Friday, August 11, 2006

Drastic Minimum Wage Increases and Why They Matter To Everyone

Minimum wages were recently increased in Massachusetts. The increase was passed by a democratic majority legislature. And yet again, in my opinion, this will decrease the amounts of money available for the middle class but not actually help the poor.

Read the article from the Boston Globe about it here

Often times, people think that more money is the solution. In fact, there is even a federal movement linking a reduction in Estate Tax to minimum wage increases. Linda Basch writes an interesting opinion article on this topic for those interested.

But since this is my blog, I am worried about myself first. And what I can see is the following:

As those with a lower wage get a hike of anywhere from 15-20% over the next two years, I will likely only get a total of about 6%. Granted, my salary is not close to minimum wage, but the strict size of the increase isn't all that worries me. It is the impact on prices.

Prices are already in sky-high. Some say this is due to oil prices. And some of it is. Some say it is due to price gouging. And some of it is. But, more than anything, it is the standard supply-demand system at work. There is not an infinite supply of resources and as a result, when demand is constant and in some cases increasing while supply is also constant and/or shrinking, prices will naturally rise. However, I don't think that it will be a slow or easy adjustment. That is why people who are struggling to live on minimum wage jobs are outraged and demanding wage increases. However, there is a real problem with that solution.

Inflation is also going to rear its ugly head. The reason is, nothing has changed in the fundamental way in which prices are determined. All that you have done by raising the minimum wage is effectively printed more money, albeit indirectly. Higher minimum wages mean that companies need to make even more money to stay in business and return good returns for their shareholders. In turn, there are usually layoffs and/or increased prices in order to accommodate that need for increased profits. These increased prices trickle throughout the economy (sometimes ahead of the real need) and in the end, we all end up paying even more than the genuine justified pay increase. And this increase hurts everyone, including me.

Lots of people think of inflation as hurting people with large sums of money who are trying to live off them. And it does, a little. But the people who really get whacked when inflation is too high are poor people - the very people who are getting the wage increase in the first place. Doesn't make sense does it? Let me explain:

If you take as fact that the price of a good will go up when the cost of the production of the good goes up (increased minimum wages), then it makes sense that the amount of money needed for other things will increase as well. Big ticket items like cars, homes, and appliances and electronics will also increase. However, for the average person making minimum wage, a 5% increase to the price of buying their first home hurts a lot more than increasing their minimum wage by 5% will help.

I'm not a professional economist. But I did take several classes in Economics. And I know that there are lots of invisible hand type forces at play. But inflation happens naturally. Please note, I am FOR increasing the minimum wage - increasing minimum wages slowly, over time, makes sense. Small changes are best because it gives the economy time to play them out without throwing things off balance. But doing drastic increases over periods of less than two years does nothing but artificially manipulate the economy. And manipulations like this ultimately hurt people because prices are often higher than they need to be in certain cases as a result, and this means that the optimum distribution of goods for the cheapest possible price is not met. The end result, more people will become unhappy than if you had done nothing.

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