Real Economic Stimulus: Abolish Minimum Wage

By: Billy Alpert

The most recent attack on prosperity is the federal government increasing the minimum wage from $6.55 per hour to $7.25 per hour, effective July 24, 2009.  This 11% increase is occurring on top of a large 12% increase from $5.85 to $6.55 in 2008. Many only tend to look superficially and argue that mandating increased wages will help to decrease poverty as the lowest wage earners will experience large increases in their wages. But of course this is a fallacy.

The excessive minimum hikes, to the tune of 24% in the last 2 years do nothing to stimulate our economy, but does everything to stifle it. After July 24, government discrimination via minimum wage laws will force the unemployment of anyone whose productivity is not worth at least $7.25 per hour. These are generally the poorest members of society, the young and unskilled workers who need to gain experience and skills to eventually be more productive and eventually earn higher wages.
Immediately following the 11% increase in the federal minimum wage, expect struggling businesses to be reluctant to eat the extra costs, and lay off more workers, destroying both production and employment thanks to government in the name of “fighting poverty”.

It is important to realize that only increased productivity can increase wages. Wages allow for consumption - when you earn wages you can buy stuff, and you can’t consume without first producing.

Therefore the focus must be on increasing productivity, and no legislation can do this, which is why government intervention always destroy wealth. One of the biggest boosters of productivity and wages is capital. For example, if in an office, there were no computers and workers had to manually write down data and waste time doing calculations by hand, then their productivity would be low. But, if the office owner had provided capital in the form of a computer to the workers, then the workers’ productivity would increase as they can produce more output with the aid of the computer. As a result of more production, the owner would be able to pay out more in wages to the workers because they are producing more to contribute to the business’ revenues and profits. What the government tries to do is force the owner to pay out more wages even if the workers are using pens and paper, and are not producing enough to warrant increasing their wages. If the owner is forced to raise wages without getting more productivity he or she may become unprofitable and be forced to close down and lay off ALL the workers.

So, what is essential to see is that only increases in productivity can increase REAL wages, meaning the purchasing power of one’s wages. Wages are the reward to workers for their production, meaning the wages allow them to buy things and consume as a reward for what they produced. If you look at it like this, it is obvious that for the real wages of workers to increase, workers must produce more, and capital (often in the form of better equipment) helps along with that process.

Both theory and history has proven price-fixing and central economic planning do not work, so it is no surprise a minimum wage, fixing the price of labor (the wages) can only lead to epic failure. If you try to artificially fix wages upward, you either get excessive unemployment combined with loss of production (which is obviously bad) or if the money supply expands you tend to get price inflation, which makes the purchasing power of all wages drop so there is no real gain.

But this is no surprise, considering Economics 101 tells us that when you increase the price of something, you get less demand. When the government increases the price of labor, then there will be less demand for businesses to hire workers.
Overall, it is not only the increase in minimum wage that is destructive; it is the fact that it even exists in the first place. Central economic planning by the government cannot create prosperity; all it does is try to spread the misery and poverty from the loss of production government policies create.

Keep this all in mind as the unemployment level will continue to tick higher and perhaps accelerate after July 24.