Minimum Wage Laws

Minimum wage laws are touted by some proponents as an easy, reliable way to improve the lot of workers earning below the minimum wage set by the law without hurting anyone else.

For a moment, accept the proponents’ view.  Then it would appear that there is an easy route to paradise.  Simply make the minimum wage, say, $10 million annually. We could all work for a year and then retire rich.

Obviously, there is something wrong with this strategy.  For one thing, if we all retired, there would be nothing produced so our consumption would necessarily drop to zero.  In reality, we would be poor, not rich.

While this example is extreme, it does suggest that the all benefit no cost view of some minimum wage law proponents is wrong.

Some perspective can be gained by asking whether an economy in equilibrium would change if we suddenly agreed to change our currency from dollars to “half dollars”. All that would entail is quoting prices that are double the current prices (for goods, services, wages, bonds, dividends, interest payment, etc.).  The “real” economy would not change at all.  Yet, the lowest nominal wage would be double the old one, in effect a 100% increase in the nominal minimum wage.

What this example suggests is that the predominant long-term effect of an x% increase in the minimum wage is a one-time x% inflation.  This implies that the long-term effect of an x% increase in the minimum wage is that low-end wage earners end up no better off than before and elderly people living off fixed income investments such as long-maturity bonds suffer a significant decline in their real income and real wealth, hence their standard of living.   The latter is true because fixed nominal payments are worth less after an inflation and all payments from fixed income bonds are fixed in nominal terms.

Since the one-time x% inflation would not occur immediately, the real economy would change short term.  Assuming rational employer behavior before and after the increased minimum wage, employing some low-end workers would no longer provide sufficient profit and they would be fired.

Evidently, the most reasonable expectation is that an increase in the minimum wage will hurt some people short-term, other people long-term and those that are hurt are the ones the do-gooders keep saying they are the most concerned about.