Thursday, May 08, 2014

The High Price of Minimum Wage

There's a lot of hubbub about minimum wage lately. Senator Majority Leader Harry Reid (D-NV) recently said he wasn't budging on his stand for an increase in minimum wage to $10.10 and blamed Republicans for killing the bill Obama has championed. Well, he was right. The vote failed along party lines by 54-42. Reid claims that $10.10 is the absolute minimum needed to get out of poverty. Anything less won't cut it. The current minimum wage is $7.25. This is the same Harry Reid who said, following the episode involving the BLM and Cliven Bundy standoff, that those opposing the US government should be considered "domestic terrorists".

According to the Congressional Budget Office, the wage increase would increase wages for 16.5 million workers. However, while it would theoretically remove some 900,000 out of poverty, the increase is also cost some 1 million workers their job due to layoff and closures. This also doesn't count the number of workers whose hours would be reduced or their increased work load to absorb the reduction of employees. Nor does it include the number of potential lost jobs which would otherwise be available. Lastly, the increase in the minimum overlooks a fundamental feature of simple economics. The increase in wages would not only reduce job or hour availability (not to mention cut backs in benefits which are calculated as part of the compensation package), but would raise real prices. After all, you didn't think employers were simply going to absorb the costs and take a hit on their bottom line did you?

Simply put, the wage increase from $7.25 to $10.10 or whatever it winds up to be will simply be passed on down the line, be it the producer, wholesaler, retailer, or customer in the form of higher prices. This in turn will require their prices to increase to absorb not just the new price but also their own wage increase, and here's something else it does. The increase in minimum wage raises prices, minimally to be sure but accumulatively as well, and reduces the demand for jobs in the long term as employers adjust and cutback on hiring. The result is few jobs available, therefore the demand for those existing jobs will increase as people. The result will be people willing to settle for less; that is, less benefits, more hours, etc. It also reduces the likelihood that employees will do anything to risk losing those scarce jobs, thus on the positive, turnover should decrease but on the negative employee will be less likely to "rock the boat", join or form unions, etc. It should also increase productivity through increased efficiency in human capital and technology. Not to worry though, less employment opportunities (and the higher cost of education) increase the ranks of military who can always use more "cannon fodder" for the next country we intend to make safe for Capitalism and the one percenters.

In short, employers will have a more docile and manageable workforce willing to work longer hours, carry more responsibilities, and accept fewer benefits, which in the long run will improve their bottom line while the military will have a steady flow of the excess. Those on fixed incomes will negatively feel the effect two fold. First, their incomes don't increase to offset the corresponding increase in prices. Secondly, the increase in minimum wage increases younger individuals to seek the available jobs that older employees were previously willing to fill and less likely to insist on or use benefits.

'Patriot Party' gathers at Bundy's Nevada ranch, Reid deems them 'domestic terrorists'

Senate Republican block Obama bid to hike minimum wage

Minimum Wage Hike Could Cost 500k Jobs

CEPR: Why Does the Minimum Wage have No Discernable Effect on Employment?

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