Straight out of the dust bin of failed government policies comes the latest proposal from Obama to raise the minimum wage to $9/hour. Like so many other economic fallacies, at first glance it seems like a good idea — take the lowest group of wage earners and give them a raise. Not only does it elevate their standard of living, but the extra money they spend boosts the economy. What’s not to like?
Well the very first thing you must ask yourself when presented with any government policy is: Who pays? Many will claim it’s greedy employers. But where do they get the money to pay employees in the first place? From the prices charged for their goods and services. Any mandatory increase in the cost of labor will ultimately flow through to higher prices paid by the consumer, which includes those least able to afford it — those making minimum wage.
But there’s a bigger problem. Not every company will be able to pass along the increased cost of labor. What happens if it is no longer profitable to pay an employee the higher rate? They will likely lose their job. What happens to an entrepreneur’s plans to start a business that requires $7.50/hour labor in order to turn a profit? It doesn’t happen, and those jobs aren’t created.
It’s easy to think of the economy as a giant black box of infinite resources, but everything has a cost, and everything must be paid for by someone. It’s much easier to visualize the negative effect a minimum wage on employment by considering what happens in the extreme. If there where truly no downside to a minimum wage, then why stop at $9/hour? Why not $15/hour, $20/hour or even $100/hour? It should be obvious that at a high enough minimum wage you create 100% unemployment.
But perhaps most troubling of all is the fact that a minimum wage law is antithetical to personal liberty. One of the foundations of a free society is that individuals are free to choose what to do with their time and money. Who is better qualified to gauge what is fair to you than you? If you see the value in accepting a job for $6/hour that provides valuable work experience and a stepping stone to higher paying positions, then why should it be illegal for you to act on that opportunity?
Take a look at the short video below for an excellent presentation on how a minimum wage creates unemployment.