Pages

Friday, November 27, 2015

$15/Hr Minimum Wage?

The Minimum Wage debate has gone to another level. Many fast food restaurant workers are making a push to have a "living wage" pushed to $15/hr. to gain more wealth. Is this an economic efficient objective?  This analysis will explore the answer to this question.


What is the Wage? 

The first step in the analysis that must be completed of the minimum wage rate, is defining the notion of the Wage rate. What is it?  The Wage rate is simply the price of labor between both parties of labor and the business owner. For example, the Business owner creates a position for his enterprise. Prospective laborers see the job posting, as the business owner provides a wage rate for prospective employees. The employee applies, and if he is offered the job, the employee is accepting the terms of the position at that respective wage rate. This is no different that someone purchasing an item at the local grocery store at the sales price. So, in short, the Wage rate is tantamount to a price.

What is Price Fixing?

When the Government, enforces a price fixing mandate, depending on how it is structured, several things can occur. In all of these scenarios, they are based on the Law of Demand. A quick review in layman's terms: If the price of the item is increased, the demand falls, if the price is lowered, the demand increases.

If the price fixing scheme is set above the agreed upon market price, a surplus can occur. This means that the price of the good or service is priced so high, that the market participants will not purchase the said good, thus leaving excess items of that good.  However, in the case of a shortage, this means that price is fixed well below the market price, and the demand has increased to the point that there is more demand than there are goods available to sell.

Price Fixing and Minimum Wage

With regards to minimum wage, government mandated price fixing, or wage fixing, simply raises the labor price above the agreed upon market price. As previously mentioned, as per the law of demand, as prices rise, and demand remains constant, a surplus is created. In this case of labor, a surplus of labor is created. This translates into higher unemployment for that specific labor class that is impacted by the minimum wage increase.

Why are these individuals pushing for the potential elimination of their positions? They assume that the business owner has an unlimited supply of capital and profits to pay the employees at the desired wage rate. However, this is not true. We are all restricted with the condition of scarcity.  The more the wage rate is increased, the larger the unemployment rate for that market segment.  Another consideration: The Business owner may lay off those higher wage employees. Or, the business owner may purchase capital equipment to do the same sort of output as these higher wage employees.

Conclusion 

Raising minimum wage acts as a price surplus on the "price" of labor, or wages. It creates a surplus of labor, as that surplus of labor translates into higher unemployment numbers for that said labor segment. Workers pushing for higher minimum wages will not benefit from this increase, as they could potentially be unemployed.

More Links on this topic of minimum wage:

From Ludwig von Mises, "Minimum Wage Rates"

No comments: