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Increasing minimum wage helps the poor, right?

It is a perfectly natural assumption – increasing minimum wage will help the poor.  Force businesses to pay their lower-skilled laborers more money and those workers will spend more, thereby helping the economy.  Right?  Well, not exactly.  While the self-proclaimed “compassionate” love to feel righteous (while standing on the shoulders of others), one needs to consider the implications of their actions.  Raising the minimum wage may give “the compassionate” a warm and fuzzy feeling, but the truth is government-meddling hurts those people that politicians proclaim to help.

If you take a look at the current situation, we already have an unemployment rate of 6.6% – if you look only at BLS numbers.  In reality, the rate etches a couple percentage points higher if you calculate based on a more realistic view of the labor market.  Roughly, over 10% of our population is collecting government-issued unemployment checks, and our response is to add more economic restraint to hiring these people?

The left leaning Economic Policy Institute claims raising the minimum wage would “lift about 5 million Americans out of poverty and that the US economy would grow by $22 billion thus creating 85,000 new jobs.” This claim was backed by one Huffington Post author, who wrote “the people on minimum wage cannot save their money therefore they would have to spend it and put it back into the economy which in turn would create new jobs.”

How simple life must be for this author.

Putting the arrant fallacy of the “inability to save” aside, basic logic dictates that for every government action, there is a requisite commercial reaction.  When the price of labor increases for a business, the business reacts by passing on that cost to the consumer.  Very few business executives willingly take a hit to their own pocket books because of the decisions of Washington D.C.

Profit to a business is like gasoline to a car.  Without profits, a business fails (along with their entire staff).  Everything is done for profit, and we need to not only understand this, but accept it.  And thus, it would seem to reason that if the government increases the labor cost to a business, the business will recuperate those costs with higher prices for their goods and services – or worse, cutting benefits or hours.

Understand that businesses will ultimately shove the costs associated with government mandates onto the consumer. In affect, this is a hidden tax included with “do good” politicians. Politicians will gladly play the role of savior in order to get a vote and remain in their cushy D.C. offices while making everyone feel like a victim.

The person who actually gets hurt by this activity is the guy at the bottom of the ladder who, at the whim of a politician, now has the next rung of the ladder raised up on him. Naturally, the reaction of many who are at the bottom will vote for bigger government and more benefits without looking at the implications or how these policies effect them. When people are made to believe they are a victim, they assume that they deserve more.  In truth, if everyone would take more responsibility for their actions (which I am starting to understand that no one does anymore), everyone would be a lot happier and a little more satisfied with the choices they have made.

Look at who is lobbying for minimum wage: Politicians and Labor unions. Politicians back it because it secures votes from unskilled laborers.  Labor unions back it simply because it reduces the competition in the labor market. For example, if we look at the Davis-Bacon Act, this was a law put in place because non-union blacks from Alabama were traveling to Long Island, New York and outbidding the union workers for jobs. With pressure from the local community, Representative Robert L. Bacon (R-N.Y.) pleaded to Congress to adopt a requirement for paying the local prevailing wages on public works projects for laborers and mechanics. It applies to “contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works”.  In other words, a way to eliminate the union’s competition.

Further, the minimum wage increases the barrier to entry for low skilled, inexperienced workers. For instance, take a young man still in high school. His parents encourage him to get a job to learn some responsibility. He applies at his local McDonalds but the minimum wage is set at $15 an hour. The manager knows the young man has no experience and has a lot of learning to do.  What benefit to the business does hiring an inexperienced worker at $15/hour provide?  Worse, regulations prevent the McDonalds store manager from negotiating a wage lower than the minimum – even if both parties agree to it.  Milton Friedman explained it very clearly: http://www.youtube.com/watch?v=ca8Z__o52sk

It takes a cold day in June before I agree with virtually anyone in Congress, but I did hear something sensible come out of Congressman Paul Ryan’s mouth during an interview with MSNBC: “Raising the minimum wage is just bad economics.. It costs jobs for people…We want people to climb the ladder and begin at entry level jobs, not have people stay at entry level jobs.”

Another fine point: government-mandated overpayment for low-skilled labor workers disincentivizes self-improvement.  If Johnny Smith makes $15/hour flipping burgers, why strive to become the next store manager?  The stress may not be worth the extra few dollars a week.

Instead of increasing the burden on businesses, our political “leaders” should instead encourage people at the bottom to work hard and strive to improve their lives.  Money does not make people happier about their job situation – I know this from personal experience. I was making close to $40 an hour not including benefits in Chicago as a laborer.  I was not happy doing it and my wife and I decided to focus on our education.  Ultimately, we left Chicago to fulfill our dreams.

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Originally from Chicago, 28-year old Joe Greenwood lives in Corvalis, Oregon with his wife, Laura and attends Oregon State University pursuing a degree in economics.

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