Several candidates (and many voters) are enamored of the idea of a massive increase in the minimum wage, with $15 or even $17 being quoted, as this is assumed to improve the lot of the very poor.
More than one problem exists with this idea:
More than one problem exists with this idea:
Wrong demographic
Actually, rather than helping the 'poor', this is likely to impact the newly employed. Most of those who earn minimum wage are actually young workers. Sure, there are families whose wage earners earn minimum wage, and we will get to them, but the majority of those impacted will be workers looking for their first job, which are normally teenagers and young adults who need the money a lot less than the truly poor.
Drives inflation
This one is a bit difficult, as it isn't immediately obvious, but think about all the people who earn minimum wage. We often speak of the makers of burritos in these pages, and we will do so again. The actual cost of a burrito is heavily dependent on labor costs, most of it at the low end. Increasing minimum wage will cause an increase in the cost of the burrito. It won't be completely proportional; other issues impinge that we discuss below.
This will increase the cost of production of nearly everything. Over a relatively short period of time, a few years, nearly everyone will have to be making more to have the same purchase power as before, so those on minimum wage will suddenly find themselves little better off than before. For instance, in an economy comprised of a doctor and several burrito producers, in order for the doctor to get as many burritos, he will have to raise his prices, leading to burrito producers having to pay more, largely negating the gains from the increase in minimum wage.
Drives unemployment
First, and almost immediately, while inflation has not taken hold, our mythical burrito house is faced with a difficult decision: raise prices or fire workers and make the remainder work twice as hard. As time goes on, he will get a third choice: buy new equipment to replace workers for much less.
So, let's look at the hypothetical dual wage earner family that makes, right now, say, $9 an hour each, for $18 an hour. In order to meet the new minimum wage requirements, the burrito house has to lay off one of them. The other, being senior, is actually given more than the minimum wage, say, $16 an hour, but, as you can see, that's less total pay than both got before.
Since the wage earner is unskilled labor, the remaining wage earner will have a hard time finding a job. They will have to spend less money, which may not be possible. It is quite likely that raising the minimum wage in this way will actually cause higher unemployment and serious hardship for the very demographic it is intended to help.
As time passes, it will be financially advantageous to replace workers with machines. Inflation often does this. Once again, this will lead to unemployment, except it will be permanent this time. Since inflation will eventually remove the effect of the minimum wage, it will eventually remove the unemployment effect, but if a particular industry has already mechanized production, it is unlikely to walk back from that.
The final cause of unemployment is that we have a global economy, and, unless we are willing to enact stringent isolationism, raising the minimum wage will drive production to countries with lower wage costs. This has already happened repeatedly. This will, of course, lead to lower employment.
Reduces entry level jobs
For a new job seeker, often a teenager, with no skills and no job history, it can be very difficult to get a job. Raising the minimum wage will make this much worse.
Mechanization will require skilled operators. This means companies that mechanize in response to the increase in the minimum wage will face higher training costs, and this presents a very real risk. The company has to bet on an unskilled worker working out, and is paying much, much more for the worker while the worker is not making the company any money.
Even companies that have not mechanized will be reticent to hire new workers. Since a company is in the business to make a profit, they need to sell more product than they incur in costs. A new worker is unlikely to turn a profit for some time at the new, higher minimum wage. This means companies will be less likely to take a chance on a new worker.
Of course, eventually, inflation will fix this problem as well.
It doesn't work
In the long term, raising the minimum wage will raise costs. It will raise costs rather quickly, rapidly wiping out the income gains for those to whom it applies, and causing hardship for those on fixed incomes, who can't respond to such massive inflation. It may trigger hyperinflation.
If we instead got rid of the minimum wage, we'd see the cost of nearly everything either stay the same or drift lower. What this means, to the target demographic, is that the things they buy can get cheaper. This is improved purchase power. While the target demographic does not have more money, they can buy more because prices have fallen, so they are better off.
If we got rid of the minimum wage, we'd see higher employment, which results in lower crime as well as lower welfare costs. Giving people the option to work with dignity for their wage is always better than forcing them to not be able to work by enshrining a number in law.
So, what should we do?
We should eliminate the federal minimum wage. States are welcome to set whatever minimum wage they like, so, if you want to live in a state with a minimum wage, you can.
Eliminating the federal minimum wage would allow for greater employment, meaning more people can support themselves and get on the job track rather than the welfare or crime track. It will allow companies to train younger workers while paying them pocket money, and will mean that people who find themselves in economic trouble can at least get some cash flow.
Eliminating the federal minimum wage would allow real data to enter the argument. Since different states would have different minimum wages, or none at all, we'd be able to compare them with a chance to make an observation on who is really right on this issue.
1 comment:
This is a good article. It says what I have said every since the subject of increasing the minimum wage has been voiced. This article says it much better than I have.
There is another way to address this which is education and training. But there is a catch here. Those who would impose their will on others cannot impose their will on the individual (because they are voters) but they can impose their will upon companies. Now if they want to increase the income of those receiving minimum wage would be get them into jobs that are not minimum wage. That, however, would take education and training on the part of those who would be making minimum wage but they cannot force the poor to get an education nor training. But they can force the employers. BTW the reason thew cannot (that is will not) make the poor to get education and training they the poor has more votes than the employers and what does politicians bow to? The Vote.
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