Talent and the Minimum Wage

Some ads airing in Missouri are accusing Jim Talent of being against raising the minimum wage. Others are claiming he has worked hard to support increases. My question is: who cares?

I know a lot of people think the minimum wage is the way to create a wonderful, almost utopian society where everyone makes a “living wage” that allows them to do what they want with their lives. The problem is that the minimum wage will never be able to provide a living wage for longer than a very brief period of time.

The problem is simple and involves two facts. First, those who actually “benefit” from the minimum wage are at the bottom of the corporate ladder — the laborers who make stuff and keep the machinery of business running. That means every product you buy probably has some minimum wage people dealing with it. Second, companies exist to make a profit and usually aim to make a certain margin of profit. Now, if the minimum wage workers make $1.00 more an hour, the company will (rightly) transfer that additional cost to the price tag of the product, since they need to maintain the margin of profit that keeps the company solvent (at the very least).

So, let's say Bob is a minimum wage worker and he makes ten widgets an hour. If he makes $6.00/hr and we hike the minimum wage to $10.00/hr (a “living wage”), we have added $.40 to the cost of the product. Put simply, on labor intensive products, the product may actually double in price if we double the minimum wage.

Now, when products start going up in price, everyone starts demanding raises to meet the rising costs. This further increases the rise in prices as the raises move further and further up the corporate chain to the very top. Soon, Bob may be making $10.00 in 2007 dollars, but those dollars are worth the same as $6.00 in 2006 dollars, since milk and bread now cost nearly twice as much to purchase. The big idea is that the minimum wage causes inflation. It comes no closer to giving everyone a “living wage” than a hamster comes to traveling across the country by running in his little wheel.

I've passed over an important issue thus far. In this consideration, I've assumed companies will always simply raise the price of a product when wage rates are forced up. That is not true; sometimes companies will simply cease production (or outsource to places with cheaper labor). For example, if the most people want to pay for a widget is $1.00 and an increase in the minimum wage forces the price up to $1.25, the company will necessarily stop making the product and then Bob and all of the other minimum wage workers simply won't have a job at all. Now, it is true that eventually (in most cases) inflation will level things out so that $1.25 is essentially what $1.00 use to be, but that takes time — time that can kill off a product. Moreover, if the industries affected by a wage hike are makers of non-essential items, demand for those items may simply cease rather than causing inflation.

I wish everyone could have a living wage, really, I do. But the simple fact is that it does not matter if Talent or anyone else supports increasing the minimum wage. Because of its close ties with inflation, you will never make the populous better off by arbitrarily increasing the minimum wage.