Thursday, July 24, 2008

Minimum Wage, Unemployment, Inflation

...are all going up today. The sad thing is that it is all accepted with warm cheers and fanfare. Hooray for the nanny state, right?

The increase, from $5.85 to $6.55 per hour, is the second of three annual increases required by a 2007 law. Next year's boost will bring the federal minimum to $7.25 an hour.

Workers like Walter Jasper, who earns minimum wage at a car wash in Nashville, Tenn., are happy to take the raise, but will still struggle with the higher gas and food prices hammering Americans.

But the problem with minimum wage laws is well documented. They are a price floor on wages. That is, they set a minimum level of value for employment. Every time minimum wage goes up, an unskilled workers are boxed out of jobs. What do we hope to achieve by keeping the unskilled and the poor from working in entry level jobs? Instead, laws like this end up favoring those who are skilled or have experience. At the same time, minimum wage laws actually cut the number of jobs available, since it is harder for companies to pay for labor, i.e., they are forced by law to hire people who are overpriced for certain jobs. Thus, they combine jobs, or add on to responsibilities by cutting staff, to more closely reflect wage levels (That or they higher illegal immigrants).

Then comes the inflation. No matter what, the economy has to deal with an artificial increase in the value of labor. Companies pay more for labor and may raise prices (even if by a modest amount). However, at the same time workers who are on the receiving end of minimum wage increases have more money to spend on goods, thus increasing demand, and also driving up prices (again, even if by a modest amount). Sometimes, the inflationary effect is almost completely undetectable at the micro level. However, when one pans out, one sees that inflationary effects costs the macro economy billions. With inflation an already pressing concern, I would say now is not a good time to throw more straws on the camel's back.

David Heath, owner of Tiki Tan in College Station, Texas, said the increase will force him to raise prices for his monthly tanning services by about 12 percent. Tiki Tan had been paying its employees $6 per hour.

"There just isn't any room for profit, and so this is why prices will have to go up," he said, citing the wage increase and higher fuel costs. "I have to recoup those costs."

The increase in the minimum wage could push food prices even higher by rising the pay for agricultural workers, said Brian Bethune, chief U.S. economist at consulting firm Global Insight
Eh, who needs food anyways right?
But he said he did not expect the change to have a major impact on the economy because recent increases in productivity, which enables companies to produce more with fewer workers, are keeping labor costs in check.
Still think minimum wage laws help the poor and unskilled?
When the minimum rises again next year, catching up with more states, more than 5 million workers will get a raise, said Lisa Lynch, dean of the Heller School for Social Policy and Management at Brandeis University.
I can't wait.

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