It is a problem, and in fact it is foolish, for a number of reasons, seen and unseen, which include preventing small businesses from starting, creating a country with less youth with work experience etc.

If you really think about it, and correct me if I’m wrong, but out of the 1-2% of the American workforce that earns Minimum Wage - meaning almost 98% earn more than minimum wage on the books - a majority of them  earn more money in the form of tips. Think about the kinds of jobs that require minimum wages like bar-tending, waiting etc. Free market is actually very fluid and can react to almost any situation you can think of, and it does this because of well… people. People drive the economy with their expectations and predictions and savings and investments.

Now, I’ll focus on the fact that it actually hurts both the employer as well as the employee. People think that the minimum wage affects the poor and that if you get rid of it, who’s to stop businesses from manipulating the wage to very low price. Neither of these points are true. 

Picture this: You own a store. A new worker for you is worth about 6 and a half bucks an hour. I come to you and say I’m willing to work for 6 bucks an hour. Great! However, too bad minimum wage is more than 7 bucks. Because you are smart, you realize that losing money on more expensive employees would put you out of business. In the end, you make less profit, and I am out of a job. 

So we’ve established that minimum wage restricts the number of employees an employer can hire. What does that mean in terms of the rest of the market? Well, less employees –> less productivity (which is the real key in economic growth…not consumer spending) –> less product (supply) –> higher prices –> you get the point.

Okay, you are starting to get it… but let’s say there is no minimum wage law. What about that?
Well, the opposite effect of more employees –> more productivity –> new market cycle of more products –> prices fall to efficient levels due to the free market –> happy fun times.

The result of no minimum wage = more people employed (some earning a little bit less) + lower prices + economic surge of new jobs. These low paying jobs will go to the youth, and more higher paying jobs will open up (as businesses respond to an increase in demand for higher skill levels) and go to the high skilled workers. Because more high paying, high skill jobs open up, youth will have an incentive for gaining more skills.

Of course, I wouldn’t exactly be talking about any of this if America wasn’t in such a welfare state, nor would I mind it if the money in your wallet right now was worth anything. As dollar value drops significantly, politicians will use minimum wage to make it seem like they are helping you (by increasing minimum wage), when in reality they are literally doing nothing. It’s a farce. Also, minimum wage laws lead to more government intrusion and enforcement and blah that we need less of, not more.

Even if a politician knew all of this and knew that we need to go into a recession by eliminating a large quantity of government control and federal reserve’s money supply manipulation, he/she would rarely ever win by using these principles as their campaign. Who wants to elect someone who will deliberately cause a recession? Unfortunately not very many people.

It’s like giving an alcoholic more alcohol to get over his alcohol problem, rather than cutting him off from the source. Sure it will hurt in the short run, but that is necessary to reinstate a free market economy.

Imagine the day when our creditors (people in foreign lands lending us money… with which we use to buy their goods again…that’s a rant for another day) stop letting us borrow after they realize our currency is in demise.

/rant

Image Credit - http://tinyurl.com/cpyy6wg