Artificial Minimum

I have made it a point in my teaching career to explain as clearly as I possible can to students in history, government or economics classes why increasing the minimum wage is not the panacea everyone thinks that it is. Much to my delight a student I taught nearly fifteen years ago recently told me that she has never forgotten that lecture! Unfortunately, far too many other people have forgotten–or have never bothered to understand–the principle.

An article in the March 8, 2014 issue of WORLD Magazine entitled “Wages of federalism” asserts that as many as seventy-five percent of Americans “support some form of minimum wage increase, according to various polls.” The article goes on to state that Democrats insist that a minimum wage increase would be “a lifeline and a no-brainer for poor workers in this election year, arguing that the extra spending money could be a deficit-free economic stimulus.” That assertion is, of course, a bunch of baloney. The notion that increasing the minimum wage will either improve employment numbers or provide workers with “extra spending money” is ludicrous. The suggestion that raising the minimum wage would be a “deficit-free economic stimulus” is as accurate as suggesting that we can fix the economy by printing more money.

I had the opportunity to see a first-hand example of the foolishness of this suggestion during a recent family trip to the Grand Canyon. Before entering the park from the south rim entrance we stopped at a McDonald’s in Tusayan for breakfast. The cost for my family of four to eat breakfast at that McDonald’s was approximately $40. Those are New York-like prices. And I assure you, we were not stuffing ourselves; we each ordered very basic breakfasts–such as a sausage and egg McMuffin and orange juice. Interestingly, as I was standing off to the side waiting for our order to be ready I noticed a framed piece of paper hanging on the wall. It was an explanation from the restaurant as to why their prices were so high. The reasons given included the suggestion that the cost of having items delivered to that location were higher than normal delivery costs (an assertion about which I was more than a little skeptical) as well as the statement that because housing is so limited and expensive in the Tusayan area the McDonald’s provides housing for its workers. This is a perfect example of why increasing the minimum wage creates as many problems as it solves. Quite simply, when minimum wage goes up the employer’s costs go up. When employer’s costs go up they pass the increase on to the customers. Therefore, if minimum wage is increased companies that pay employees minimum wage will either cut employees or increase prices to compensate for the added expense. All of a sudden any “increased buying power” resulting from the wage increase is gone because the cost of everything has gone up!

According to the WORLD article even the “traditionally liberal” Bill Gates has spoken wisely on this issue, telling an interviewer on MSNBC, “It’s not as simple as just saying, ‘Let’s raise the wage.'” The Congressional Budget Office has projected that President Obama’s proposed increase to the minimum wage would cost 500,000 jobs!

The reality is that a free market economy will create its own minimum wage, though that may well look different in different regions, at different times of the year and/or for different jobs. If companies offer wages that are too low no one will do the work. If they set prices too high no one will purchase the good or service. Leave the free market economy alone and it will eventually work it out on its own; there is seldom any good that will come from creating an artificial minimum.