Wednesday, January 10, 2007

Minimum Wage Increases Tend to Hurt the Poor

When passing popular legislation like the minimum wage increase, I wish voters and policy makers would take a second to think about the people they hurt with their well meaning actions.

We imagine that the legislation hurts the hated enemies of our community like Walmart, the big box stores and the massive franchises that currently dominate the retail market space.

The truth of the matter is that the negative effects of the minimum wage increase will be felt by the small marginal independent business. Like most retail regulation, the minimum wage increase will give a further competitive edge to the big box store. The big box store has a lower ratio of employees to sales and inventory than the small independent store on the corner. An artificial increase in wages has a direct disproportionate affect on the small stores since employee wages make up a greater portion of the store’s costs.

Small, marginal firms depend on their ability to rapidly adjust to changes in market conditions. In a free market, marginal companies would have the ability to respond to steep drops in the market simply by adjusting their biggest costs (employee wages). Imagine a small restaurant in a resort community. If it were not for wage regulations, they could simply keep their workers on during the slow season when there is no work to be done. Instead, they have to lay them off every year.

I dislike minimum wage legislation as such legislation tends to have a disproportionate affect on the small marginal businesses that add character to the economic landscape.

It also does something else that is extremely nasty.

The minimum wage increase ends up creating obstacles for companies trying to provide goods and services to the poor.

It does not take a degree in higher finance to figure this one out. Guess which income group consistently pays the lowest wages for goods and services?

Yep. Poor people tend to pay less for goods and services than rich people. A really poor person trying to start a company ends up paying lower salaries than rich people who try to start companies. When you have an artificial minimum wage, you pretty much destroy the ability of poor people to start new businesses … which effectively keeps them in poverty.

My estimation is that the minimum wage legislation will have zero financial affect on the ultra-rich Congressmen that pass the legislation. Nancy Pelosi is from a family that is so rich and powerful that they can pay well above minimum wage for their servants. The people most hurt by the minimum wage are the people trying to start a marginal business with dreams of escaping poverty. Congress is slamming the door on this American Dream.


Frank Staheli said...

Excellent insight about the affect on the poor who try to start a business!

Was it Hazlitt or Bastiat that talked about the "things unseen" or the unintended consequences of economic and political actions?

At any rate, this is one that I hadn't thought about, and I'm sure most people unfortunately don't care about.

At any rate, nice observation! Maybe it will encourage a few more people to think.

y-intercept said...

Personally, I think this minimum wage increase will be relatively benign because so few people are paid minimum wage. The BLS statistics showed that wages rose despite the lack of government mandates for wage increases.

There is actually a large number of marginal jobs that did not exist at the time of the last minimum wage increase that exist today. The minimum wage increase will simply make these marginal jobs disappear again.

The main thing the minimum wage increase will do in make secular progressive feel smug. There apparently is great power in such feel good legislation as people on both the right and left will generally select the option that makes them feel good over the option that actually is good.