On its surface, raising the minimum wage seems like a great thing to do to help the working poor. After all, who wouldn’t want to try to help a mother with two kids who is just making it at a fast food restaurant? There are also several relatively new arguments for a minimum wage increase. Among them:
The need dictates the reward argument: Living in (insert your favorite big city here) costs a lot and there is no way for someone making less than $15 per hour to pay for necessities to raise a family.
The taxpayer against evil business owner argument: We are giving out a lot of money in food stamps, cell phones, rent subsidies, and other government welfare programs. We should shift the cost to the employer so we could save that money as taxpayers.
The overpaid CEO argument: The CEO makes 100 times what the lowest paid employee makes, versus 10 times back in 1935. We should raise wages to put things more in balance.
The noble poor argument: People have worked for the company for 20 years, giving thousands of hours per year, so they deserve to get paid more.
The Keynesian economic stimulus argument: Paying people more will put more money in their pockets, which will stimulate the economy.
Each of the arguments appears to have some merit on its face. After all, why wouldn’t someone want to help a hardworking mother-of-three who works 60 hours per week at two jobs to make ends meet? Who wouldn’t want to ensure everyone had enough to pay for basic necessities, especially if some evil business owner paid for it? Why should a corporation make billions of dollars a year, or a CEO make 100 times what someone sweeping the floors makes?
Unfortunately raising the minimum wage won’t help the people you wish to help because the economics just don’t work. In fact it will hurt them and make their lives more desparate. The cleaning business will cut their workers by half, keeping only the most capable employees who work the fastest. The working mother-of-three at the fast food restaurant will be replaced by someone with a college education from a culinary school when the restaurant upgrades from cheap burgers to gourmet sliders. The hotel will replace all of its American workers with illegal immigrants who accept lower wages because they live ten to a room and get paid under-the-table.
Even those who stay, and the rest of us working at above minimum wage, will be hurt. Because there will be fewer people working and more collecting government benefits as their sole source of income, you’ll be paying more in taxes or there will be more inflation robbing you of your savings as the government prints money and borrows from your future. There will also be fewer goods and services to go around, meaning that you’ll be working harder to keep the same standard of living or your standard of living will decline. Where before the lowest skilled workers were at least producing enough to provide for half of their own needs, now they will not be working to provide for any of their own needs at all. People will also find it difficult to find a first job and gain the skills they need to become more productive and move up the income ladder because the first rung will be too high.
Why will all of this happen instead of things working out? Because doing so violates one of the three basic principles of an economy (let’s call these the SmallIvy Economic Theories):
Theory 1: You can’t be paid more than you produce. If you produce $8 worth of goods per hour, you can’t be paid more than $8 per hour without the person employing you going broke. In fact, you’ll need to be paid less than $8 per hour or the person hiring you will not make any income and starve.
Theory 2: Giving money or things to someone who doesn’t produce enough to earn it just results in transferring wealth. You can tax a car dealer, give the money to someone who isn’t working, and then have them turn around and buy a car, but the amount of wealth in the world remains the same – the car just went from one person to another. This does not cause the economy to grow.
Theory 3: Taking money that people earned from them reduces their desire to produce. If you were the car dealer in the previous example, would you be eager to do all of the work needed to rent the building, hire the employees, buy the cars, and do all of the paperwork if you weren’t making any money after taxes?
So how do you raise your wage? You gain the ability to produce more per hour. You increase your skills. You work more productively. You look for things you can do to make the company you work for more money.
As an example, let’s say I ran a ditch digging business and you are my employee. If using a shovel, it takes you 1,000 hours to dig a ditch which I can sell for $1,000, the most I could pay you is $1.00 per hour (probably $0.75 after my costs and a small profit for my trouble in running the business were taken out). Want to earn more? Learn to use a backhoe so you can finish a ditch in an hour instead of taking 1000 hours. Then I could pay you maybe $600 per hour after paying for the upkeep on the backhoe and taking a small profit.
The point is, the way you make more money is by becoming more productive. This translates into providing more value and helping more people meet their needs.
Comments, please? Any holes in my theories?
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.