The financial world we live in is just as wild, if not more, than the mountains and woods we walk through. We are told that the fundamentals of our economy are strong, but we can feel that something is wrong. My unique financial background and survival passion make Financial Survivalist and excellent place to learn and share.

Thursday, January 30, 2014

Three Unintended Consequences of Minimum Wage

Lately there has been a lot of windy politicians blowing about an increase of the minimum wage. I believe 10 states are considering bills to increase the minimum wage. There is also a lot of huff about a "livable wage." Though intentions are good, no one actually considers what raising the minimum wage would actually do. Here are three unintended consequences of minimum wage.

1. Unemployment Increases

It's simple, if labor costs more then employers will purchase less of it. This doesn't mean every employer will purchase less. It just means that employers will run their business with the minimum amount of employees it can. However, the remaining employees will cost more.

2. Prices Increase

If it takes a fixed number of man hours to create a product and the cost of those man hours increases, then the cost of the product increases. A business has to make a profit or break even in order to stay in business. A business owner may absorb some of the increased cost, but realistically most of it will be passed on to the consumer in the form of higher prices. This is also known as cost push inflation.

3. Inflation Increases

IF raising the minimum wage works at all (ie more people making more money), then this means there is more money among the people that are most likely to spend it. When people suddenly have more money to spend and they spend it, this causes demand pull inflation.

In conclusion, raising the minimum wage increases unemployment and inflation. Even the people that are making more cannot buy more because everything cost more. The only situation in which it can have a different affect is if demand for labor is stronger than supply, but in that case the wage rate adjusts naturally. I'm not saying we should lower the minimum wage at all, but is increasing it really going to fix the problem? I argue no. Below is a video from Learn Liberty (a bunch of economists) explaining the affects of minimum wage.


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