A Lesson in Economic Fallacies – Phillips Curve: Fallacy of Minimum Wage

Go Lean Commentary

Ring the bell: School’s in!

There are lessons that the Caribbean need to learn about minimum wages:

In the long run, it makes no difference in buying power.

If wages are increased – as in an universal minimum wage increase – then inflationary forces would kick in and consumer prices will also adjust upwards. So as a government policy, raising the minimum wage is an economic fallacy.

This relates to the topic in the field of Economics related to the Phillips Curve. This empirical model establishes that there is a ‘short run’ trade-off between unemployment and inflation but this is not been observed in the long run. The textbook definition of the Phillips Curve is as follows:

Reference Title: Phillips Curve

Source: Retrieved July 9, 2016 from https://en.wikipedia.org/wiki/Phillips_curve

The Phillips curve is a single-equation empirical model, named after A. W. Phillips, describing a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation.

While there is a short run trade-off between unemployment and inflation, it has not been observed in the long run.[1] In 1968, Milton Friedman asserted that the Phillips curve was only applicable in the short-run and that in the long-run, inflationary policies will not decrease unemployment.[2][3] Friedman then correctly predicted that, in the 1973–75 recession, both inflation and unemployment would increase.[3] The long-run Phillips Curve is now seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment.[4] Accordingly, the Phillips curve is now seen as too simplistic, with the unemployment rate supplanted by more accurate predictors of inflation based on velocity of money supply measures such as the MZM (“money zero maturity”) velocity,[5] which is affected by unemployment in the short but not the long term.[6]

CU Blog - Phillips Curve - Fallacy of Minimum Wage - Photo 2

Key: NAIRU = Non-Accelerating Inflation Rate of Unemployment

This subject matter synchronizes with the book Go Lean…Caribbean, which calls for the elevation of Caribbean economics. The book asserts that the Caribbean has to pursue a quest for job creation, but to set the sights on a higher target, high-paying jobs, because minimum wage jobs are no elevation at all; it is only a fallacy. As conveyed in a previous blog-commentary, the Go Lean book examined the anatomy of minimum wages (Page 152) and its effect on a community’s eco-system. It defined minimum wage as:

the lowest hourly, daily or monthly remuneration that employers may legally pay to workers

The minimum wage is generally acknowledged to increase the standard of living of workers, reduces poverty, reduces inequality, boosts morale and forces businesses to be more efficient. Critics of the minimum wage, predominantly followers of neo-classical economic theory, contend that a minimum wage increases unemployment, particularly among workers with very low productivity due to inexperience or handicap, thereby harming less skilled workers and possibly excluding some groups from the labor market

This fallacy of minimum wage is commentary 4 of 6 in this series on Economic Fallacies from the movement behind the Go Lean book. As related in the first submission on this series, the situation in the Caribbean region is likened to the imagery of an animal foraging for food, but then gets distracted and “chases a squirrel up a tree”. The squirrel in the tree will never be a meal; it is just a waste of time and energy for the animal. This analogy conveys the waste of time associated with a frivolous and fallacious pursuit. The other commentaries detailed in this series are as follows:

  1. Independence – Hype of Hope
  2. Austerity – Book Review: Mark Blyth’s “History of a Dangerous Idea”
  3. Education & Student Loans – Not a good Return on Investment
  4. Phillips Curve – Fallacy of Minimum Wage
  5. Self-regulation of the Centers of Economic Activity
  6. Casino Currency – US Dollars?

All of the commentaries in this series are economic in nature. They refer to rules for managing the valuable resources of time, talents and treasuries. The creation of jobs require a measure of all three of these resources. A mission of the Go Lean roadmap is to create jobs in the region. The roadmap – for a total of 370 pages – presents a comprehensive plan to create 2.2 million new jobs, with a heavy focus on high paying jobs, exhausting the Science, Technology, Engineering and Mathematics / Medical (STEM) fields.

This subject is no childs-play; this is heavy-lifting. There are supplemental teaching points that align with this subject.This is gleaned from a Khan Academy’s online/e-Learning teaching course:

CU Blog - Phillips Curve - Fallacy of Minimum Wage - Photo 1What is the relationship between the aggregate demand curve and the Phillips curve?

