NASHVILLE, February 23, 2014– Democrats have stirred the pot (yet again) for a minimum wage increase. It is of paramount importance that people attain a basic working knowledge of the laws that guide labor markets. Democrats stress that increasing minimum wage will lift people out of poverty. This is not true. In fact, a minimum wage increase will hurt the very people we are told it is designed to help– America’s poorest.
When most people think of supply and demand they associate the idea with goods and services, which they pay for with their money, such as cable television, groceries and utilities.
The majority of Americans understand that if a drought occurs then many plants will die. This will cause fewer plants to yield produce, which will cause the supply to be limited. Thus, the price will increase due to movement relating to the supply curve. They also understand that if Apple’s next iPhone was filled with new, groundbreaking technology then the price of the iPhone 6 would soar due to movement relating to the demand curve.
However, many people do not associate minimum wage with supply and demand. This should not come as a surprise. The vast majority of Americans aren’t business owners. Due to this lack of experience, most do not understand the market laws at play.
Supply & Demand
The fact is that minimum wage is a perfect example of supply and demand. In fact, it’s Economics 101. Employees are suppliers of labor (supply). Employers are the consumers of that labor (demand). Since the minimum wage was created in 1938, economic dead weight loss has ensued.
The minimum wage is a price floor. This means that a firm can pay no less for your labor than what the government dictates. How is this a problem? It prohibits voluntary labor contracts.
For example, say a 14-year-old kid wants his first job at McDonald’s. The candidate has no skills, he’s never worked before, is vastly inexperienced and presents a sizable risk to the firm. Due to the fact that the government has now mandated the employer pay the 14-year-old $15/hour the firm decides to hire someone with more experience. The kid voluntarily offers to work for $7.50/hour. However, the government won’t allow it. A potential contract has now been killed and economic dead weight loss is the result.
Furthermore, firms can only pay wages that are below their average revenue product of labor (ARPl) curve. In layman’s terms, if the firm only nets $1.00 of profit per unit of labor at a cost of $9.00/unit then a $1.10 increase in each unit of labor will net the firm (-)$0.10.
If labor currently costs $9.00/unit and the government mandates firms pay $10.10/unit then the firm must do one of three things. The firm will either raise prices in order to maintain all units of labor, fire employees (results in decreased production–supply), or fire employees and require that current employees increase output to compensate for lost labor units. Yes, even a $0.20 increase will have this effect on some firms.
Various firms will react differently. The net result is lost jobs and increased prices for goods and services (inflation). Higher prices for goods and services are further accelerated by the fact that some firms are now producing less due to higher variable costs. This causes movement with relation to the supply curve and prices increase with demand remaining constant.
Democrats have attacked this as being a fallacy. It is not. It is an economic truism. The Congressional Budget Office has already verified that increasing the minimum wage right now will destroy 500k-1 million jobs. One million people out of work? That’s exactly what we need going into a quasi recovery from the recession.
As stated previously, wage floors hurt America’s poorest. Many individuals seek “black market jobs”. These jobs are off the radar of government’s restrictive wage laws. Think of baby sitters, handymen, maids, farm hands and other similar “cash under the table” jobs.
The majority of employees in this market lack the training and experience to seek more lucrative jobs. Therefore, they often find themselves in poverty and unable to climb the career ladder.
As noted before, an increase in the minimum wage will cost jobs. One million workers who were previously employed at the previous wage floor are now unable to find work. Fired because they lacked the marginal value necessary to maintain employment, these individuals will have an extremely hard time finding work at the new wage floor.
What will they do? They flood the secondary labor market looking for cash jobs because they cannot find employment at the new wage floor.
This causes a surplus of labor (supply) in that market. This means that firms, as consumers (demand) of labor, can now pay less for each unit of labor due to surplus conditions.
America’s poorest are now in a far worse situation than before due to the new labor surplus in their market. Their wages are now being reduced and increased competition for available jobs now exists. This is then compounded with inflation from the minimum wage increase, which causes the purchasing power of the dollar to decrease. The net result? America’s poorest are now making less and their dollar is worth less.
To promote a minimum wage increase as salvation for America’s poorest is purely insidious. In reality, the effects on these Americans is simply detrimental.
The minimum wage has been raised countless times since its creation. Yet, it doesn’t seem to be working. If raising the wage floor worked then people would no longer be in poverty and all would be prosperous. The solution is simple. America must return to sound fiscal policy and abandon the Federal Reserve’s fiat monetary system. Until this occurs, minimum wage will continue to be adjusted upwards. Soon enough the wage floor will be $100.10/ hour and a happy meal will cost $70.00. The wage is not the problem. It’s the money itself.