Eugene Coyle writes:
"Shemano thinks of an economy with an owner deciding between running a business
and working at the Post Office. That is not the US economy, and thus his frame
could us off in the wrong direction. I'm not going there tonight."
I was using shorthand for what I think should be the unobjectionable notion
that being an owner has an opportunity cost. If you think owners don't have
such a choice to do something else with their time and capital, I guess we will
have to disagree.
"There will be large changes in the economy as industries with relatively small
shares of labor costs do better than those where labor is a large share. It
has been remarked already on this list that labor is not a large share of
manufacturing cost. Day care centers, where labor is a significant cost will
be hit harder. With extra time off for parents, furthermore, the demand for
day care could drop, so that service might suffer doubly. We can say that the
economy will change. We can say that the economy will drastically change."
Agreed. Not my question.
"But Shemano asks the wrong question."
I was always taught there are no wrong questions.
"The biggest impact on owners of shares will be not from a one time drop in
profits but from facing an economy growing more slowly -- never mind not at
all. We know that the value of a share depends on the estimate of the rate of
growth of profits along with the level of profits. A simplified statement of
the cost of capital is: k = F(D1, P0) + g where k is the cost of capital, D1
is the Dividend expected in period one and P0 is the current price of a share.
g is the growth rate of dividends expected by investors. We see in the equation
that the cost of capital, k, depends in part on the rate of growth, g. It is
geneally accepted in finance theory that k is an increasing function of the
rate of growth. (Sabri, where are you when I need you?) Conversely, the lower g
is, the lower the cost of capital, so David Shemano's investor may continue to
invest, though dreams of compounding beyond Midas' hopes diminish. It will take
a decade or two to see how things evolve."
You are begging my question. You want to tell me that the owner will make less
over time, assuming he continues to make the same investment. What I want to
know is whether there is any evidence that the owner will make the same
investment when he expects to make a smaller profit. I have to assume some
econ grad student spent a couple of years trying to answer this questions.
What is the empirical answer?
Look, you said: "So what happens here? Profits drop -- the income distribution
could be significantly improved." I am just asking whether there is any
empirical evidence that increasing labor costs has any long-term effect on
profits. I would think this should be relatively easy to answer - look at the
profit margins of companies in industries and regions that instituted 8-hour
wage laws both before and after the change in the law. After a period of
adjustment, say 10 years, was there a change in profits, a change in income
distribution?
David Shemano
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