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Wednesday, October 29, 2014

What's the Right Minimum Wage?




Proponents of the increasing minimum wage seek to assist those who need to earn more money. While this is a noble claim, does raising the minimum wage actually help those individuals? 

At the core, the employee's wage is simply a "price" on labor. Similar to a price paid to purchase an item at the store. Analyzing that purchase there are two parties: The Buyer and Seller of the item. This is similar to the notion of hiring an employee, as there are two parties in this transaction: The Employer and the Employee. The Employer is "purchasing" the labor services from the Employee. 

When folks are shopping at the store for an item, they typically are seeking an item that has a lower price, not a higher price. Conversely, the person selling the item is seeking to sell their item at the highest price possible, as compared to the lowest price. Voluntary exchange between actors in the labor market is no different. The Employer is seeking to pay the employee at the lowest wage possible, and the employee is seeking to push for the highest wage possible. 

How does this fit into Minimum wage? 

Keep consistent with the purchasing the product analogy, let us suppose that the TV's lowest price is $300, as they are selling like hot cakes. The Stores cannot keep the TV's on the shelf due to the increased demand. If the local government says that all TV's most be sold at $1000 per unit, what happens? The sales will decline, and more TVs will sit on the shelves, and they will be unsold. This same phenomenon happens in the labor market. If the agreed wage between employer and employee is $8.25/hour, and the minimum wage is raised to $15/ hour, the employer must make a decision. The employer can lay off that employee, have the employee work fewer hours, or purchase capital equipment to do some of the work, or a combination. 

The net effect of raising minimum wage is that there is extra labor being unused, just like the TVs in our analogy. This translates into higher unemployment in those specific labor markets that make those lower wages. 


In closing, minimum wage increase does not assist or help the poor; it simply makes matters worse, increasing unemployment in those labor markets where they need the most financial help.  

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