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Minimum Wage & Economics

What happens when we raise minimum wage, from somebody who took AP Macro and Microeconomics and got a 5 on both tests.

Katie Y.

on 1 May 2014

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Transcript of Minimum Wage & Economics

The Problem:
Many say the solution is to raise the minimum wage. Let's see why that might not be the best option for minimum wage workers.

When the minimum wage is raised, employers have to make adjustments so that their profit margins aren't affected. While we might hope that CEOs would take a pay cut to help the working class, and while a few CEOs might choose to do so, we have to assume that the average person who has worked his or her way up to CEO will want to find another way to make up the difference. Humans are often motivated by greed, and so we should look at what's most likely to happen when business executives (who are, in fact, human) need to find ways to cut costs.
Employ Fewer People
The business will decrease production. This will involve them making less money, and they would likely only do it if other options are not viable. This will also require less labor to make the goods and provide the services they produce.
Not every country has America's minimum wage laws. Many business have started outsourcing jobs to other countries where labor is cheaper. This means, that at least where American people are concerned, businesses will...
Welfare and Other Government Benefits
Hey, if people can't find jobs, they can just go on welfare, right?

Right. But with an increase in welfare recipients comes higher costs for the government. The government will try to make up these costs by bringing in more revenue. Which happens to come from taxes. Who's going to pay those taxes, and what does that mean?
Minimum Wage
Common Sense Economics
People can't afford basic necessities.

If the price of Cheetos goes up dramatically, you'll likely buy fewer Cheetos. If the price of milk goes up, you might look again at those articles about how dairy isn't as good for you as the "got milk" ads claimed.

If the price of labor goes up, you might hire fewer laborers.

This means more people will be unemployed and will have a harder time affording basic necessities.
We ended up back where we started. Let's look at the next option business owners have for cutting costs.
Raise Prices
When the cost of producing a good or service goes up (and labor is included in that cost), many businesses will increase the price of the good or service.

(Hint: Milk, bread, McDonald's hamburgers, and your clothes are all goods that likely involve minimum wage labor and will likely go up in price with an increase in minimum wage.)
You Pay
Your taxes go up. You have less take-home pay. You now have a harder time making ends meet. We're back to our original problem.

But what if the corporations pay?
Corporations Pay
If the corporations pay extra, their costs will go up. We just went over how they deal with that.
Raising the minimum wage eventually comes back to bite the very people it's supposed to help. In a free market system, the price of labor follows supply and demand rules.

Without minimum wage, many jobs would pay much less. But the prices of the goods produced by those workers would also be reduced. There would be more jobs on the market, and companies would compete for workers. In order to compete, companies would have to offer higher wages and better benefits.

TL;DR: A truly free market fixes itself. Government interference usually hurts those it's trying to help.
Back where we started again. However, we've covered all the basic options that businesses are likely to choose when dealing with increased labor costs. These options reflect the reality of economics and human nature, as seen throughout history. While individual humans might sometimes be generous, not all will be, and those that are won't always show it the same way. For instance, a wealthy CEO might choose, instead of taking a pay cut to raise employee wages, to give generously to a charity serving the homeless or a scholarship fund benefiting working class students who've studied hard and need a little extra help.

We've seen that raising the minimum wage can lead to unemployment and higher costs of living. What happens to those who get the pink slip?

Full transcript