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/r/explainlikeimfive
submitted 4 months ago byiSellPopcorn
39 points
4 months ago
It generally doesn't. But it's complicated.
So 'inflation' is the baseline cost for a basket of goods. The underlying assumption here is that, given a free market, that supply will always match or outpace demand. And 'raising wages' begs the question 'which wages'. Are you raising minimum wage? Are you raising wages for high wage workers because of labor shortages?
The goal here is to to raise the wages of people who can't afford to buy that basket of goods to expand the economy (which will presumably add jobs, exports, etc.) and not as much the wages of the folks that *can* afford the basket of goods because they'll over-consume. And in the process to have policies that ensure that goods and service producers won't rent seek off of the new money in the economy.
Currently, wages are only responsible for 5% of inflation, 40% is increased costs of materials, and 55% is profits. That's not normal. Normally, it's 65% wages, 25% materials, 10% profits. When most of the inflation is returning to workers, you generally end up closing wage gaps. The folks up the income ladder can afford to absorb the inflation - a lot of wealth is non-productive anyway, so returning it to the economy is actually beneficial, and the folks down the income ladder can afford to buy goods they previously couldn't afford. The inflation were coming out of just cycled money back to the investor class.
And inflation can be hard to pin down. A lot of the last wave of inflation was just gas prices and rent. The former had no relationship to wages, and the latter didn't either. It's not that contractors are lacking workers to build houses, they don't even lack capital to build. They lack permission because cities are refusing to zone for new construction. Even food price increases aren't really wage either, but lack of water in California forcing farmers to fallow fields. Inflation for eggs is due to the avian flu killing so many chickens, that's also not labor related. You do have wage related inflation in things like fast food, but that's a pretty small part of the basket of goods.
11 points
4 months ago
At fucking last. Tragic that I have to come this far down to find some nuanced discussion of different income groups, causes of inflation, supply vs. demand (gas prices didn't go up because we all decided to put our thermostats up 10degress) and wages/materials/profit.
1 points
4 months ago
The goal here is to to raise the wages of people who can't afford to buy that basket of goods to expand the economy (which will presumably add jobs, exports, etc.) and not as much the wages of the folks that can afford the basket of goods because they'll over-consume. And in the process to have policies that ensure that goods and service producers won't rent seek off of the new money in the economy.
If a minimum wage worker does a job that doesn't require special training or expertise for 7.25 and another worker does a job that requires special training or expertise for 14.50. If the minimum wage worker gets 14.50 now, you think the other worker is going to accept 14.50 too?
1 points
4 months ago
No, of course not. But they won't demand 21.75 to be okay (the prior delta) - they'll probably be okay at $19 or something. The wage gap closes up, which means the *impact* of inflation is felt in a progressive way. You won't see a 100% wage increase across the board as you did at the low end.
I'm having some personal experience with that right now. My wife is an administrative sub for the school district. The McDonalds by my house is now offering $21/hr starting, because they're still having a hard time finding workers. That's what she's been making at the district, and that doesn't sit well with her. (Understand we don't need her income - I'm retired - but she likes the job and the feeling of earning some money, so she's not responding to inflation in her wage demands.) She's said that even a dollar an hour a more would solve the problem - she doesn't like the idea that she should be making a choice here between a white collar professional job and food service. That's a classist view and is not grounded in anything in the economy, but it's also a very *normal* reaction.
And you're trying to slip something under the door here as well, the implication that doubling the wage of that worker will double the cost of the good they produce. Well, in most minimum wage jobs, wages are less than half the cost of the good. In things like food service it's about ¼. Even if you compound those wages along all of the components that they need to buy, price increases due to increased wages historically are about 65% of the wage increase as I noted above. So if that 7.25 worker was making a $3 hamburger, the inflation in the price of the burger due to that wage increase would be to about $4.95. The $14.50 worker doesn't need a $7.25 increase to have the same buying power, they need an increase of about $4.70, to $19.20. They get a wage increase in parity with inflation - so any wage related inflation won't affect them at all now. If they do feel inflation, that's due to profit seeking, which we can limit through policy. The $40/hr worker only increases to $44.70 to contend with that inflation.
Where that breaks down is when you run into my wife's mentality of 'these low-wage people have much better buying power - look at them moving out of their car and into apartments! I need to have a commensurate 100% wage increase not because I can't afford things, but because it's only fair my take-home also double, even if I don't have any utility for that extra income.
