type of market there are only a few things that the owners can do to stay in business. The businessman can: hire fewer minimum wage workers, reduce the number of minimum wage workers, reduce the non-pay benefits, charge more for the product/service that these minimum wage workers provide, or [and as the most likely case] a combination of the above actions.

These are what are called “unintended consequences” of government action.


* ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center for Developing Economies, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the twentieth century. He has written thirteen books, including the best sellers Aftershock and The Work of Nations. His latest, Beyond Outrage, is now out in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause. And he has a new film, Inequality for All.

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