Simplistic Economics on the Minimum Wage

President Obama has called for an increase in the Minimum Wage,making the claim that it would be good for business because those receiving the higher wage would have more to spend. Higher demand would lead to increased consumption. That boon is easy to see, but serious policy makers must also consider the less visible consequences.

Where does the money for the raise come from?

No business has a money tree from which to pluck dollars, the raise must be accounted for either by reducing the wages of other employees or the number of employees, reducing their consumption, or raising the prices of the company’s products or services, leaving the customers with less to spend somewhere else, or from the business owner(s) pockets, reducing their consumption, or investment in their own business, or those of others through stock purchases, reducing the consumption of those businesses or their employees.

In every case, the increased consumption by minimum wage earners comes at the expense of reduced consumption by someone else. There is no net benefit to the economy.

Increased wages can bring true increases in consumption and economic growth only if they are the result of increased wealth creation by the employee.

Either the President is being guided by extremely simplistic economic theory or he is simply pandering and hoping no one will notice the fallacy. Neither option is encouraging.

The President’s advisers should point out to him that ‘pulling oneself up by his bootstraps’ is only a figure of speech.

3 Responses to Simplistic Economics on the Minimum Wage

  1. Very good. I like.

    just to add:

    One columnist reminds that this will cost jobs especially among blacks who already have a higher unemployment rate.

    You explain well that the extra cost, money, must come from somewhere, less employees, higher cost of goods and services (for the consumer), all leaving less money to spend elsewhere on something else.

    I surmise that at least 80% of voters don’t understand this fallacy.

    IF a higher minimum wage is good, why not raise it to $20/hour?

    I see it as form of socialism, a redistribution of wealth.

    If the Chinese work for $5/day, how can they buy US made at $9/hour? How will the higher minimum wage help balance the trade deficit?

    A $600 billion trade deficit is equal to 12 million jobs paying $50K/year, each.

  2. This is correctly the population problem…restated.

  3. Gail Combs says:

    If you increase minimum wage at this point in US history, it has three effects.

    1. If you are a large corporation it solidifies your plans to move to China, India or Brazil.

    2. If you are a tiny company you get your workers part time from the Underground Economy.

    3. If you are a mid-sized company you fire your older expensive workers and hire cheap temporary or part time help.

    A higher minimum wage, Obamacare, illegal immigrants and H1b visa holders will continue the increase in the Unemployment rates.

    Since Obama (2009) unemployment has gone from ~22% ==> ~23% See:

    Clinton played games with the statistics to hide the effects of WTO and his technology transfer to China. See:

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