This article is to look at a hypothetical position on how big firms or key industry players may have the ability to predict changes in minimum wage or regulations. In this article, I put forward the proposition that big firms possess asymmetric information allowing them to know, or “predict” with a certain amount of accuracy, when the minimum wage is raised by state or federal authorities.
While this theory is still hypothetical, I will also provide some recent evidence on cases which represent this phenomenon. This article will also look at what do firms do, and how this asymmetric information changes valuations of labor and capital towards the firm.
Obtaining Asymmetric Information
Larger firms have the ability to lobby government officials. It’s no secret that billions of US Dollars have been lobbied from various industries and groups.
Ludwig Von Mises refers to “caste conflicts” in which societies generally tend to not have conflicts with each other when a higher degree of market freedom is ascertained; while government-granted privileges allows those who live off the government to divide and drive a wedge between society.
This idea can be further expanded when considering how lobbyists cause bigger firms to have the ability to “live off the government” compared to medium and smaller firms.
With this, we can conclude that not only do larger firms have more “purchasing power” with politicians (in terms of lobbying for rules and regulations), however this can also be expressed in the form of information as well.
First, let’s define what lobbying means.
“The act of attempting to influence business and government leaders to create legislation or conduct an activity that will help a particular organization.”
We can also further expand the definition of lobbying. As mentioned above, larger firms with their lobby groups could also hold the potential of “purchasing” information.
Why would a Lobby group want to obtain information? The essential reason on why lobby groups obtain information is because this allows for firms to plan and coordinate their actions in order to prepare for inevitable changes in market environments due to societal changes in morality (example, a higher minimum wage to reflect changes in living cost, or to reflect what is believed as the “Value of Labor” according to those pressure groups).
This, in turn with the asymmetric information obtained from lobbying efforts, allows for larger firms to seize the opportunities not made available to smaller firms.
Take the example of Wal-Mart and raising wages for employees.
With the inevitable fact that the minimum wage will be raised federally (within certain states the minimum wage has already been raised), Wal-Mart essentially raised wages to reflect the value contributed for the current line of employees.
However, what about the future employment of employees down the line? Essentially, Wal-Mart has already cut 7000 jobs due to automation. This in essence shows that Wal-Mart not only reduced its hiring rates, but also cut back in the total amount of jobs being offered on the job market.
The reason for this could potentially be that asymmetric information was obtained by Wal-Mart lobbyists on an estimation of when the minimum wage will be raised. As a result, Wal-Mart has adjusted its labor force, changed their salaries, and continuing to expand their automation process.
A Basic Economics Crash-Course
Before we can continue with our discussion, a small crash course in basic microeconomics is needed in terms of understanding the value of labor and how it changes. Below is a diagram representing the “Marginal Value Product of Labor.”
With the current prevailing wage rate, we receive total employment for the firm or industry at Q1. Now, let’s assume that we have perfect conditions in our hypothetical industry. We must introduce a new concept called “Marginal Value of Capital” (MVPK). This new concept essentially like the last one measures every additional amount of value added per increase of capital goods employed.
As seen in the diagram, the prevailing amount of capital at the current rental rate (the cost of employing capital goods) allows for a firm or industry to employ Q1 quantity of capital.
Now, in a market environment, new technologies form and are employed over the long term. Assuming that no other factors affect the changes in the MVPK (such as changes in revenues, or changes in MVPL), those new technological factors essentially shift the MVPK towards the right, indicating an increase in their value.
As a result, more capital is employed. However, what about the MVPL?
Essentially, an increase in the MVPK will also increase the MVPL. The MVPL also shifts towards the right. The reason on why the MVPL will shift to the right is because when new capital goods are introduced, this will allow for the labor force to utilize new production methods and thus increase their value of production as well compared to the equipment and production methods used previously.
Now that we understand the basics on how changes in technological factors increase the value of labor, we must now turn our attention towards a change in minimum wage laws.
Let’s take an example below of a graph showing MVPL.
With a sudden change in the short term with wages (due to minimum wage legislation), we see that the quantity of labor employed reduces.
Because firms would want to continue to produce at the same output, this would mean that firms must replace Labor with capital goods. However, take into consideration the supply and demand of capital in the short term.
In the short term, capital is fixed/extremely inelastic.
The reason for this is because new factories and technologies can’t magically appear within the short term. Thus, as a result with the increase in demand, this will essentially increase the rental rate for new capital goods as when taking in consideration the law for supply and demand.
As a result, this would change the MVPK in the short term as well. Due to this change in MVPK, we will see firms reduce the amount of capital employed as well.
This would therefore mean, a firm will have to reduce the amount of goods and/or services it provides to the market (this is called the quantity effect), hindering economic growth in the short term by reducing consumer real purchasing power, and reducing profitability of firms. This in turn reduces the potential of profits obtained by investors to be reinvested in new industries elsewhere.
Large Firms Applying New Information
Now that we’ve explored basic microeconomics with wages and capital, let’s go back towards our hypothetical theory on how large firms have the ability to predict minimum wage changes.
Let’s make McDonald’s as our example company.
McDonald’s lobbyist are attempting to prevent congress from introducing an increase in the minimum wage, however, eventually their influences will fail.
Once their influence on congress reduces, lobbyist may have the ability to obtain information about at least when the minimum wage legislation will be introduced and at what moment it would go into effect in the economy as a whole.
With the information obtained, McDonald’s would get to work in order to prepare itself for when the minimum wage will be passed and placed into the economy as a whole.
First, McDonald’s would calculate the “Marginal Value Product of Labor” and at how many employees they would employ if they did nothing within the current timeline, and thus reflect the number of employees required.
Pw represents the predicted wage rate and Pq represents the predicted quantity needed as a result of a minimum wage increase.