Exposing the Minimum Wage Fallacy

Raising the minimum wage will increase wages, but it won’t increase purchasing power, which means the standard of living for those making minimum wage will not increase. Those who trumpet raising the minimum wage as a way to alleviate the burden of poverty do not understand how businesses operate. This is nothing more than an attempt to attract voters ahead of a contentious midterm election cycle.

Labor is an expense that companies have to account for just like raw materials and advertising. When the cost of doing business increases, the bottom-line of the company suffers. In an effort to produce positive earnings and maintain profitability when the cost of doing business increases, companies either have to increase prices or cut costs. For instance, if the price of cotton increases, then a clothing company may have to increase the cost of its clothing, and thus pass on the price increase of cotton onto the consumer, or the company can look for another cotton producer that can supply it with cheaper cotton.

In the case of labor, a company can look to control rising costs by exporting jobs if the price of labor cannot be decreased below a minimum wage. But, in the case of minimum wage workers this is not a feasible option given that many minimum wage jobs exist in service industries that cannot be outsourced. This leaves the option of raising prices to absorb the additional cost of doing business.

When prices increase, then my dollar today will not buy as much as it did yesterday. If my hourly wage increases by 10%, but the cost of living also increases by 10% then my purchasing power hasn’t increased which means I am no better off than before the wage increase.

Furthermore, pricing in a free market adjusts to supply and demand. Higher wages means a higher demand for products which means prices for those products will increase in order to establish market equilibrium. So even a company with a labor force that will be unaffected by a change in minimum wage, say a company that already pays its employees $20.00/hour, will be able to raise its prices since more people will be able to buy their product. But, this also means that those employees who make $20.00/hour will be relatively worse off than before the minimum wage increase because they will have reduced purchasing power as a result of the minimum wage increase and the resulting increase in cost of living.

In simple terms, people making minimum wage will be no better off than they were before, and those in the middle class will be hit with a cost of living increase due to government tampering in the market. Critics of my line of argument might say that businesses should absorb the new costs by cutting into their profits and those at the top should be willing to take pay cuts in order to maintain current pricing levels. Businesses exist to make money and those in the upper-echelon of business like to make money for themselves and their companies. To say otherwise is naïve.

Raising the minimum wage is political sleight of hand. Over the long run, when markets have time to react, the cost of living will increase, thus hurting the middle class and returning minimum wage workers back to where they began. Reducing the number of people who live at or near the poverty line requires increasing the capacity of the private sector to create those jobs and equipping people with the skills necessary to be employed in those jobs. Artificially raising wages will not have a lasting positive effect on the poor and will hurt the middle class.