The Dangers of Minimum Wage

(Note: I apologize for the weird font/type size. I copied and pasted parts of this from my outline and it messed the formatting up slightly. :P ) 

So, I have been falling terribly far behind in my series of posts for this month. It was probably not a good idea for me to plan on tackling big topics at the same time that all of my semester projects are coming due, but I will get the last two installments of the Love, Relationships, and Controversy series finished and posted at some point. If they end up leaking into December, then so be it.

In the meantime however, I've had several requests for a much easier post to write. Over the last week I participated in a Speech competition at my university and last night my speech actually won me first place. A number of my friends and family members requested that I post my speech somewhere for them and this seemed like as good a place as any.

Every time I gave the speech it was slightly different, because I was working off an outline rather than reading off the text, but this is a pretty close approximation.

The Dangers of Minimum Wage 

By: Nicholai Stuckwisch 

        Wouldn’t it be awesome to be making ten dollars an hour? If you already making that much or more then you may not care, but if, like me, you work at a minimum wage position you may be feeling the brunt of the economy downside and wishing that a $10 an hour minimum wage requirement was installed. In fact, according to the GallopPolitics statistics website, an overall 71% of Americans approved of raising the minimum wage to $9 back in March of this year. Underneath the outward attraction and appeal of a higher minimum wage, however, there are some major risks that go along with it. 

          I’m no Ben Bernanke, but in the course of pursuing a business degree here at IU, I’ve taken a few Economics classes and the principles that expose the risks associated with the minimum wage are pretty fundamental and important. Using these principles, I hope to show you how the seemingly amazing ideal of a high minimum wage could actually be highly detrimental to the lower classes. The sad truth is that a high minimum wage decreases employment for young and unskilled employees, increases market prices, and actually widens the economic divide between classes. 

         All three of these points may seem counter-intuitive, but I can support each of them. 

         Firstly, higher wages create higher labor expenses for people that often translate into layoffs. If it costs you more to employ a position than you will be forced to either to make job cuts or take a loss in profit. At the same time, because the minimum wage is not very high right now, some employers can afford to hire young and unskilled employees, but it the cost of employing those individuals became more expensive, employers would be pickier about who they hire because it is costing them more. 

         The wage level that works best for our society is determined by the economic principles of supply and demand. Essentially, what supply and demand tell us is that at some point the demand for something and the supply for something are equal, and at that point you have an overall, optimal equilibrium level that is best for society. If wages are raised above their equilibrium level, you end up with a dead weight loss that translates into layoffs and unemployment. Professor Dr. Gregory Mankiw, author of the textbook Principles of Microeconomics, states that “If minimum wage is above the equilibrium level… The result is unemployment. Thus, the minimum wage raises the income of those workers who have jobs, but it lowers the income of workers who cannot find jobs.” 

         Those enamored with the idea of raising minimum wage in order to increase income are often oblivious to the impact it will have on those who end up with no income at all. Sadly however, the dangers of raising the minimum wage are not limited to employment. 

         The second point that I would like to address is that higher labor costs result in higher prices. If employers want to maintain a similar staff to one they held prior to a wage increase, they will be have to raise the prices of their products and services to compensate. It makes sense if you think about it. If it costs more to produce something, you will have to charge more for that something to balance things out. 

         The increase in price that occurs as a result of trying to balance things dilutes the effectiveness of a greater income. Just because you might be making more money under a higher minimum wage law, doesn't mean you are better off if you then have to pay more in order to acquire the things you purchase. According to Christina Romer, a journalist for the New York Times, “[A] reason that employment may not fall is that businesses pass along some of the cost of a higher minimum wage to consumers through higher prices. Often, the customers paying those … have very low family incomes. Thus this price effect may harm the very people whom a minimum wage is supposed to help.”

       Also, it is unfortunately true that the amount of money people are being paid to accomplish a job does not increase the usefulness of that job. Just because it costs you more to produce something doesn't mean that thing you are producing is worth any more than it was previously. Susan Rhea, and journalist for the Huffington Post writes in an article that “[T]he middle-lower class, barely gets by because discount stores like Walmart have taken over the mass retail market. If Walmart were to start paying employees … a living wage, and [gives] health care to all employees, their prices would go up.” 

       Increasing payment for a job that paid out just as much as it did previously raises prices and dilutes the value of the dollar. 

       One of the major arguments for raising the minimum wage right now is that the rich are earning far too much compared to the poor. Unfortunately however, raising the minimum wage can actually hurt the lower classes without damaging the upper classes nearly as much.  

      The last point that I want to make is that a nation-wide wage increase actually helps to create a wedge that creates an economic divide between classes. When layoffs from a forced wage increase occur, they occur for those working at minimum wage positions, not those earning a large salary. Typically, people working at these lower wage positions are working there because they are either A) new to that job, or B) working a job that is not entirely vital to the life of the company. So, when cuts occur, they are going to occur at the minimum wage positions. 

      On top of that, increased prices, while not fun for the wealthy, are not nearly as damaging for the upper class as they are for the lower classes. The wealthy already have enough money to spare so if everything rises in price they won't be happy, but they'll ultimately be fine. The lower classes, and those on fixed incomes however, are often already strapped for funds and barely get by at the current wage levels. If prices increase they will be hurt significantly. 

      The market, as I said, is governed by the laws of supply and demand, and the upper class simply as a higher demand than the lower classes. They have a higher cost threshold and are able to more easily adjust to price increases. David Neuremark, a University of California Irvine professor argues, according to journalist Damien Paletta from the Wall Street Journal, that "A lot of the benefits of minimum wage leak out to families way above the poverty line." 

       I want to apologize if I have ruined your dreams for a higher national minimum wage, but hopefully you now see that it would not actually be beneficial for all of us to be making as much as we might like. Ultimately, raising wages across the board would result in unemployment for the young and unskilled, higher market prices for us to deal with, and an even greater economic divide between two already bitterly separated classes.  According to a survey of my class, 40% of them believed that raising the minimum wage would have an overall beneficial effect on the economy, but hopefully you now realize that this is not necessarily the case. 

       So, the question then is: How do we keep these problems from arising? The minimum wage should be a state issue and so it is to our state leaders that would should turn to to deal with this topic. Contact your governor, you senators, and your state representatives  and let them know that the young people of America do not approve of our jobs being lost, our prices being raised, or our economy being split. Tell them to vote against and bills supporting a minimum wage increase and fight sending our economy back into a downward spiral. 

      Thank you.