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Minimum Wage Increases are a Necessity for Capitalism to Work

by on July 31, 2013

It is believed by many that capitalism has been the driving force for the economics successes of western civilization.  Others may say it has been technological advancement.  And others may say that it was capitalism that financed this technological advancement.  Whatever the reason may be for the advancement of our civilization, the underlying measurement for that advancement has been the ability to live in a more comfortable way.  This could include such things as vacations, more leisure time, safer working conditions, higher wages, universal health care, 401ks, pensions, paid sick leaves, maternity leaves, bigger houses, air conditioning etc….

All of these things that we use to measure economic success are in fact just increases in the ability to purchase things that allow one to live more comfortably.  We have reached a point in human history where we no longer have to focus on producing just the necessities needed for sustaining life, those necessities (food, shelter, and clothing) are now able to be produced for every human on this planet, there is no scarcity for these items.  This would meet the very minimum requirements that the constitution arguably lays out in the fifth amendment, as was argued earlier from a guest post from Mike Wright.

A few months ago the house shot down an attempt to raise minimum wages to over $10 an hour.  Since then there seems to have been lots of talk and debating as to how this would effect the state of our economy.  There are generally two economic effects that are brought up that are effected by raising minimum wages: unemployment and inflation.

Effects on Employment

When it comes to measuring the effects of employment numbers from raising the minimum wage there are numerous studies that show that it causes higher unemployment, causes lower unemployment, or that it has no significant effect on unemployment.  Measuring unemployment from county to county, state to state, can be a difficult thing since many factors such as taxation and industry concentrations can have an effect on unemployment thus skewing any such studies.   There is an abundance of studies that show that the effect on employment is that it doesn’t effect it in any negligible way.  But most of these studies only show short term effects, and doesn’t do well to take into effect that it may take time for companies to adjust and obtain the sales necessary to dictate hiring more.  How long does it take for a store to open a new one?  It typically takes a few years of planning to do this, so any increase in employment may not be realized until several years down the road.

More income = more sales = more hiring

What matters is knowing how employment is boosted in an economy in the first place.  Employment occurs only when the sales exist in a firm for them to consider hiring to handle increased sales.  So it is logical that if you want to increase employment you have to increase sales first, and you can’t increase sales unless you have more customers who have the ability to purchase your good or service.  So one way to increase sales, in the aggregate, is to increase minimum wage, and this would presumptively increase hiring for firms.  Granted there may be firms who can’t afford any increased costs and it may cause them to fire an employee or employees, but the firm that can’t afford an increase in wages is also just another large cost away from going out of business, so for those cases it is just a matter of time for them.

Effects on Inflation

I have seen on numerous occasions where people think that a certain percent increase in minimum wage will result in the same percentage increase in inflation.  This is a basic misconception that fails simple algebra.  Taking just the most basic example will show this.  A burger flipper makes $10 an hour, and can produce 100 burgers an hour that sells for $1 a burger.  This means that a burger flipper’s wage cost is 10 cents per burger.  To make the math easy here, if we were to double that burger flippers wage to $20 an hour that burger flippers wage would result in an increase in that burger by 10 cents.  So we see a burger flipper get a 100% raise and only an increase in cost of 10%.  On the most basic level this is an obvious decision to make to increase the purchasing power of our lowest classes.

But it really isn’t as simple as that, there are of course minimum wage earners that ship the burgers, that slaughter the cows, in other words there are effects on the prices of buying that burger before the burger flipper makes it.  Luckily this country has done some work in the past to see how increases in the minimum wage effect the end price on these burgers.  The study laid out several different scenarios from a 9% increase in the minimum wage, and the most liberal scenario showed that the prices on the end product didn’t even reach a 1% increase, keeping in mind that this was the most liberal scenario.

Berkeley also did another study using Walmart as an example, those findings were also consistent with others done on inflation from minimum wage increases:

“Even if Walmart were to pass 100 percent of the wage increase on to consumers, the average impact on a Walmart shopper would be quite small: 1.1 percent of prices, well below Walmart’s estimated savings to consumers. This works out to $0.46 per shopping trip, or $12.49 per year, for the average consumer who spends approximately $1,187 per year at Walmart. This is the most extreme estimate, as portions of the raise could be absorbed through other mechanisms, including increased productivity or lower profit margins.”

The general consensus is that it will definitely result in prices increasing, but this increase is just a one time price level increase.  The increase in income for minimum wage earners would be far more beneficial than the harmful effects of a one time inflationary event.

Low wages are a subsidy for businesses

Another viewpoint in support of a living wage is that it uses those under the living wage as a way to subsidize businesses from not having to pay the full cost of employing people.  So it is asking the poorest people in this country to help keep businesses from enduring more labor costs, or it uses the federal government to pay the remainder via welfare and medicaid to help the poor reach an acceptable standard of living.  MIT has put together a minimal living wage calculator for every county in the U.S., see for yourself here: MIT Living Wage Calculator.  One thing to keep in mind here is that it assumes lowest costs of living possible, so it is a conservative estimate on what each counties living wage ought to be.

How this all helps capitalism

Capitalism requires sales for it to be sustainable, and a poor class that has the ability to purchase things helps to keep that sustainability.  If minimum wages were to increase it would effect the purchasing power of 30 million Americans, and if that wage was raised to $15 an hour it would inject $450 billion into the economy, and not just once, but every year.  And this sector of the economy is one in which spends a large majority of their income.  This increase in sales for businesses would increase hiring and create more competition with more businesses opening up to capture market share.

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From → Economics 101, Fiat

6 Comments
  1. Dear JP,

    Great post! If I may make a small technical suggestion, instead of using the phrase “one time inflationary event,” consider “one time price change.”

    From Investopedia, inflation is “the rate at which the general level of prices for goods and services is rising.” So, ‘inflation’–more formally ‘price inflation’–is defined as a consistent price increase over time as opposed to a single event. If I’m reading you correctly I believe your intended meaning is the latter.

    Kyle

  2. Other wages, particularly union scales, are indexed to the minimum wage. They go up, too, when the minimum goes up, even if they are already much higher than the minimum.

  3. The city of Seatac, a 10 square mile area around the Sea-Tac (Seattle-Tacoma) airport will vote soon on raising the minimum wage in the city to $15 an hour. That will be an interesting experiment, if the vote succeeds. There are lots of hotels and restaurants there, and lots of minimum wage workers in them. There are also lots of hotels and restaurants within a mile of the city limits. With globalization, it’s not as extreme as it seems to compare Seatac’s experience to the experience of a country that tries by law to raise its wage scale above those of its neighbors and trade partners.

  4. Minimum wage as it currently exists does not help people that it is allegedly supposed to help.

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