February 20, 2004

Minimum Wage? Indexed to Inflation? Argh!
Posted by McQ

Looking through the Kerry economic plan specifics, the one concerning the minimum wage struck me immediately. To say this is a TERRIBLE idea is to be relatively nice about it. To say it is about special interests (namely labor unions) should go without saying:

Protect the American Worker

John Kerry believes that ensuring there is a fair playing field for workers is important to a strong economy. He supports increasing the minimum wage and indexing it to inflation.

It might be better to entitle this “Protect the American Worker by Risking His Job”. Increasing the minimum wage is probably the worst way to “protect the American worker”.


It places an artificial floor on wages. It says to an employer, “you can’t pay anyone less than this” regardless of the worth or VALUE of the job. Oh and by the way, Kerry also wants to index the minimum wage to inflation.

Now we all have an idea of the concept of value, I’m sure. We know, for instance, when something is of good value for the money we’re going to spend. We also know when something isn’t worth the money we’re asked to spend. What’s our usual reaction to the latter? We don’t spend it.

The market is the usual mechanism which determines the price of a job and a product. You may be a fantastic fast-food counterman but if the going value for the job is $8 an hour, you’re going to be hard pressed to convince the owner you’re worth $14 an hour. He or she will most likely not see the increased value you bring to warrant that difference in pay. Why? Because you sell HAMBURGERS which have a value already determined by the market through competition. It is this part of the equation those who push the minimum wage always leave out. .

What the minimum wage does is disregard product pricing and competition and arbitrarily decide that all jobs are worth, at a minimum, a particular price. It short-circuits the market mechanism which usually makes that determination. So what happens?

Well lots of things, none of them particularly good.

1. Let’s say the minimum wage goes to $7 an hour. That’s great if you were getting $5.50 an hour, but what about those folks already getting $7 an hour? They EARNED their way from $5.50 to $7. Are you, Mr. Employer, going to leave them there? Not and keep them happy. So one of the effects of an increase in the minimum wage is to bump the wages of all employees up.
And that contributes to what? Wage inflation, which in turn contributes to general inflation.

2. Now that we have a $7 minimum wage, employers feel the need to reassess the value of the jobs being performed. While paying $5.50, the value for some of the jobs being performed was good, that value isn’t as good at $7 an hour. So what does the employer do? Well he has a couple of options. Outsource the job to a company (or country) which will do the same job for the money the employer was willing to pay previously (or less). That way, the product price isn’t effected, profits aren’t effected and consumers aren’t asked to pay more (which usually has the effect of losing business). Net effect: Jobs leave the company or the country.

Or the employer can combine the job with others he has. He may split the job up among 2 of his $7 an hour employees as an additional part of their job, give them a $.50 an hour raise and be ahead $.50 cents an hour plus all of the headcount costs on the job he just eliminated. Net effect: one less job multiplied over many companies.

3. The argument is that raising the minimum wage would give workers a “living wage”. Well, not really. One would have to assume that the dynamics of the market would be frozen to where the cost of the minimum wage wouldn’t be recovered somewhere in the economic cycle and that the minimum wage earner would accrue a rise in purchasing power which couldn’t be eroded. That’s far from the truth.

Labor is a cost of doing business, it is a factor in calculating the “cost of goods sold”. So when labor cost is increased, two choices are offered the producers. Absorb the cost or pass it on. If the purpose of business is to make and maximize profit, what do you suppose that natural inclination of any business is going to be? Yes ... pass on the cost of the increase in labor cost in the price of the product. So who, then is going to pay this increase? Why the consumer in higher prices for products.

And who is a consumer just like the rest of us? The minimum wage earner. So very quickly, because of the broad impact of a minimum wage increase, his purchasing power is eroded to the point that he may not have as much as he once had at the lower minimum wage point.

Which brings us to inflation. What is inflation? It’s a sustained rise in the general price level.

And what contributes to inflation? Rising costs. So if labor is a cost and we arbitrarily and artificially raise it, what’s a likely outcome? Exactly ... inflation.

Yet Kerry wants to index the minimum wage to INFLATION? That has to be one of the stupidest ideas yet put forth by anyone. Every time the inflation rate goes up, the minimum wage goes up thereby putting further upward pressure on what? The INFLATION rate!

Can you say “vicious cycle”.

So he’s in favor of a policy that will:

1. Increase inflation
2. Erode purchasing power
3. Lose jobs

IOW, play to the desires of special interests while hurting the economy, losing even MORE jobs and causing an inflationary spiral. Yeah ... that's the ticket!

And this man has the temerity to criticize the economic policy of others?