Wednesday, May 20, 2009

Minimum Wage, Minimum Employment, and Minimum Profitability

Ok, let's see if I can simply explain why minimum wage laws are so bad for the economy. The reason for this post is because in July minimum wage is set to jump almost 11% to $7.25 an hour.

Minimum wage laws are detrimental because in effect they work like price controls. In the free market a good or service is worth whatever a buyer and seller agree to or in other words, wherever supply meets demand. If the government sets a minimum price for a good that does not necessarily mean the good is worth that price. If the good is not worth that price to a buyer then the good will not be purchased.

Here's an example. Let's say in order to help out the auto companies the government enacts a price floor of $7K on automobiles so no buyer can purchase an automobile for less than $7K. Well, there are many cars out there that are worth less than $7K (like my 1974 Pinto). Will those less valuable cars be sold? The answer is no because they are not worth $7K. So in effect the government has forced many automobiles out of the market. So even though the government enacted the price floor in order to help the auto companies, what the government has in fact done is hurt them, because now fewer cars will be sold.

To make my point more clear here is a more simple example. Let's say you want to buy a Coke. A Coke in the free market would sell for $.75 but because Coca Cola is struggling and they employ many Americans the government puts a price floor on a can of Coke for $1.00. There is a Pepsi right next to the Coke priced at $.75. Are you going to spend the extra $.25 to buy the Coke? You might but my guess would be that the vast majority of people wouldn't therefore fewer Coke products are sold and the government has just ended up hurting Coca Cola rather than helping. Just because the government says something is worth a certain price doesn't mean that it is.

You see, each person in the work force has a price, a value to a buyer (employer) and a seller (employee). Some people are worth hundreds of dollars an hour while others are worth minimum wage and others are worth even less. So when the government dictates the minimum wage they are essentially making everyone in the workforce who is worth less than minimum wage unemployable. Why would you pay someone minimum wage if they were worth less than minimum wage.

Let's say a company employs a large number of low paying employees. These employees currently make less than $7.25/hr and will make $7.25/hr starting in July. So the company has a bunch of employees who are worth less than $7.25 an hour (because the company the "buyer" and they "the employees" agreed to their wage in the free market) who will be paid more than they're worth in a few months. How long do you think the company will keep them all employed if they're not worth what they're being paid? Well, if they don't perform to their new standard then chances are they will be let go and the company will go find employees who are worth the $7.25 an hour that they are forced to pay. Furthermore, the company's total labor costs will increase. Is it likely that the company will be able to raise prices enough to offset the increase in wages in this economy? Probably not. Therefore, the company will have to find some way to cut costs and the first place they'll likely look is payroll.

Minimum wage laws are one of the greatest causes of unemployment. There are many people out looking for a job and can't find one because they are not worth the minimum wage. David Neumark, a professor at the University of California at Irvine, estimates the July rise will destroy some 300,000 jobs among teens and young adults. So these people continue to live off of our tax dollars and become very expensive to society. Why not let them enter the workforce at whatever wage they agree to work for? Our company would definitely hire more people if we were allowed to pay them less than minimum wage and I guarantee there are people out there willing to work for less than minimum wage instead of be homeless and living off of the government.

Politicians love to appear sympathetic to the poor by advocating that a "living wage" be paid. They tell us what that wage is and then force businesses to pay it. They are taking on a central planning roll by telling us what is good for us and what is not. Why not allow workers to decide how much they're willing to work for? If they do not want to work for $7.00 an hour then they don't have to but why not at least give them the option rather than force them to live off of the taxpayers and remain unemployed?

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