Minimum wage morality
Friday, July 24th, 2009The minimum wage jumped to $7.25 this week in what proponents say is a step toward economic justice for the working poor. But with unemployment nearing 10 percent and teen and elderly unemployment rates even higher, others argue the increase puts the most vulnerable at higher risk of losing their jobs right now.
What do you think? Is raising the minimum wage right now a moral, or immoral, act?
Rev. Brian Carpenter– Presbyterian Church in America, Sturgis
Well, I’m not sure “moral” and “immoral” are the appropriate categories. Perhaps “effective in bringing about the desired end” and “ineffective in bringing about the desired end” or “smart” and “dumb.”
This debate is a sterling example of how the general public could benefit from a basic course in economics. Last night, for instance, Alicia Garcia, a KOTA tv anchor, said that workers were getting a raise courtesy of the government. I looked at my wife and asked her if she had gotten any of that money from the government to give to our employees. You see, in addition to being a minister, I am also a small business owner. My wife and I own a food concession business. The business is marginally profitable for most of the summer and really only makes money during the Sturgis Rally. I can therefore provide a real life example of how the minumum wage works.
There is only so much money “in the business.” We do everything we can think of to maximize it, of course, and are endlessly tinkering and experimenting in order to do so. Out of that amount of money we have to pay expenses. When somebody raises the price of a product we need to run our business, we have several options. We can seek to cut expenses somewhere. We can take that increase in input costs out of the business and further reduce our profit, or we can pass that expense on to the customer in the form of higher prices. When our selling price goes up, the basic laws of economics decree that the demand will decrease to some extent. We will sell less product. At some point, we cannot sell enough product to be profitable, and we either expand the business in order to spread our input costs over a wider area, which is the model of American capitalism today, with all its mergers and acquisitions, or we shut down the business and walk away, throwing six people out of work (but making me much less tired and grumpy.)
When the government mandates a rise in the minimum wage, our expenses go up. That takes more money out of the business. We either accept lower profits (and we can’t go much lower, trust me) or we pass the cost increase on to our customers, thus further decreasing our sales, or we find a way to reduce our labor input costs. We hire fewer people and demand more work out of the people we do hire. Working for us becomes less pleasant than it was before.
It is axiomatic to the laws of economics that when the government intervenes to place a floor under the price of something, they artificially increase the supply, and when they place a ceiling on the price of something (like rent-controlled apartments in New York City) they artificially increase the demand and thus decrease the available supply. The minimum wage is an artificial floor under the price of labor. It draws people into the labor pool that might otherwise find other things to do. The best example of this is the teenager. She might rather do summer sports than work if she could only get $5.00 an hour for her labor. But she is willing to work instead of do summer sports for $7.25 an hour. So she tries to find a job. So do all of her friends. This increases the supply of labor relative to the demand for labor. When supply exceeds demand, the price always goes down. But since the government will not allow the price of labor to go down below $7.25 an hour, then the effect is a continuation of the artificially high supply of labor. That is the definition of unemployment, more laborers than there are jobs. For every dollar you raise the minimum wage, the effect is a small, but measurable increase in unemployment.
There is also a more pernicious effect as well. If we were able to keep those dollars in our business instead of paying them to the employees, we take very few of them out for ourselves. We would plow most of them back in to the business. We would buy things that most of you wouldn’t buy, like another ice shaving machine, or new linoleum for the trailer floor. We also might expand the business, and then we would need to hire more people, thus creating new jobs that weren’t there before. Or we would save it to carry us through the lean times, thus providing more money for the bankers to lend and further stimulate our economy. That is good for the manufacturers and retailers. If we were a large, international corporation instead of a Mom and Pop business, we would pay the excess money out to our stockholders in the form of dividends, which would be good for you if you own the stock in your IRA or pension fund.
But our high school aged employees buy consumable items, like gas for their cars to cruise on Saturday night, or IPods. If you have a bunch of teenagers with money in their pockets, most of them spend it. The working poor also are able to save very little, and spend almost every penny they make on consumables. When more people have money and desire to spend it, they spend it. This will, at least in the short term, cause inflation, which is more money chasing a fixed supply of goods. When everyone wants an IPod, the price of IPods stays high or even increases. When everyone wants a gallon of gasoline, that gallon of gas will rise in price. Raising the minimum wage has also been demonstrated to increase the price of basic consumable goods that we all rely on every day. Food, gasoline, used cars, etc. etc. increase in price. These price increases eat up the benefit of the increase in the minimum wage, prompting politicians to raise it again and start the process all over. When I was in high school, I worked for an Albertson’s grocery store for $3.35 an hour, the minimum wage in 1985. I could purchase slightly less than three gallons of gasoline with one hour of my labor. Now the minimum wage is $7.25 an hour and our teenaged employees can purchase slightly less than three gallons of gasoline with their labor. What’s changed? Nothing but the numbers involved.
If the government would stay out of the price fixing business and let the laws of supply and demand work as they always do, we would actually have less poverty and less inflation. It’s counter intuitive, I know, but it is true nonetheless.
