3 Reasons Why Minimum Wage is Ridiculous

There has been a big push to increase the minimum wage to $15/hr nationally. Several cities have already done it. Several democratic candidates have promoted it.

The logic behind the minimum wage is that people need a 'living wage.' Making $9/hr is not enough to pay for a house, a car, and keep food on the table. Let's raise that number up where people making minimum wage can survive.

Now, the obvious next question should be why stop at a 'living wage?' Why not bump that up to a very comfortable upper middle class wage? Why not ensure that the minimum wage is not enough to buy two SUVs and a McMansion in the suburbs?

And while that may get the wheels spinning for Bernie and AOC, the rest of us intuitively understand there might be a problem with that.

The truth is that raising the minimum would be ridiculous. It would be bad for the poor, bad for the economy, and bad for consumers.

1) Unemployment Rates Will Increase
To explain why, let me touch on something that even Bernie and AOC understand: price controls don't work. Let's say that the government decides that gasoline is too expensive. So, they declare that all gasoline must be sold no higher than $1.50/gallon. What would happen?  A couple things. First, consumers would consume more gasoline. Long trips would be less expensive. Driving less fuel efficient cars would be more affordable.  Second, the supply of gasoline would drop. Many oil producers, refiners, and gas stations, would find that more attractive profits could be made elsewhere. Only the most efficient producers would be able to (or want to) continue to supply. Can you guess what would happen? More people want to use more fuel and less people want to produce fuel. You guessed it, fuel shortages.

This is not unique to fuel. Bread, milk, eggs, and countless other commodities hold to the same principle. Cap the price and you get shortages. Go look at old pictures of bread lines to see the result.

It works the other way. For a variety of reasons, governments have tried to raise the price of various commodities (often to help farmers). The idea here is that no one can sell corn (or milk, or whatever) below a certain price. That way farmers can stay in business by making more profit. Let's do another thought experiment. Say that the government mandates that milk cannot be sold below the price of $5/gallon. What would happen? Well, on the consumer side, price sensitive families would buy less milk. They would restrict how much their kids can drink, maybe switch to other beverages. They could water down the milk to make it last longer. What happens on the supply side? Well, all of the sudden that milk industry seems like a lot more profitable venture. Farmers switch from making other products to making milk. You can, after all, make $5/gallon. What happens when you have less people  using something and more people producing it? The obvious effect is that you have an excess of that thing. Companies who thought they could make a profit now find that they cannot sell their $5 milk. It sits and rots.

Price controls on commodities always results in either a shortage or an excess supply. Every single time. Like I said, even socialists usually can see this.

How does this have anything to do with minimum wage? The answer is that fixing wages artificially is the exact same thing. You have something that is being supplied at a price (wages for our labor). If you artificially raise that price, what happens? Well, on the demand side (businesses), you are going to have a drop in demand.

Consider this. I own a corner shop and would rather not come in on weekends to sweep the back room. I'm thinking about hiring someone to do it. But my decision matters a lot based on how much I have to pay. If it is very cheap to hire someone, then I will certainly do it. If it very expensive, maybe I will just come in myself. Say my line is about $100 a day (~$12.5/hr for 8 hrs). Well, if minimum wage is $15/hr, I come in the shop myself. A bit of a hassle but not the end of the world.

A similar scenario could be found at a more macro level. If I am a corporate manager at a fast food chain who is trying to hit certain profitability numbers, I can see that the cost of labor is starting to eat away at profits too much (thanks to the new minimum wage), I know that the best way to lower that is to look for opportunities for headcount reduction. You can do that by installing machines for cashiers. You can do that by outsourcing cleaning services. You can do that by just making the existing workforce do more.

Bottom line, if you raise the wages beyond what the workers are worth to the employers, there will be a reduction in demand.

Now, what will happen on the supply side? Consider that you are stay at home mom. You looked at work right after you had kids but you realized that daycare cost almost as much as you could make working at the bank. So you stayed home, enjoyed your time with the kids, and made do. But now, you realize that the bank has to pay you $15 and you rethink your decision. You get dressed, dust off the resume, and go down and apply for that teller job.

But you are not the only one. The guy who had been working at Post Office and was making $16/hr realizes that just for $1/hr less, he could work with a lot less stress at the air conditioned bank. And the guy who was working as a janitor thinks the same thing. In short, there now a bunch of people applying for that job now that the wage is $15/hr where there were none back when it was $11/hr. 

There is more supply of workers. But less demand for workers. What happens?

The same thing that happens when that happens with butter or milk. An excess of workers (on one side) and a shortage (of jobs) on the other side.

That is what we call unemployment. Raising minimum wage increases unemployment.

But minimum wage has additional horrible effects.

