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Federal Minimum Wage Rising – Good or Bad?

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Earlier this week I wrote about the increase in the Federal Minimum Wage which recently took effect. The minimum wage increase from $5.10 to $5.85, and will increase by $0.70 on July 24 of each of the next two years, capping out at $7.25 in 2009.

A fellow personal finance blogger, Eric, from Freedom or Security: What’s it to You?, wrote a ‘devil’s advocate’ piece about how the raise in the minimum wage is not good and left a comment on my blog. Like me, Eric is a veteran of the USAF. He recently began his blog, so I thought so I thought I would mention it here, and have give him a good natured response to the comment (post?) he left on my blog. ;)

Eric’s Comment:

A minimum wage is like putting pressure on a wound that needs medical attention.

The Argument: Increases in Minimum Wages Means Higher Prices
While this might sound like an argument FOR minimum wage, it is not. Prices increase for three particular reasons. 1. Inflation, which is the de-valuing of your dollar. Cause: The Federal Reserve printing money and Bank Loans (through fractional reserve banking). 2. All else constant, demand for a good or service increases caused by any number of reasons. 3. All else constant, supply for a good or service decreases again caused by any number of reasons. Price increases are not caused by minimum wage increases.

Next Argument: Increased Minimum Wage Helps the Poorest
While this might be true in a fantasy world, it doesn’t apply here. As a matter of truth, it does exactly the opposite. The majority of those working minimum wage jobs are people whose incomes supplement the main household income. (e.g. high school student) These people are not at the bottom of the wealth totem pole.

Finally: Unemployment
After a minimum wage increase, the cost of unskilled labor increases. This is just an effective price floor. Basic economics shows that any price floor above equilibrium price causes a surplus. In this case, a surplus of labor also known as unemployment. Hopefully this new minimum wage will have a minimal impact on unemployment because of the complementary tax breaks to businesses.

It doesn’t make sense for the government to do this. What it earns from possibly higher tax revenues, it pays out through unemployment benefits and tax breaks to businesses. Heaven forbid there should be a net loss to the government. The best way to help the poor is to stop the fractional reserve banking system and stop printing new money(easier said than done, I know).

This was a long response to my fact based article in support of the increase in the Federal Minimum Wage, and I decided it deserved a good response. So Eric, here is my response to you:

Hi Eric,

The reasons you listed are based on your studies of economics principles. I do not have the background you have, so I will not attempt to argue these economic principles. In my opinion, your statements open up more questions than they do give answers.

To answer your arguments:

1. “Price increases are not caused by minimum wage increases.” (quote from your comment). You state price increases are caused by any of: inflation, increase in demand, or decrease in supply. If price increases are not caused by minimum wage increases, why is this an argument against the Federal Minimum Wage?

2. If the people at the bottom of the “wealth totem pole” aren’t working minimum wage jobs, what are they working? If they are not working, a minimum wage job would be better than nothing, so it would proportionally help those willing to take on the work. How does it do the exact opposite of helping the poorest, and what will help them?

Some interesting facts about those earning minimum wage:

  • Families with affected workers rely on those workers for over half of their earnings.
  • 46% of all families with affected workers rely solely on the earnings from those workers.

Source: Economic Policy Institute – Minimum Wage Trends.

3. Unemployment: First, you have to prove that a $0.70 raise in the Federal Minimum Wage will raise the price floor above the equilibrium level, thus causing a surplus of unskilled labor (unemployment). In many states the minimum wage is currently higher than the Federal Minimum Wage, and I have not heard of rampant unemployment in any these states. Personally, I hope not too many people will lose their jobs over $28 per week. (40 hours a week x $0.70 = $28).

  • The states that have adopted higher-than-federal minimum wages have seen low-wage workers’ incomes rise with no negative side-effects.
  • Over 650 economists, including five Nobel Prize winners and six past presidents of the American Economics Association, recently signed a statement stating that federal and state minimum wage increases “can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed.” (EPI 2006).

Source: Economic Policy Institute – Minimum Wage Trends.

The truth of the matter remains: Even if you could wave a magic wand and correct the causes of inflation from today forward, there would still need to be a correction to the minimum wage which was last raised over a decade ago.

  • The federal minimum wage of $5.15 is currently at its lowest real (i.e., inflation-adjusted) value in over 50 years.

Source: Economic Policy Institute – Minimum Wage Trends.

This raise, and the two that follow, are an attempt to help correct the gap between inflation and what minimum wage workers earn. It is not a fix-all, but it is a step in the right direction.

To see how difficult it would be to live on minimum wage, Nick, from Journey to Financial Freedom (blog no longer available), made a budget based on the take home pay for a minimum wage earner. It is not a pretty situation to be in and any extra money a minimum wage earner can earn would go a long way toward meeting essential expenditures.

In my opinion, this is such a complex issue that volumes of books could be written to study the pros and cons of the situation. None of those volumes of studies would do anything to help out those who earn the minimum wage, and it is likely the money spent on the studies could have been put to better use in other venues.

Thanks for the great comment Eric, and I always welcome dissenting opinions. ;)

EDIT: Eric posted a well thought out response on Freedom or Security – Minimum Wage: Back Again. Check it out. :)


Published or updated February 27, 2011.
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{ 1 comment… read it below or add one }

1 Eric

Alright, Mr. Ryan.

It took me some time, but if you follow the link you should get some good reading. It’s quite long so I’d wait if you don’t have the time. :) I really enjoyed this debate.

Eric

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