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Minimum Wage, Maximum Stupidity

July 30, 2009 - 7:36am
Nick Coons by Nick Coons

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The minimum wage increase to $7.25/hour went into effect a few days ago, back on July 24, 2009. But minimum wage is just another term for price-fixing, and price-fixing always leads to market instabilities. This is a completely misguided attempt at helping lower income individuals.



A wage is a price, like anything else; it's a price on labor.  Prices should be set by the market, as the market takes into account both supply and demand so that the maximum number of people get the best deal possible.

What would happen if we set the price of milk to $7/gallon, or the price of lettuce to $10/head?  People would buy less of those things.  This is no different with labor.  When the cost of labor goes up, businesses buy less of it.  They do one of several things:

  • Raise prices.  This ultimately puts the cost of minimum wage hikes on the consumer, many times the same people who the raise in wages were intended to help.
  • Decrease services.  Again, a cost to the consumer.
  • Layoff employees.  As wages are pushed higher, it's often less expensive to replace low-wage workers with machines.

I was in a meeting the other day with one of my clients, and they send out massive amounts of mail.  They have an office worker that folds the letters, and stuffs and seals envelopes.  Next month, they'll be acquiring a machine to do this job, because the cost of the machine is now less expensive than paying a person to do it.

Wages are set by competition in the market.  If a business owner is paying too little, he'll lose good employees to other businesses that will lure them away with higher wages.  This leveling out means that employers can't pay too little and expect to remain successful in business.  When minimum wage increases, new money doesn't just magically appear in order to pay everyone more.  If an employer has 10 employees at $6/hour and wages are increased to $7/hour by a government mandate, the employer often has to let one or two workers go in order to comply with the law and be able to afford the increase of the remaining workers.  Minimum wage increases cause unemployment increases.  While a higher paying job is better than a lower paying job, a lower paying job is better than no job.  And in these times of rising unemployment, reducing or abolishing the minimum wage is what we should be focusing on in order to increase employment.

But people can't live off minimum wage, you say?  First, I've already debunked that myth, showing how someone can not only live off $5.15/hour (the minimum wage in Arizona a few years back), but go on nice vacations, buy a car every few years, and retire at the age of 52 with hundreds of thousands in investments enough to maintain his life-style throughout the rest of his life.  Retiring at age 62 will yield even better results.

However, that's all very interesting, but not the point.  Less than 3% of people work minimum wage jobs in order to support themselves completely.  Minimum wage jobs are held almost entirely by unskilled workers, generally teenagers.  It would be highly beneficial for a 14-year-old to work a few hours after school and gain some experience that will help him later in life.  However, there are very few things a 14-year-old knows how to do that are worth the minimum wage.  By the time this person is 16 or 18 and they apply for their first job, they have no experience yet are expected to be able to do something that is worth the minimum wage.  A work ethic simply does not exist on its own, it must be learned; and low-paid, unskilled work at an early age (voluntary, of course, no forced labor) is an excellent way to acquire these skills.  But the minimum wage knocks the bottom rungs off the latter, and somehow we expect people to climb it anyway.



Related Content:

Risks and Opportunities - Richard Sutton
Sandy and Price Gouging in New York and New Jersey - Nick Coons
How to Fix the Economy 101 - Nick Coons


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