At first, unemployment will go down, shifting aggregate demand (AD) from AD1 to AD2, which increases Y (output) by Y2 – Y1. This increase in demand means more workers are needed, and then AD will be shifted from AD2 to AD3. However, this time, much less is produced than in the previous shift, but the price level has risen from P2 to P3, which is a much higher increase in price than in the previous shift. The increase in price is called inflation. – Khan Academy Lesson

Question: As much as the increase in demand would affect inflation wouldn’t another and maybe more obvious explanation be that as wages raise the costs of producing increase (since labor most often is a very important production factor) and thus forcing companies to increase prices as to offset the increase in wages?

Answer: Increase in price won’t always lead to increase in profit, because it entails decrease in demand in a highly competitive market. It will do so when there is so much money in the economy that demand becomes insensitive to price, or when profit is marginal. The former factor takes place first, the later – second.

VIDEO – Phillips curve – Inflation – measuring the cost of living – Macroeconomics – Khan Academy – https://youtu.be/v7ZWTZ9NgU4

Uploaded on Feb 15, 2012 – The observation that inflation and unemployment tend to be inversely correlated.

The book Go Lean … Caribbean calls for the elevation of Caribbean economics using sound economic principles and best-practices, not the pursuits of economic fallacies. The book serves as a roadmap for the introduction and implementation of the technocratic Caribbean Union Trade Federation (CU) with the charter to facilitate jobs in the region. The book posits that STEM industries and careers can be a great equalizer for the Caribbean to better compete with the rest of the world. These jobs are not location dependent. There is only the need for the “community will”. This job-creation mantra is among these 3 prime directives of the CU/Go Lean roadmap:

  • Optimization of economic engines in order to grow the regional economy to a GDP of $800 Billion.
  • Establishment of a security apparatus to protect the resultant economic.
  • Improvement of Caribbean governance to support these engines.

Early in the Go Lean book, the responsibility to create jobs was identified as an important function for the CU with these pronouncements in the Declaration of Interdependence (Pages 14):

xxvi.     Whereas the Caribbean region must have new jobs to empower the engines of the economy and create the income sources for prosperity, and encourage the next generation to forge their dreams right at home, the Federation must therefore foster the development of new industries, like that of ship-building, automobile manufacturing, prefabricated housing, frozen foods, pipelines, call centers, and the prison industrial complex. In addition, the Federation must invigorate the enterprises related to existing industries tourism, fisheries and lotteries – impacting the region with more jobs.

xxvii.    Whereas the region has endured a spectator status during the Industrial Revolution, we cannot stand on the sidelines of this new economy, the Information Revolution. Rather, the Federation must embrace all the tenets of Internet Communications Technology (ICT) to serve as an equalizing element in competition with the rest of the world. The Federation must bridge the digital divide and promote the community ethos that research/development is valuable and must be promoted and incentivized for adoption.

xxviii.   Whereas intellectual property can easily traverse national borders, the rights and privileges of intellectual property must be respected at home and abroad. The Federation must install protections to ensure that no abuse of these rights go with impunity, and to ensure that foreign authorities enforce the rights of the intellectual property registered in our region.

Job creation has been a frequent topic for blog/commentaries. Consider this sample list:

http://www.goleancaribbean.com/blog/?p=8262 Where the Jobs Are – One Company’s Model: Uber
http://www.goleancaribbean.com/blog/?p=8045 Where the Jobs Are – How Small Businesses Can Help
http://www.goleancaribbean.com/blog/?p=6089 Where the Jobs Are – Futility of Minimum Wage
http://www.goleancaribbean.com/blog/?p=5034 Where the Jobs Are – Patents: The Start of Innovative Jobs
http://www.goleancaribbean.com/blog/?p=4240 Where the Jobs Are – The Effects of Immigration Policy
http://www.goleancaribbean.com/blog/?p=2857 Where the Jobs Are – Entrepreneur-ism in Junk
http://www.goleancaribbean.com/blog/?p=2750 Where the Jobs Are – Role Model for Jobs by Self-Governing Entities
http://www.goleancaribbean.com/blog/?p=2025 Where the Jobs Are – Attitudes & Images of the Diaspora
http://www.goleancaribbean.com/blog/?p=2003 Where the Jobs Are – One Scenario: Ship-breaking
http://www.goleancaribbean.com/blog/?p=1698 Where the Jobs Are – STEM Jobs Are Filling Slowly

