Tuesday, March 08, 2005

Senate defeats efforts to raise the minimum wage

I say, good! I noted last week that the worker is worthy of his hire. That goes for low pay, too. A lot of bleeding-heart economists and pundits think otherwise, though. They think there's such a thing as a free lunch, when economics always shows that there are trade-offs.

Simple supply and demand tells us that when a mandated price exceeds the true value of the product, buyers will want less. Now, labor is a commodity like any other, and it has an equilibrium price where buyers and sellers agree. Just like a company won't pay a CEO more than he's worth, a company won't want to pay a low-wage worker more than he's worth. So a minimum wage's most obvious effect is to reduce employers' demand for labor, meaning fewer jobs and an increase in unemployment.

Some businesses must maintain their labor pool, like a gas station or convenience store that has only one minimum-wage worker at any given time. Those businesses must pass the higher wage costs onto the customer. But would that additional $1 or $2 more per hour significantly affect prices? Well, for a small 16-hour gas station, that becomes $5840 over one year (not to mention that the employer must pay $362.08 more in Social Security payroll taxes). Now, some types of big business, those with a higher ratio of revenue to workers, would more easily absorb increases in the minimum wage than smaller businesses. This brings me to something I've always found curious: liberals disparage big business (except when run by the state), yet their proposals like minimum wage hikes, mandated health insurance benefits, etc., most adversely affect the smaller businesses that liberals are supposed to champion.

Santorum's bill does address the minimum wage's greater effect on small businesses. His proposal is to exempt businesses with annual revenues below $1 million, raising the threshhold from the current $500,000. But even with this provision, raising the minimum wage is still an economically unsound idea. Businesses would have to increase their prices, reducing the real purchasing power of those already making $6.25 per hour, pulling them down to minimum wage when before they were a little bit better off. Everyone else would be affected too: the closer you are to the new minimum wage, the more you'll feel the effect of reduced purchasing power. So while the minimum wage benefits those making under $6.25 per hour, the resulting price hikes will really hit those making $7 or $8 per hour. Why not raise it to $8, then? Or $10? You can't, because you trap yourself in a cycle: no matter how high you raise the minimum wage, you really hit those making just above it. Let's also not forget that higher prices affect those who are now making the new minimum wage, so they won't enjoy the full value of the minimum wage increase.

Then there's the dilemma of what would happen to "big businesses" like Wal-Mart and Target, which partly depend on low wages to provide goods at the lowest possible cost. A hike in the minimum wage would ripple through their prices, chiefly affecting people of lower-income (their main patrons) who depend on these "big businesses" to maximize their purchasing power.

Yet another problem with raising the minimum wage is that it shifts labor from where it has a true value to where it is overvalued. Raising the minimum wage to, for example, $6.25 per hour would tend to increase the supply of labor that is worth less. This would tend to pull labor from where it's truly worth $6.25 per hour to easier jobs that are now declared worth $6.25 per hour. Or someone could be doing moderately difficult work for $6.50 per hour, but a hike in the minimum wage may encourage him to take an easier, low-grade job; the slightly lower pay could be worth it. This, then will create a shortage of labor in some jobs that were worth a true $6.25 per hour, forcing employers to offer higher wages to compete. It's good for workers, though, isn't it? Not until the new price increases ripple through and catch up with them.

There's nothing new that I've stated here, but a lot of "advocates for the working poor" and even some conservatives don't consider the unseen economic effects of their proposals.

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