Economics 101: Minimum Wage and Living Wage

Being the kind compassionate souls we Americans are, we often get tricked into believing things because we want them to be true. Wages, jobs, and poverty are often passionately debated and exceptionally prone to hopeful misinformation and logical fallacies. Minimum wage and the idea of a “living wage” are examples of just that. They sound good and helpful but in practice they do more bad than good. They displace jobs and discourage hiring, cause increases in price levels, and they don't help the majority actually raise their quality of life. If this all sounds shocking and contradicts everything you believe to be true, then you are exactly the kind of person who needs to continue reading. Suck it up and keep an open mind. We all have the same goal and that is to improve everyone's quality of life.

In economics we refer to workers as labor. Capital is made up of certain property, equipment and resources used to create a good. An increase in the cost of labor increases the value of capital relative to labor. In the early 20th century elevators were operated by an operator who manned the controls. When these workers unionized and asked for pay increases the push button elevator took off. Today it is near impossible to find an elevator operator. This was a trade off when capital became more valuable compared to labor. When a minimum wage increase goes into effect businesses start taking action. Some of these actions include suspending hiring, laying off workers, investing in automation, or revamping operations to run efficiently with fewer employees. I can’t possibly outline all actions a business might take but I can tell you what businesses will not do in response to a minimum wage increase. They will not look for ways to hire more workers. Higher unemployment doesn’t help improve quality of life.

Another thing businesses do to adapt to a minimum wage increase is raise their prices. This is a change in price level. That means the people who were already unemployed and those who became unemployed because of the minimum wage increase are even worse off. They have no income and everything they need just got more expensive. Everyday Americans like small business owners, middle managers, blue collar workers; suffer from price level increases as well. Their wage doesn’t go as far as it used to so a minimum wage increase can operate like a pay cut for most Americans. Then you are left with the few Americans in entry level positions who benefitted from the minimum wage increase. Their paycheck increased but some of that is offset by the same price increases hurting other Americans. The result is ultimately a small quality of life increase by a few Americans and a quality of life decrease for most Americans.

Increasing minimum wage is like chasing a carrot on a stick. Imagine if we increased minimum wage to $100. How could a business possibly afford to hire anyone new? How could they keep all the employees they have? They couldn't. Could you still buy a candy bar for a buck? Absolutely not. Attacking poverty or quality of life through increased minimum wages will simply never work. It sounds good as a talking point and makes you think someone cares about the little guy but in practice it hurts most Americans.

The “living wage” is a vague concept that essentially attacks quality of life by raising wages. The problems with a “living wage” are essentially the same problems with minimum wage. “Living wage” is just more loosely defined. It is based on the idea that there is some minimum standard of living that people should be able to afford. Eighty years ago a “living wage” probably meant having the money to put food on the table and a roof over your head. Sixty years ago it might have meant having a house, a car, and a white picket fence. These days it is just as subjective. I would guess now it would include the previous items plus central air, a refrigerator, microwave, television, cell phone or something along those lines. Most Americans have these things and in the future I am sure people will think a “living wage” entails many more amenities. I want folks to have creature comforts but the concept of a living wage is that carrot dangling on a stick again. You cannot mandate pay raises to improve quality of life. Any action of the sort will do the same things minimum wage increases do. It will put people out of work and increase the price level. People calling for a “living wage” don't know what they are talking about. They are asking for a utopian pipe dream. They choose to look at the world through rose colored glasses. To these folks raising minimum wage, or paying some fictional “living wage” has only one effect and that is positive. This simplistic view is at the least careless and at the worst delusional.

There is only one way to raise quality of life and it is not through mandating higher minimum wages or assigning a “living wage.” You cannot bring wages up to the carrot, you can only bring the carrot down to your wages. The only way to afford a better life is to bring down the cost of items. You do that with innovation, by making businesses more effective and efficient, by developing better ways to manufacture and distribute goods. Things like this bring down the price of goods so we can get more for our money and improve our lives. Minimum wage creates higher unemployment and leads to a lower quality of life for most Americans. We need to educate ourselves and stop pretending that simple, feel good answers work in a complex economy. Good intentions do not always make for good results. You can slap lipstick on a pig but it’s still a pig. Put down your carrot and stick and do something that will actually improve our quality of life.

The problem stems from a faulty understanding of economics as a “zero-sum” game. When viewed from this perspective, the economy is seen as a “pie” from which everyone must cut a slice.

The left betrays this ignorant conception by using such terms and emotionally goading the mass of workers to seek out an unmerited bigger share, rather than increasing the total output through their industry.

In the 1998 movie “Pi” the film correctly portrays the pattern of economic growth as one which mirrors nature and the exponential development of life itself. The “Golden Mean” and its resultant arc, the “Golden Spiral” evince the ever increasing, outward expansion of the results from invention, industry and market expansion.

Leftists deem these concepts to be beyond the grasp of the masses, holding on, as they do, to their low estimation of human potential, and, perhaps, their own failure to grasp the concept themselves.

Thus they stifle human potential with a “dumbed down” educational system that is at odds with the fact, as John Taylor Gatto observed “...that genius is an exceedingly common human quality, probably natural to most of us...”

Faith in God, the worth and potential of His creation, and man’s natural tendency to make the most of it, founded this country, sparked the industrial revolution and built the greatest nation the world has ever known.

Settling for government mandated parceling of its wealth will be its destruction.

You know, the labor overseas is a faulty and emotional argument. If labor wasn’t cheap overseas the jobs wouldn’t be there and people would be worse off. those jobs are a lifeline to the people and gives the government much needed capital to improve their country if they choose to.

had another person accuse America of exploiting others and you really just have to consider that these countries are worse off without the job. If you went into a desolate country and out of the kindness of you heart payed them all $5 an hour then the folks are just going to see massive inflation.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.