Minimum wage: Why it (usually) breaks your economy, and modding ideas on how to fix it

[alexander.julian.erhard]

If you ever tried to implement the minimum wage law, chances are you most likely went bankrupt due to either unemployment, or if you subsidized buildings, due to out of control subsidies costs.
Or you heard from other players that this will most likely happen and therefore have never tried it.

So why does this happen, and how could the implementation be changed to prevent an econonmic collapse while reasonably fullfilling the goal of the law, ensuring better wages for your (non-upper class) population?

Currently, the minimum wages law gives a base +50% minimum wage modifier (this applies even in unincorporated states) and an additional +10% per institution level, meaning + 60/70/80/90/100 % for your incorporated states.
This modifier applies to the average wage of either a region or your entire country (I don´t now for sure which, but it is a problem in both cases).
A 50% minimum wage forces every building to pay at least 50% of the average wage, so if the average wage is currently 10, everyone has to pay at least 5.
That is of course bad news for every building with a profit less than 5, especially if you can´t subsidize it.
But in both cases (Either it goes bankrupt and unemploys its workers, or the government keeps it alive via subsidies), this means that the average wage is now even higher, so low wage buildings have to increase their wage even further.
At a 100% minimum wage modifier, everyone will over time be forced to pay the wage of the highest wage building, and then that building will be locked to at least that wage too, preventing wages from ever going down again I think.
Meaning either almost full unemployment, or unsustainable subsidies.

The weird thing about this is that welfare payments accomplishes almost the same thing by making the government pay for it instead of the buildings, with far less risk of collapsing your economy.
(A large Peasant and/or Unemployed population can still screw you over if you decide to go for welfare laws though)


So how would I change this, if I knew how to mod the game:

Idea 1: Flat minimum wage (maybe the simpler idea, but worse than my second idea imo):
Today, most countries I know about implement a flat amount of money per hour as minimum wage.
So I am going to assume everyone works the same amount of hours and say that every building has to pay for example an average annual wage of 2/4/6/8/10 now.
This will probably only be a viable option for countries that can subsidize everything, but shouldn´t create gamebreaking unemployment for them.

Idea 2: Minimum wage based on building profitability (The better option imo):
When opening a building, you should see a annual profitability per population value and average annual wage per population value below that.
Because
Annual profitability =
(weekly value of output goods - weekly value of input goods (not including wages!))
*52 (assuming 52 weeks in 1 year)/employed population
and
Average annual wage = weekly wages/employed population,
a builiding is profitable exactly when the annual profitability value is higher than the average annual wage value.

If a building is profitable, the percentage of average annual wage/weekly profitability also determines how much of that profitability goes to the employees,
and how much goes to a building´s cash reserves, dividends only to owners and/or investmment pool.

My idea here for the minimum wage law is to make the average minimum wage a percentage of a building´s profitability, for example a 80% minimum wage means a building with 20 annual profitability per population is forced to pay at least an average annual wage of 16, one with 5 profitability is forced to pay at least an average annual wage of 4.

And make the percentages go from 40% to 80% for example.

Note that this implementation would most likely help the non-owners of very profitable buildings more than those of less profitable buildings (who already tend to have a higher wages/profits ratio) and actually increase wealth inequality in the lower and middle class, but still bring down the overall wealth inequality, which would be VERY different from how the law is currently supposed to work (if it wouldn´t break the economy due to poor implementation), or how a flat amount minimum wage you see in a lot of countries today would work.

I think that´s actually a very good thing though:
It would make minimum wages and welfare actually different from each other:
Welfare primarily helps the poor and unemployed through government money,
minimum wages would ensure all workers get at least a certain part of a building´s profits and reduce the power of owners particulary in profitable buildings.
It would also mean less investment pool money as you reduce the amount of dividends owners can get, but at some point that actually becomes a good thing too.

[kgkong]

Not an issue for me. I don't always use minimum wage laws and that. But chances are, you're over extending your economy in another area, usually with administration centers, ports, military and naval bases, or having issues maintaining employment from other unproductive factors in business, so you force minimum wages to encourage more employment but the businesses still lack productivity so they have to get subsidized, so now you're really tanking the economy.

Honestly, it doesn't need to be changed at all.

[jfoytek]

So the whole idea of minimum wage is a false premise that only makes your economy worse. And its good to see it causes exactly what it does in real life a less healthy economy...

Not sure why you think it needs to be fixed... Its based on a premise that minimum wage is actually a positive thing and not the flawed government regulation that only gums up the works and causes problems...

[kgkong]

Ideally, yea you need to keep wages low. To keep the pop groups in a high SoL, you don't give them more money. You give them more disposable income. To do that, you're reducing the costs of the goods they demand. You run off the lowest taxes possible. And you only let wages rise based on competition in your market. If competition is a big problem to keep pops employed locally or where you need them in your own states, you put on closed borders.

I've found the most ideal time to enact minimum wages is when you're having a problem keeping populations in your nation, or in your incorporated states where you should have manufacturing focused. Unincorporated states should be primarily resource and plantations (raw goods).

Welfare is the most detrimental to the economy because you're literally just subsidizing minimum wage. And it's especially troublesome when you can't keep industries productve.

[alexander.julian.erhard]

Originally posted by KingGorillaKong:

Ideally, yea you need to keep wages low. To keep the pop groups in a high SoL, you don't give them more money. You give them more disposable income. To do that, you're reducing the costs of the goods they demand.

Yeah ... how are those Industries going to stay profitable then?

[VoiD]

That sounds like an economics issue, someone @ paradox doesn't seem to know how minimun wages work.

Minimun wages don't really change actual wages too much, it's basically a cutoff point, all really should be doing is increasing average wages, by firing people who aren't that productive or wouldn't be worth hiring, so people with less access to education or skilled labor training just get ♥♥♥♥♥♥.

It's absurd to think that a company would, ever, hire someone at a loss, like in the game, if wages are too high and the prices of goods aren't high enough people would just get fired, no point in hiring someone to increase losses after all, right?

Also, it's lacking international competition too, when a country's laws is trying to force industry to become unprofitable, or not profitable enough, rich people woudln't just say "meh, I'll make less money", they'd look for better deals, better countries with cheaper labor and higher demands for goods & services, that's how china got so heavily industrialized while the west kept passing dumb laws.

Real wages, like everything else related to economics, are decided by supply vs demand, you don't need a law telling hospitals they need to pay their surgeons well, they know that if their offer isn't high enough the surgeon has options, and the hospital won't have the employees it needs. But they surely can tell the janitor to accept a very low pay or get ♥♥♥♥♥♥, as they know the janitor doesn't have anywhere else to go, and their skills are worth that much everywhere else, forcing business to fire even more people and make low skilled labor even less desirable just makes their problems even worse as it removes even more options for employement for the lower classes, and then they REALLY need to accept that minimun wage offer and be glad they didn't just get unemployed like everyone else.

tl;dr minimun wage laws should never make people live better, it should just increase unemployement, close down certain industries, and send industry to other countries, but it should never bankrupt a nation either, as it doesn't really increase anyone's wages.

[Darrenb209]

Originally posted by VoiD:

Also, it's lacking international competition too, when a country's laws is trying to force industry to become unprofitable, or not profitable enough, rich people woudln't just say "meh, I'll make less money", they'd look for better deals, better countries with cheaper labor and higher demands for goods & services, that's how china got so heavily industrialized while the west kept passing dumb laws.

That level of globalisation occurred after the game's time period.

While in the late 1800s it wasn't unusual for companies to acquire parts of their supply chain, Land for rubber plantations, cocoa plantations and things like that from other countries, it was incredibly unusual for a company to even open a factory in a different country's territory unless as part of government policy. The only exception to this was colonial territory with the same "overlord".

In fact, since that type of foreign investment was part of colonial tactics, another country's business trying to get into your country was viewed as a bad thing to prevent if you could.

[kgkong]

Originally posted by alexander.julian.erhard:

Originally posted by KingGorillaKong:

Ideally, yea you need to keep wages low. To keep the pop groups in a high SoL, you don't give them more money. You give them more disposable income. To do that, you're reducing the costs of the goods they demand.

