Tuesday, November 2, 2010

Why minimum wage hurts

Minimum wage is a touchy subject. It's an institution as old as time (or, at least the 30's), and is one of those subjects where if you disagree with it you're automatically put into the category of "uncaring" (as many libertarians/conservatives are). So, not caring about being uncaring, here are my three beefs with minimum wage:
  1. Increased business costs
  2. Prevents unskilled, young, old from getting jobs
  3. Decreases productivity in individuals
Firstly, minimum wage increases business costs. As the minimum wage increases, so do the costs that come with hiring and keeping employees on the payroll. What usually comes from this is one of two things: the companies won't hire (which I'll discuss later), or they will severely limit the number of hours worked and attempt to run the business with as few people as they can. Neither of those things are good, and end up costing the business more in lost productivity and efficiency, as well as costing us jobs.

Secondly, minimum wage discourages companies from hiring the unskilled, young, and elderly. If we look specifically at teenagers right now, a lot of the time the labor that they perform is not necessarily worth minimum wage. This gives companies an incentive not to hire workers in our age group because they are expensive (hence the above average unemployment for teenagers). If we look at unskilled workers, especially grunt laborers in the construction or landscaping industry, we also see a lot of unemployment. Companies who require a lot of unskilled labor can't afford to pay them all minimum wage, so they make due with a lighter workforce. That can lead to the same issues as increased business costs: lost productivity and efficiency. Why should construction projects on our streets take years?

Lastly, we see a decrease in the productivity of individuals (as well as the business as a whole). Workers who are working with the skills of a $4.50/hour worker will not work at the $7.25/hour level just because you pay him that much. The person is expecting that pay, and thus doesn't have to work for it. Inversely, this also says to the employer that if you don't work at the $7.25/hour level then you don't deserve the job, and they simply won't hire you. Either situation is bad.

Labor is a commodity, like food and water. It has a price (wages), that are based on the laws of supply and demand (for that job), as well as skill level and productivity. It should return to this model, because right now we've enacted a price floor that causes a lot of problems. If we let the job market run naturally, then more workers will be able to get jobs, and be incentivised to increase productivity.

That being said, minimum wage is hard to get rid of. If we do it now, what will happen is that the price of labor will fall to its natural, uninflated value. The problem occurs when you take into consideration the overall inflation of the dollar. The value of labor will fall (because it is propped up artificially), but the price of goods and services, as well as living expenses, will not. So, the only way to gracefully remove minimum wage and NOT screw everyone over is to deflate the dollar. There are a few of ways to do this.
  1. Go back to the gold standard
  2. Get rid of centralized banking
  3. Deregulate banking industry, let big banks die out
  4. Institute a free-banking model
Going back to the gold standard would cause our dollar to deflate, making the difference between overall inflation and wages much less. That would soften the blow of removing the price floor.

Getting rid of centralized banking would make it so that the government can not artificially inflate or deflate the currency when it deems it necessary, as well as prevent all of the other problems associated with central banking (the sort of nepotism we see between the Fed and big banks). This would make it so the market determines the value of the currency, and would most likely cause it to deflate.

Deregulating the banking industry and letting big banks die out makes it so that our money is more secure. The big banks who invest in so many industries and markets are at a much greater risk of failing than your local credit union. Local banks, like credit unions, are also MUCH better for local economies, because your money is being invested locally (common sense).

I've kind of already mentioned the free banking model. This just means that the banks would issue their own banknotes, and that the amount of banknotes would be subject to market forces (i.e. supply and demand). This would stabilize the price of the dollar (we've done it in the past, c. 1830's).

So, there you go. Also, read this http://www.fff.org/freedom/1295d.asp.

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