Raising the Minimum Wage

Wednesday, July 28, 2004
Often you hear politicians talk about raising the minimum wage, including at tonights DNC, and they make it seem as if this will solve a lot of problems for those who are less fortunate. I don't think this subject is so cut and dry. Giving higher wages to those making the least might actually hurt them in the long run. Let me explain.

Let's say the government mandates that the minimum wage is raised. This makes those who were earning minimum wage have more money in their pocket. But what other effects does this have? First you must understand what money represents. Money is just paper, it has worth because somebody's production made it worth something. The US can print all the money in the world but if it isn't backed by something of value it is worthless. So if the US mandates higher wages they can't actually increase the production of the entire country.

Economics is about supply and demand, if something is rare it is worth more and vice versa. Well now money is easier to come by so it is "worth" less. This makes everyone not given a raise poorer, and the money they have saved is worth less. For example, maybe before the raise not everyone could afford a new Honda Civic at $14,000. But because he got a raise a minimum wage earner can now afford it. Well more people want the Civic. More Civics aren't magically produced so the price of them must rise. The guy who was close to minimum wage but wasn't quite there is made worse off.

Now take the next step. The guy who earned a little more than minimum wage is going to see he is doing relatively worse than he was before. He is either going to just stay worse off or demand a raise. Well, this is one big chain so the next guy wants a raise, and the next guy, and so forth. What does this cause? Nothing but inflation. Everything will cost more and nobody is better off (actually people are worse off because inflation is bad for everyone but that is a topic for another time).

There is more. The employer now must make a choice. The higher minimum wage means that he will most likely either:

1. Decide he can't afford it and fire the person making the minimum wage
2. Raise his prices in hopes of recouping his cost
3. Lower his overall cost by reducing wages for others
4. Eat the cost and make less profit

We can all agree one is bad. It is better to have a bad paying job than no job at all

Two and three are bad for the same reasons I stated above. It's a chain reaction where sooner or later all prices will need to rise. There isn't any more production backing the money so all money becomes worth less.

Four while possible is unlikely. People are in business to make money. If they can't earn money at what they are doing they will do something else. It is wishful thinking to believe that if a business man can raise his profits he won't by any means necessary. Some small businesses might, but all the large companies who have millions of stock holders to answer to simply won't. And those are the companies who really move the economy.

So what is the answer? I'm not sure. Like I said, the above may or may not be true but it is important to see all sides of the argument and to make an informed decision. In the end I don't think it helps to re-cut the pie into different size pieces because the people most adept at cutting the pie (most likely those with the bigger piece already) will just find a way to ensure their piece stays just or big or bigger. The only thing to do is to make the whole pie larger.


Anonymous said...

Excellent analysis. Similar logic explains why you can't just give everyone health care. There's only so much health care resources to go around and if you try to control the price, there will be fewer resources offered.


xosweetxpeaxo89 said...

i agree as well...raising minimum wage would be terrible...because if we raise the minimum wage that means that the prices on evering will have to go for the employer to compensate his employees salaries and we'd be right back to wher we start with the minimum wage people complaining because they still cant buy anything...there will always be people at minimum wage who cant afford things but that's just life