Yeah ... how are those Industries going to stay profitable then?

Produce more at a lower cost, and creating larger demands for end of economic chain goods. It's not perfect but it keeps things balanced. Pop groups are wealthier because they don't have to spend as much on most of their goods so they can afford more goods at lower wages. It works quite well for me, as I'm always rocking productive industries following this.

[Zebulon Ecthelion]

I think it should be a "flat" minimum wage that's determined by your nation's standard of living. In essence, the basic minimum wage should be around whatever is necessary to ensure that your low income strata always meets their "minimum expected" standard of living with higher minimum wages being increments above that.

[alexander.julian.erhard]

Originally posted by Spazz Maticus:

I think it should be a "flat" minimum wage that's determined by your nation's standard of living. In essence, the basic minimum wage should be around whatever is necessary to ensure that your low income strata always meets their "minimum expected" standard of living with higher minimum wages being increments above that.

Anything that makes it not based on the average wage in your country is fine imo, because basing it on the average wage means that average wage rises (both if lower wage buildings adjust because they have to, and if they have to fire because they can´t afford to), forcing more adjustment etc.

I´m fine with spending a bit of subsidising money if I am rich enough to afford to pay a bit of extra government money even at lower taxes.
It´s better than stockpiling Gold for sure.
I´m definitely not fine with everyone becoming unemployed, or having to pay unsustainable subsidies because one random building had very high wage of 25 or something like that and the law (at least at Level 5) than gradually forces everyone to pay that or close,
because Paradox just didn´t bother to playtest their game or just think about how their mechanics are implemented and what that causes I guess.

[Wolfie]

My suggestion would be setting the minimum wage (and also welfare) on either a set number of pounds, or on a set SoL, either number would increase with institution level. This would represent the minimum wage/welfare being more of a living wage: the minimum amount necessary to survive in the current economy. So the lvl 1 minimum wage might be standard of living 10, or 2 pounds. Then lvl 2 might be 12 SoL/3 pounds, etc, to represent a living wage not just meaning one doesn't starve, but also that one can buy other necessities or afford to go to school or get healthcare, for instance. Of course this would cause a spiral if the average national wage is less than the minimum wage, but it shouldn't reasonably happen, and if it does you shouldn't have instituted the law in the first place

[Weatherman]

If minimum wage is causing you to go bankrupt, then you've got inefficient industries. It's the spread between your lowest wage (and likely lowest productivity) workers and your average that's causing your problems. Import the low profit goods and reallocate those workers to higher productivity jobs. Then you'll be able to get the social benefits from a minimum wage without the economic harm. Don't be afraid to remove low profit industry buildings, though it's better to avoid building them in the first place.

I suggest only going for minimum wage after you have laissez-faire and free trade. Those both help you optimize your economy, and your revenue will be based mostly on income tax at that point, so minimum wage should increase your revenue.

[lubed_assassin]

Originally posted by Weatherman:

If minimum wage is causing you to go bankrupt, then you've got inefficient industries. It's the spread between your lowest wage (and likely lowest productivity) workers and your average that's causing your problems. Import the low profit goods and reallocate those workers to higher productivity jobs. Then you'll be able to get the social benefits from a minimum wage without the economic harm. Don't be afraid to remove low profit industry buildings, though it's better to avoid building them in the first place.

I suggest only going for minimum wage after you have laissez-faire and free trade. Those both help you optimize your economy, and your revenue will be based mostly on income tax at that point, so minimum wage should increase your revenue.

Economic harm is still there because how the game implements min wage. It just increases wages, it has zero reference to any specific SOL or set livable wage. That means even the most profitable industries can be led to fire people in a downward cycle. Once fired demand is reduced and they fire people in other industries. In this game it really just functions as a form of reverse taxation that makes the labor movement happy but cost more money.

Like the OP said hes not sure if its state or national wage average, but if its state that would be devastating for profitable states. One state could have a min wage of 5 and another could be 15.