2) The Poor and Uneducated Will Be Hurt Most

One other major negative effect, is that it makes life much more difficult for inexperienced and unskilled workers. History is full of stories of men who started off at the bottom of a company and proved they were good workers and eventually became titans of industry.  Henry Kaiser the "father of modern shipbuilding," for example, was poor and unskilled but made his first step out of poverty by taking an almost-commission only sales job at a hardware company. He proved to be so good that he made enough money to start his own company (and become a millionaire). That first rung (close to $0/hr) was what he needed to get someone to give him a chance. By raising the minimum wage, men and women like Henry Kaiser would have to compete against a much larger and more experienced field of applicants for fewer jobs. There would have been no commission only sales job for him to get (with zero experience or skills) but a $15/hr sales job that talented men and women (many of whom would have been happy doing something else before the wage hike) are also applying for.

For many years, low to no wages has been the needed first rung on the ladder of economic freedom.

Men like Henry Kaiser would end up being unemployed. He might end up on welfare. Another anonymous poor person that society would look down on.

So, a big group of people that are hurt by high minimum wages are those who are born into non-college attending families. Single parent households. Families where English is not the first language. These kids graduate from high school.... maybe.... and then have to go into the work force. What do they have to offer?

One thing. One thing that the college educated stay at home mom cannot offer something that the Post Office employee cannot offer. You can offer to take the job for low wages. "Pay me $5/hr. I don't care. Just give me a chance." You can say. For the first year or so, you make close to nothing. The owner of the business took a risk but was rewarded by a hard worker who he didn't have to pay much. The worker is rewarded by getting a year of experience under his belt and showing the owner and his managers that he had the skill and work ethic to do the job.

Then guess what? He is all of the sudden marketable. He can compete with the guy from the post office or the stay at home mom. If a promotion comes up, or a job at the store down the street, suddenly, he no longer needs to offer the low wage. He can offer his experience and skills.

That low wage was the bottom rung on the ladder that he needed. Now that he has reached it, he can reach the next level.

3) Inflation will Delete Any Positive Effects
Okay, you might say, but some people will be helped right? If McDonald's has a guy making $12/hr who does a decent job, he won't fire him. He will give him the raise. And that guy will have a little bit more cash to pay bills, feed his kids, and live a decent life. Right?

Uh, no. Not really.

Let's go back to a thought experiment I mentioned at the beginning of this post. Let's say we set the minimum wage high enough so that everyone makes $1 million a year. Everyone is rich! But then you want a haircut. You hop in the car and head down the street to the Great Clips. You stroll inside and look at the sign, it says, Men's Haircut = $200.

"Wow!" you think. "That is expensive. What happened?" Well, the answer is that it is hard to get a millionaire to cut hair. Great clips has to pay them the minimum wage of a million dollars ($500/hr) and then some.

But it is not just great clips. The Walmart down the street now has workers getting paid millions and they have to cover those wages with their product costs. Groceries cost you $600/day. The oil companies and gas stations now have a lot more costs as well and therefore gas is $300/gallon.

Suddenly, you have a sinking feeling.... that $1 million/yr you make is going to disappear pretty quickly.

Obviously, this is an extreme but the principle is true for any artificial wage hike. The more people make, the more companies need to cover those costs in the products and services they sell. The $15/hr minimum wage might not make haircuts $200 but they will have an impact. And if all the things you buy in your life go up a few percent, that extra couple dollars you make an hour start to be less attractive.

 Answering Objections 
But what about the living wage? Is it fair that corporate executives are pocketing millions while employees cannot keep food on the table?

The Henry Kaiser example showed why not every job needs to offer a living wage. Most low paying jobs are stepping stone jobs. We take them when we are working our way through college or we take them to get some work experience. Sometimes people take them to make a little extra money in retirement. Whatever the reason, few people NEED a living wage from McDonald's.

Now, it is possible that there are some. Maybe a single mother who cannot find another job. The answer to her plight is not to force all companies to raise their minimum wage, but instead to help her as a person. The church should help her (giving her food and helping with the bills). Maybe the government should help. But doing all the damage I outlined above (raising unemployment, removing the lowest rungs from the ladder, and increasing inflation) should not be an option when we look at helping her.

Another objection might be that we have a minimum wage and none of the things I said have happened. Two things are at work here. First, if you keep the minimum wage lower than what anyone would pay anyway, then it does little or no damage. To take the milk example, if I said, "no one can sell milk for less that 5 cents a gallon," it would not hurt anything at all. No one was doing that anyway. Many of the minimum wage increases over the years have largely been that sort of increases. They have kept the minimum wage low enough where it did not have huge effects on the economy. But, it should be noted, as Thomas Sowell points out in his Basic Economics, that these increases did have some effects. Sowell notes that the minimum wage primarily hurt black people. Black unemployment prior to minimum wage increases was the same as white unemployment. But forever after, there was a huge gap. He argues this is because black people needed that bottom rung. They needed to be able to offer low wages to get out of poverty, out of crime, and out of racism. Minimum wage removed that rung.

Finally, I think there is something strange about the fact that the democrats, who seem to think almost any behavior (sex, drugs, etc) is fine if it is between consenting adults, cannot see how anti-liberty it is to tell two adults that they cannot come to their own agreement on a wage. Two people agreeing on an hourly rate should be their business.

In short, raising minimum wage is a ridiculous idea that should be rejected, laughed at, and dismissed. Sadly, too many people are not doing that.

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