The book Go Lean…Caribbean details the creation of 2.2 million new jobs for the Caribbean region, many embracing STEM skill-sets. How? By adoption of certain community ethos – that “community will” – plus the executions of key strategies, tactics, implementations and advocacies. The following is a sample from the book:

Community Ethos – Deferred Gratification Page 21
Community Ethos – Economic Principle – Economic Systems Influence Choices & Incentives Page 21
Community Ethos – Consequences of Choices Lie in the Future Page 21
Community Ethos – Job Multiplier Page 22
Community Ethos – Lean Operations Page 24
Community Ethos – Return on Investments Page 24
Community Ethos – Ways to Impact the Future Page 26
Community Ethos – Ways to Help Entrepreneurship Page 28
Community Ethos – Ways to Promote Intellectual Property Page 29
Community Ethos – Ways to Impact Research & Development Page 30
Community Ethos – Ways to Bridge the Digital Divide Page 31
Strategy – Mission – Education Without Further Brain Drain Page 46
Tactical – Fostering a Technocracy Page 64
Tactical – Tactics to Forge an $800 Billion Economy – High Multiplier Industries Page 70
Tactical – Separation of Powers – Commerce Department – Patents & Copyrights Page 78
Implementation – Ways to Pay for Change Page 101
Implementation – Ways to Deliver Page 109
Implementation – Ways to Impact ICT and Social Media Page 111
Planning – Ways to Improve Trade Page 128
Advocacy – Ways to Create Jobs Page 152
Advocacy – Ways to Improve Education Page 159
Advocacy – Ways to Impact Labor Markets and Unions Page 164
Advocacy – Ways to Foster Technology Page 197
Advocacy – Ways to Impact Main Street Page 201
Advocacy – Ways to Battle Poverty – Third World Realities Page 222
Advocacy – Ways to Help the Middle Class Page 223
Appendix – Growing 2.2 Million Jobs in 5 Years Page 257
Appendix – Job Multipliers Page 259

The CU will foster job-creating developments for above minimum-wage jobs, by incentivizing many “innovation sector” jobs: high-tech start-ups, incubating viable companies, and implementing Self-Governing Entities. The primary ingredient for CU success will be Caribbean people, so we must foster and incite participation of many young people into innovation sectors or STEM fields. This quest is the opposite of the minimum wage fallacious pursuit observed in many Caribbean countries who prioritize tourism and tourism-related service jobs.

Of the 2.2 million new jobs in the Go Lean roadmap, there is no expectation that all jobs will be in the innovation sector and above the minimum wage. No, service industries will always persists, and these frequently feature a minimum wage scale. But these jobs will not be the focus nor the target of the Go Lean heavy-lifting. They will simply be the derivatives of the innovation sector jobs. This derivative enjoys a job multiplier effect; for every direct job, additional ones are fostered “down stream”. The Go Lean book details this dynamic; consider this sample from Page 259:

With only a fraction of the jobs, the innovation sector generates a disproportionate number of additional local jobs and therefore profoundly shapes the local economy. A healthy traded sector benefits the local economy directly, as it generates well-paid jobs, and indirectly as it creates additional jobs in the non-traded sector. What is truly remarkable is that this indirect effect to the local economy is much larger than the direct effect. My research, based on an analysis of 11 million American workers in 320 metropolitan areas, shows that for each new high-tech job in a metropolitan area, five additional local jobs are created outside of high tech in the long run. – Enrico Moretti’s.

The roadmap anticipates only a 3.75 job multiplier factor in the estimation of the 2.2 million new jobs.

Everyone is hereby urged to lean-in to this Go Lean roadmap, so that we can create the high-paying, community-impacting jobs, and not consume ourselves with a focus on minimum-wage jobs. How to accomplish this heavy-lifting tasks? This roadmap provides the turn-by-turn directions. This is an action plan to not just improve the Caribbean workplace, but the entire homeland. To make this, our homeland, a better place to live, work and play. 🙂

Download the book Go Lean … Caribbean – now!


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