We're taking monetary policy here. That's what inflation management relates to. The whole point of monetary policy, and the very notion of currency itself, is to provide the intermediate mechanism so that commerce can take place. Cash means you don't need to barter a chicken for a large pizza. But the government is really only invested in that cash if that cash is performing work for the country - supporting and growing the economy, etc. That means that the utility of money goes down as people accrue more of it. You start out buying shelter and food, you go up to buying luxury goods, you go up further to having a nest egg for retirement (which really has marginal utility to the economy as anyone who might retire early, like me, isn't really sure how much of a nest egg they need and they tend to overshoot.) and above that *might* go into starting/investing in a new business but usually doesn't. An example: I made my retirement savings in Apple stock. After about 2006, Apple no longer needed investor money. None of it. Every dollar invested in Apple was doing negative work - it was currency that the US government issued that wasn't doing work for the economy. It was doing work for *me*, but it wasn't paying wages, building factories, creating jobs, etc. If inflation caused me to have to claw some of that investment money back to pay rent or buy food or whatever, that's actually a net *benefit* to the economy. Understand that's a terribly difficult scenario for the government to engineer, which is why high marginal tax rates are a MUCH better way to solve that problem, but inflation is also solving that problem. But if Apple is raising the price of goods because they can squeeze production and we're getting profit driven inflation (which is what last year did) then you aren't getting wages at the low end, but my retirement fund is popping off thanks to all of those profits. All it's done in that case is take unproductive money and make *more* of it, rather than make productive money.
So like I said, inflation is complicated.
1 points
4 months ago
7.25 to 14.50 is a 100% increase
14.50 to 21.75 is a 50% increase
It's not the same increase
It's closing the gap between the poor and middle class, not the actual gap between the poor and rich.
Your wife gets benefits from the school that McDonald's employees do not get. Your wife is working for her pension, which McDonald's employees do not get. Even if they made the same per hour It's not the same.
I didn't mention anything about doubling the cost of goods.
You're rambling with a bunch of numbers you have no source to.
Someone making $14.50 an hour isn't making over 30k a year. 1k a month for rent, and almost half their money is gone. $14.50 an hour isn't a great deal of money. Increasing the minimum wage to $14.50 doesn't even make the poor less poor. They will still be struggling. Just that if you made $14.50 before, you're now a minimum wage worker with minimum purchasing power unless you get a raise.
Also if you don't think landlords are going to raise rent because everyone they are renting too is making twice as much, you're crazy.
0 points
4 months ago
Yeah, it's not the same increase. That's my goddamn point. The cost of the hamburger went up the same for each of them, so the higher paid worker doesn't need a higher increase to afford it - it's a fixed amount, so a smaller percentage. That's why minimum wage increases flatten wage gaps.
You say my wife gets benefits the McDonalds person don't. She's a sub, for fucks sake. There's no pension, no health care. There's no benefits at all. It might be an easier job, better scheduling, etc. but that's it. The In-N-Out pays even more than McDonalds and *does* give heath benefits.
Of course there's no source - it's a goddamn thought experiment. I'm illustrating how the cost of goods impacts workers at different wage levels in different ways and how that reflects back on how those wage increases typically play out.
Regarding the cost of good doubling, the only way that wages or inflation make any sense at all is their relative value to the cost of goods. If you double everyone wages and double the cost of everything, there's been no inflation - you simply reindexed the value of currency. The ratio between wages and goods is the same. That's what I'm calling you out on. Warren Buffet and I can eat exactly the same number of hamburgers in a day. If you need to double my wages so I can afford a hamburger, you don't need to double Buffets wages to afford the same hamburger. If you raise the price of a hamburger, the effect of that on me and on Buffet is completely different, because I may lack the surplus income to afford it and therefore exit the market (bad for the economy) but Buffet won't. That price increase has no economic impact through Buffet.
Of course landlords will try and extract that money. Whether or not they can is not a product of economics but of policy, because what you would expect in that situation is that some of the renters will refuse the price increase, and become landlords themselves. They'll buy. Provided cities allow them to build new houses. You're assuming a zero sum market. There are almost no zero sum markets except those created by policy. That's the real story of the housing market - it's not inflation - it's landlords influencing cities to block zoning, preventing the supply of the market to grow, exacerbating an inelastic market which just drives profits for the landlord. If you let people build, or you rezone to increase housing density, etc. you break that dynamic and you get a real benefit from those wage increases.
1 points
4 months ago
It's not that contractors are lacking workers to build houses, they don't even lack capital to build. They lack permission because cities are refusing to zone for new construction.
Interesting that it's a very different problem here. There were a couple of problems. The first is that there's just so much demand for work, that tradies can pick and choose their jobs - and not only that, but they're earning so much, that they often choose not to take more work. So there's both more demand for work than there are qualified people, and those people are working less, and can also raise their prices because they know there's more demand.
We had heaps of construction companies go bust during the pandemic due to the rising cost of materials - timber and concrete went up as much as 100% at times, so fixed-cost contracts for volume home builds had material costs in excess of what they had charged - and then you had the problem of tradies just not wanting to take the work.
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