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Wednesday, September 27, 2006

A Price Floor By Any Other Name...

Front page of the CS independent (http://www.csindy.com) from this past Thursday provides the material from this post. The story... Boon or Bone. Amendment 42 to the Colorado Constitution to raise the state's minimum wage from the $5.15 (as it has been at for almost a decade) to $6.85. $1.70 an hour... approximately and extra $68.00 per week or $3500.00 per year on a full time job. Not only that but the bill also states that there are to be annual increases to the minimum wage to keep pace with inflation base on the Colorado consumer price index.


The Independent being as it is has all kinds of sad interviews with guys standing in line hoping for work saying how they cannot get by on minimum wage and the raise while not nearly enough for them would be a big help. Unfortunately one thing the article does not address... the same thing that any economist should recognize right away is... the price floor! There is no mention whatsoever of the negative consequences price floors can have on the job market and the dangers of requiring a higher minimum wage with inflation.


So... why this is a bad idea. For the same reason any price floor is a bad idea. It prevents the market from operating at the equilibrium. If the price is forced higher than the suppliers of the jobs that are now at minimum wage will not be willing to supply as many of these jobs, while the demand for these jobs will go through the roof. So the poor chaps that are now waiting in line to get their minimum wage jobs will soon have a lot more people waiting in line for even fewer jobs. So instead of their $206.00 per week paycheck they may end up getting nothing.


Another reason this is not a good idea comes from the side of the suppliers of the jobs. It is logical that the largest employers will not be feeling the hit from this change as hard. For that matter how many large corporations actually offer jobs that only pay minimum wage. I think even the lowest bag boy at Wal-Mart makes more than that. No it is the small business owner with few employees that all earn minimum wage or a little more that will be feeling the heat from the this change. Regardless of the size of the company though; when costs go up they have to be either absorbed by the business or passed on to the consumer. In most cases at least some of the increased costs will be passed on to the consumer so the people that gain the most form this increase in wages will end up giving much of that back when they go to buy their groceries or other items at the stores that have raised their prices to account for the increase in bringing the goods to th market. Not only do they suffer the consequences but the rest of the market does as well. So the people not making minimum wage and gained no benefit from the increased wage have to pay the higher prices to compensate the producers.


Final reason involves the stipulation that the raises should continue every year to keep up with inflation. However when do some of the highest inflation rates occur? During times of economic hardship and recession. That sounds like a great idea. When business are struggling the most to make a profit and deliver goods to the market lets make them give their employees even bigger raises that usual That just exacerbates the previous points. There will be even fewer jobs and more people wanting them. Then goods will cost even more to bring to market and more of that will be passed to the consumer which hurts everyone.


So where are the positives of raising the minimum wage? There are none that I know of that are true economic benefits. It seems there should be a better way to solve this issue other that instituting a price floor. I just have no idea what it is... perhaps someone can enlighten me as to why this is actually a good idea.


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