The Fallacy of Minimum Wage Increases

Many states saw an increase in minimum wage standards on New Year’s Day. While most people support a higher minimum wage, let me explain why hikes in minimum wages don’t actually make things better for anyone.

Few people realize that when minimum wages go up, so do all other wages. If minimum wage is $10 per hour, and it’s suddenly increased ten percent to $11, those who were making that same $11 per hour will no longer be satisfied. Why? Because the skills required to garner the small premium above minimum wage have just been devalued. That person is also going to want a 10% increase in their wage to keep pace. He or she now needs to earn $12.10 per hour to maintain their extra value.

Logic should now tell you to look at the next person on the wage scale who was earning $12.10, and right on up the ladder to the top wage earners. Everyone needs to get that same 10% wage increase or a company is going to have a lot of dissatisfied workers. A dissatisfied workforce leads to dissent which usually leads to compromised quality of products and services… or employees leaving. By the time everyone gets their 10% increase, and the costs of labor have worked their way through the supply chain, overall costs for products and services have jumped by just as much - remember, supply costs will also have increased. The result? You’re back to where you started from – unable to afford products and services that used to be less costly. The increase in minimum wage could even turn out to be negative should the employer decide to outsource overseas, automate operations, or even close down business completely. Where does this leave the once hopeful worker? In the unemployment line.

Virtually everyone has a wage at which they will not work, no matter how easy or how difficult the job, or how much responsibility is involved.

A surgeon isn’t going to perform operations if the wages he/she charges will not pay for the costs of becoming a surgeon. Joe Sixpack isn’t going to collect trash unless he feels the wages make up for smelling like garbage 24/7. A lumberjack (one of the most dangerous jobs according to statistics) isn’t going to lug around a potentially foot-decapitating chainsaw for the same pay as burger flippers or cashiers who have little to no health risk.

Left on its own, minimum wage will be dictated by what should dictate it – supply and demand. If demand is high and supply is low, wages will need to increase in order to garner enough employees to meet demand. On the other hand, if demand is low and there is an abundance of supply, workers will have to either compete by accepting less than the competition or by finding another job.

Minimum wage is nothing more than another tool used by legislatures and politicians who want to be seen as “doing something” so they can get reelected, or newly elected.