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Minimum Wage Raises Are Causing Price Hikes – Just As Expected

The minimum wage leads to a surplus of low-skilled workers who cannot sell their time because the government mandated that they cannot reach a voluntary agreement with their employer.

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By Mason Mohon | @mohonofficial

For us it’s very simple. There’s no big pot of money out there to get the money out of.

That was the statement of Mike Wiggins, owner of Granny Schaffer’s restaurant in Joplin, Missouri. He is being forced to raise the prices of food items up to 20 cents for one reason: the minimum wage increase.

He estimates that he may have to pay an additional $12,000 in annual wages to his staff, which is only to the harm of consumers, due to the direct effect that it has on the prices of goods.

But this incident is not isolated to Missouri. New minimum wage requirements are going into effect in 20 states, ranging from a nickel per hour increase in Alaska to an increase in $1 hourly in states such as Maine, California, and Massachusettes. In Seattle, large employers are going to have to pay $16/hour at the minimum. Similarly, in New York City, it has gone up to $15/hour.

As a Yahoo! Finance report indicated:

Economic studies on minimum wage increases have shown that some workers do benefit, while others might see their work hours reduced. Businesses may place a higher value on experienced workers, making it more challenging for entry-level employees to find jobs.

Studies from the University of Washington showed that when Seattle raised its minimum wage to $11’hour, then further to $13/hour, there was a 6.9% reduction in hours for those working for less than $19/hour, leading to a net decline in hours and ultimately leaving the workers worse off.

And all of these results are expected. Free-market economists have been explaining this for years. Ultimately, the worker’s effort for a certain amount of time is a good being sold from the worker to the employer. Like any good, there is a standard supply and demand graph that it can be analyzed against. And in this model, a minimum wage acts as a basic price floor.

The graph for each quality of work is different, with the equilibrium point (the wage agreed upon by the worker and employer) residing at a different position based on the worker’s skill. If the employer determines that the worker’s labor is worth something around $20/hour, this price floor will have no effect. But when this exact same price floor is enacted where the equilibrium wage is at $6/hour, this worker will be guaranteed unemployment.

Economists understand that a price floor leads to a surplus of unsold goods. In this case, it leads to a surplus of low-skilled workers who cannot sell their skill because the government mandated that they cannot reach a voluntary agreement with their employer.

As Yahoo! Finance continued:

The new state minimum wage laws could affect about 5.3 million workers who are currently earning less than the new standards, according to the liberal-leaning Economic Policy Institute, based in Washington, D.C. That equates to almost 8 percent of the workforce in those 20 states but doesn’t account for additional minimum wage increases in some cities.

So we have unemployment, or we have what we saw in the case of Granny Schaffer’s. The prices go up and consumers have to pay more. And in this instance, we have the exact same issue with a price floor above equilibrium. There is always a tendency towards equilibrium in any business endeavor as F.A. Hayek shows us, so businesses are always cutting it quite close (unless there is a large change in the quantity demanded or supplied and there is a lag in the adjustment). Because of this, when the price is forced up because the employer does not want to lay off their workers, there will once again be a surplus of unsold goods. This is bad for the business, and consumers are not getting the goods they desire.

All around, raising the minimum wage is a bad bet. So why are we still pushing for it anyway?

The sole reason is the empty platitudes of liberal talking heads and the likes of Sam Seder. When faced with economic analysis, they simply ask “but how is it moral for the employers to not pay a ‘living wage'” (whatever that means). It is a failure to see the bigger picture and look past the immediate effects of a government program. Bastiat warned us that the unseen exists, but because it is unseen, it is hard for many to take into account. One may pity those ignorant of their own economic misgivings, but when you realize that their faults are affecting the economy as a whole, compassion quickly goes out the window.


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