minimum wage

minimum wageThis graphic accurately represents the effects of minimum wage. Like all good or services in the economy, the higher the cost, the less people purchase. This is the basic law of supply and demand. As prices increase, less is purchased. It does not matter if the item is Doritos, or plumbing services, or even minimum wage labor, the laws of Economics are absolute.

If plumbers suddenly doubled in price, America would suddenly find itself with a new surge of do-it-yourself plumbers. People would hire fewer plumbers and either let small problems slide or figure out alternative ways of getting their plumbing needs met. Certainly not all people would resort to these alternates, but the effect would be visible. The more expensive that plumbers become, the more profound the effect.

Whether plumbers make more money or not depends heavily on if the increase in payment per job outweighs the loss in job opportunities. If it doesn’t, in a free market, plumbers would then lower their prices to recapture that lost income. If the government prohibits plumbers lowering their wages, the plumbers lose out on possible income.

A higher wage per hour sometimes leads to less wages overall. If the person becomes unemployed, this wage is then reduced to zero.

Firms are not magically immune to the laws of supply and demand. In the case firms hiring of labor, labor is only hired when the expected returns outweigh the cost. No one will be hired for a greater cost than they bring benefit to a firm. If a worker only brings $50,000 annually in services to a firm, then spending more than that $50,000 (in salary, taxes, insurance, etc.) results in a net loss for that firm. The firm is better off not hiring that individual.

When minimum wages are established, those who cannot bring at least that much value (the cost of wages, benefits, and overhead costs) to the firm cannot be hired. If these people (who produce less than the value they bring) retain a job after the minimum wage is implemented, they will soon find themselves without a job. Sustained losses are hard to maintain, especially in competitive low end labor career fields.

The great thing about this illustration is that there is one minimum wage house who has the tip of the house above water. In order to become employable, some workers are going to have to become more productive (work harder). Either that, or they might forgo some benefits (costs to employ them). Maybe they lose hours from their work schedule. Maybe the firm stops giving employee discounts or other fringe benefits. Maybe the managers are allowed to treat the employees worse. After all, work environment leads to workers wanting to accept lower wages. My wife worked for a place that would let employees sleep on their down time. Sure, they were only making $6 per hour, but they often got paid to sleep.

Labor costs are not always felt in terms of per hour wages. Focusing on per hour wages above other labor factors is dangerous and short sighted. Note, when minimum wages are government enforced, people cannot make their own decisions on the type of work environment they wish to have. These people, even if earning more money, are made worse off.

All government meddling in the market leads to unintended consequences. The government cannot improved people’s lives by fiat, so can only hurt society as a whole with their laws. Those that they purport to help, are hurt the worst.

About christopher fisher

The blog is meant for educational/entertainment purposes. All material can be used and reproduced in any length for any purpose as long as I am cited as the source.
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One Response to minimum wage

  1. Tom Torbeyns says:

    Nice post but it seems to me that you can look at the conclusion from both sides. :-)

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