A $20 Minimum Wage?!

There has been much hype about the Occupy Wall Street movement lately.  Although their frustration with the lack of economic growth, not to mention the collusion between Big Government and Big Business, is valid, frustration is insufficient in terms of implementing change.  You need sound policy to back it up.  Naïveté exists amongst these protesters, and an "unofficial" list of demands exemplified it.  The first demand was to "restore the living wage," which entails raising the minimum wage to $20.  But why stop at $20?  Why not make it an even $100?  The short response to this is that such an increase, whether to $20 or $100, would backfire.

And now, the longer answer.

One of the main issues is that minimum wage increases unemployment.  In simple economic terms, the minimum wage is a price floor imposed on the labor market.  If minimum wage were below the equilibrium point, minimum wage would have no effect.  However, Leftist think tanks such as Economic Policy Institute admit that their wages would have been higher without the price floor, which is another way of saying that the price floor is above the equilibrium point.  When a price floor is above the equilibrium point, it creates a surplus [of labor], which in this case, means that minimum creates unemployment.  This effect is more pronounced because low-skilled labor is more elastic than skilled labor.  Studies such as those from the National Center for Policy Analysis, Employment Policy Institute, and the United States Congress back up the economics.  

Let's say that just about every study done on minimum wage is wrong, the laws of economics are wrong with regards to price ceilings, and minimum wage actually doesn't increase unemployment.  You still have the other issue of minimum wage increasing the cost of production.  Producers need to compensate for the loss in increased wages.  They will do so by making the product more expensive, which translates into less consumption.

This especially hurts small businesses.  Mom and Pop shops don't have the same advantage of economies of scale that a company such as Wal-Mart has.  Especially with this recession, driving up production costs gets so ridiculous that the typical consumer will not want to shop at the Mom and Pop shop, even though the service is more personable.  Minimum wage laws have thus adversely contributed to the closing of small businesses, especially during this recession.  The same principle applies to non-profit organizations who cannot afford the current minimum wage.  And even for large companies such as Wal-Mart, this incentivizes them to have human labor replaced by machines (e.g., automated checkouts).

Rather than helping those in need, minimum wage laws are hurting them (also see economist Greg Mankiw's thoughts), which obviously is the opposite of what was intended.  This is pronounced on the global level, in which the United States has been racking up trade deficits for quite some years.  In terms of foreign competition, the United States is at a disadvantage because China can charge whatever they want for labor, whereas the United States has to pay a minimum amount.  The issues with this (i.e., increased labor costs and less workers) are more noticeable because you have to compete even harder to import quality products.

Although the minimum wage is not the sole culprit to current economic problems, it should be evident that minimum wage laws hurts those who it was intended to assist, is detrimental to labor markets by increasing unemployment, and impedes on America's ability to compete in the global market.