The Problem of Minimum Wage

Written By: Timothy Fish Published: 2/2/2007

At the time of this writing, it has been reported that a bill has passed in the U.S. Senate that would raise the minimum wage from $5.15 to $7.25 an hour. While this is likely to sit well with low-income voters, this is a move that will hurt the economy and hurt them as well. For the low-income voter, this 41% increase appears to be $4,200 per year in free money that can be used to buy more stuff. Let’s take a closer look at what happens when minimum wage is increased.

The $2.10 increase has to come out of someone’s pocket. As much as some people would like to think that the money will come out of some fat-cat employer’s pocket, it actually comes from the consumer’s pocket and the employee’s paycheck. This is the way it always works. Let’s follow the money to find out why.

How Minimum Wage Impacts the Manufacturer

The employer’s costs increase. Let’s suppose there is a U.S. manufacturer who is paying several of his employees below $7.25 an hour. By law, he would be required to increase the amount of money he is paying to these workers. He might have 100 minimum wage employees. By analysis, he has determined that these employees are bringing in $520 per hour of the company’s revenue for the company. For simplicity, we will ignore the cost of benefits, etc. so, the company is making a profit of $5 per hour from the work of these 100 employees. With a requirement to pay the workers more, the employer’s expenses go from $515 an hour to $725 an hour. Because he is only charging customer’s enough to bring in $520 then he is stuck with a loss of $205 an hour. If he doesn’t do something, this will quickly eat into his savings and the company will go bankrupt. He has two choices that may work in combination. He can either charge more for his product or he can reduce costs. If he increases the price the consumer is paying for the increase, but sales will go down and fewer workers will be needed. Instead of 100 workers, he might only need 72, so he lays off 28 workers. He can keep the price the same if he can reduce the cost enough. It is not as simple as laying off the 28 workers it would require to bring the cost back down to less than $520 an hour. It may be that 72 workers are not enough to get the job done. He can’t afford to hire more workers at a rate of $7.25 an hour, so he goes someplace where he can pay the workers less. He might move the manufacturing facility to another country where it will cost him $517 per hour to do the work. His profits are not a great a before, but the consumer might be convinced to pay a little extra and his profits are much greater than they would have been if the facility had stayed in the United States.

How Minimum Wage Impacts the Store Owner

Most products are sold in stores of some kind. A minimum wage increase hits a store owner from all sides. The manufacturers are likely to raise the price of their products. The products may be a lower quality as manufacturers seek cheaper labor. The store’s employees may have to be paid more, due to the minimum wage increase. Some consumers will be making more money, but they won’t want to see their wage increase eaten up by inflation. Other consumers will be put out of a job, so they won’t be able to buy as much. The store owner is forced to do a couple of things. He must raise his prices to cover the increase that has been passed to him from the manufacturer as well as the payroll. He must also consider laying off nonessential personnel, so that he doesn’t have to raise prices more than the customers will pay.

How Minimum Wage Impacts the Consumer

The consumer ought to be feeling great. He just got a 41% raise, right? Wrong. He gets his paycheck and goes down to the local store. That $4,200 item that he thought he was going to be able to buy with that increase now is a $4,300 item or even worse. Some consumers don’t get a paycheck at all. Instead they are on the unemployment line. If someone was taking home $175 a week before, he will probably be thinking that was a whole lot better than the big fat $0 a week he is taking home now. Even $100 a week might be better than that, but no one will pay him $100 a week, it is illegal to do so. Maybe he can start his own business washing car windows or something.

The Solution

Minimum wage increases are touted as a solution to poverty, but in reality they are just a ploy to get votes. Minimum wage drives jobs away from America. Minimum wage increases inflation and makes it harder for businesses to survive. The solution is to completely eliminate it.

Some people will say businesses will pay employees less than what they deserve if there was no minimum wage. This is not true. With no lower limit, businesses would be limited, but instead of being limited by the government, it would be the employees who would be setting the limit. Some businesses are paying all or most of their employees more than $7.25 an hour. Why is this? The employees refuse to work for less. There is such a high demand for these employees that the businesses are forced to pay more. When the economy is good and skilled workers are few, the businesses pay more. When workers are plentiful, the businesses can pay less.

If there was no minimum wage then it could literally be said that anyone who wanted a job could have a job. An unskilled person might be looking for a job. He goes to the employer and the employer is unwilling to hire him because he has no experience. The person seeking the job suggests that instead of paying him $7.25 and hour, the employer pay him $6.50 an hour until he can prove that he is worth keeping around. If the person is a good worker then the employer will eventually raise his wage. If he is not a good worker, the employer may either lay him off or offer to keep him on at an even lower wage. The worker would be paid the amount he was worth and would probably have a job, as long as he was willing to work.