Maybe if it was slowly implemented like they do IRL, a ticking up minimum wage every year it might help.

[Weatherman]

Originally posted by lubed_assassin:

Originally posted by Weatherman:

If minimum wage is causing you to go bankrupt, then you've got inefficient industries. It's the spread between your lowest wage (and likely lowest productivity) workers and your average that's causing your problems. Import the low profit goods and reallocate those workers to higher productivity jobs. Then you'll be able to get the social benefits from a minimum wage without the economic harm. Don't be afraid to remove low profit industry buildings, though it's better to avoid building them in the first place.

I suggest only going for minimum wage after you have laissez-faire and free trade. Those both help you optimize your economy, and your revenue will be based mostly on income tax at that point, so minimum wage should increase your revenue.

Economic harm is still there because how the game implements min wage. It just increases wages, it has zero reference to any specific SOL or set livable wage. That means even the most profitable industries can be led to fire people in a downward cycle. Once fired demand is reduced and they fire people in other industries. In this game it really just functions as a form of reverse taxation that makes the labor movement happy but cost more money.

Like the OP said hes not sure if its state or national wage average, but if its state that would be devastating for profitable states. One state could have a min wage of 5 and another could be 15.

Maybe if it was slowly implemented like they do IRL, a ticking up minimum wage every year it might help.

That's just not correct. Profitable industries won't fire workers. What's happening in your play-through is that your profitable industries somehow turned unprofitable. Either the inputs got too expensive, or there wasn't enough demand. Also, reduced labor demand would make other industries MORE profitable because they'd have cheaper labor. What you're probably seeing is that those fired workers are reducing their consumption of your other industries' products. It sounds like minimum wage is causing problems in your play through, but it's due to your economy. Transition away from those low productivity industries before implementing it and you should be fine.

I think OP is confused about the game mechanics. The minimum wage is based on the normal wage, which is the average paid by industry across your incorporated states. Government wages are based on it, and if you go to a government building and hover your mouse over "Wages" it will show you the normal wage for your country. Minimum wage does not apply to unincorporated states or colonies and does not take their income into account. Minimum wage comes from the "Workplace Safety Office" institution, and the effects of institutions don't apply to unincorporated states. You CAN implement it incrementally by changing the level of this institution. In OP's example where he's got a normal wage of 10 and his industries can't afford a minimum wage of 5...the problem isn't minimum wage. The problem is his economy sucks. That means his industries can't afford to pay starvation wages, which, minimum wage isn't going to help.

At the advanced economic stage where I implement the Workers' Protections law, my lowest paid workers already are making over 50% of the average wages. If a building doesn't offer that, then they already aren't taking those jobs because they have higher wage options (which I want, because those options are higher productivity too.) If minimum wage is causing you problems, it's because of the spread between your lowest paid workers and your average. You want to eliminate those lower productivity buildings and optimize for your higher productivity industries.

It's also not a reverse tax--it increases income tax revenue because it increases incomes. It slightly decreases dividend taxes, but that should be a small fraction of your tax revenue at this point. That assumes that your minimum wage is actually raising income.

Minimum wage is just a price floor. If the price of labor is already higher than the floor you're setting, then it doesn't cause any problems. Since it's % based in this game, the thing that is causing you problems is the spread between your lowest wage and the average. You can use minimum wage in some situations to boost incomes and consumption, but I primarily use it to win back over the trade unions after I let all the immigrants in. It also gives a good boost to population growth by reducing mortality.

[kgkong]

@Weatherman: You are missing his point, that the player's productivity is inefficient. They're productive enough but once you enact minimum wage, the industry's overhead costs raise with the increase in minimum wage, in turn being the resulting factor in them no longer being productive. Being inefficiently productive is not the same as being unproductive. But being inefficiently productive leads to a slight increase in an input cost to the industry causing unproductivity, which can spiral into the repeatedly hiring and firing of pop groups.

[Weatherman]

I'm not missing his point. The point of the thread is "The game is broken because I can't get minimum wage to work right." I explained how and when to use it effectively. It's a tool that works in some situations, but not all.