Why I Hate: The Minimum Wage
A Thought Experiment
from 
JoeUser Forums
JoeUser Forums
Let's say I own a small factory. The factory produces about $100[1] worth of widgets every day, and requires a crew of seven people to operate at full efficiency.
Let's also say that this factory operates in a country where it is customary to pay workers by the day, and that $10 per day is a low but acceptable wage.
Now, I could pay my seven workers up to $14 per day, and still make a $2 profit. Very tight margin, but at least there's some money left over for my investors, or for capital improvements, or for the company Christmas party, or whatever.
Now, let's say the government passes a law, requiring that all workers be paid a minimum of $15 per day. What happens?
The first thing that happens, the day I begin complying with the new minimum wage, is that my factory loses money: $5 per day, in fact. Not much, but it will add up quickly.
Why I Hate, #1: The minimum wage hurts the economy, creating deficits instead of surpluses for any employer on a tight profit margin. It punishes employers for being competitive or generous in their hiring and employee compensation practices. Thus, it is bad for both employers and employees.
Of course, I can't keep operating my factory at a loss each day. I need to make some adjustments.
One thing I could do is raise the price of my widgets, to cover the increase in my payroll costs. Of course, this would tend to nullify the value of the minimum wage in the first place. Sure, my workers get paid more, but--surprise!--their cost of living just went up, too.
Why I Hate, #2: The minimum wage promotes inflation. By increasing the operating costs for employers, it drives increases in the costs consumers must pay for goods and services. Pay raises are offset by price increases. Instead of a Better Tomorrow for my employees, they get inflation. And inflation is bad for the economy.
But as bad as inflation is, a price increase may be my best option. Let's see what else I can do...
Well, I can fire one of my employees. This brings my factory back into profitability--improves it, even, since I go from a $2 profit to a $10 profit.
Why I Hate, #3: The minimum wage promotes unemployment.
Of course, my profit margin just improved dramatically, from $2 before the minimum wage law to $10 after the minimum wage law. And my employees even got a raise (the ones I didn't have to lay off got a raise, anyway)! On the other hand, that profit increase isn't real, because the factory's efficiency just went down. Now, instead of having 7 workers producing $100 worth of widgets, I have six workers producing about $85 worth of widgets. In fact, at $15 per day, my workers cost me more than the value of the widgets they produce.
Why I Hate, #4: The minimum wage promotes massive unemployment by driving companies out of business. It also hurts the economy by making whole sectors unprofitable.
But maybe I can keep my factory in the black. Let's say I lay off my least efficient worker. Instead of a 14% efficiency loss, maybe I only have a 9% efficiency loss--that's the maximum I can afford, anyway. Now my factory is making $91 of widgets every day, but at least that's better than my payroll costs of $90 per day for my remaining 6 employees. I'm down to a $1 profit from a $2 profit before the minimum wage, but it's better than going out of business, laying off more employees, or driving inflation, isn't it?
Why I Hate, #5: The minimum wage harms the economy by reducing profits.
Summary:
1 The minimum wage increases deficits and decreases surpluses.
2 The minimum wage accelerates inflation.
3 The minimum wage increases unemployment.
4 The minimum wage puts employers out of business, hurting the economy and increasing unemployment at the same time.
5 The minimum wage makes employers less profitable, without improving the economy or the lives of employees (who must now work harder to keep their employer profitable; sure, they get paid more, but they have to work more, too. You could call this another kind of inflation.)
Question: What do I not understand about the minimum wage, that makes it such a great idea?
[1] After accounting for the cost of raw materials and support services like water and power, but not payroll expenses.
Let's also say that this factory operates in a country where it is customary to pay workers by the day, and that $10 per day is a low but acceptable wage.
Now, I could pay my seven workers up to $14 per day, and still make a $2 profit. Very tight margin, but at least there's some money left over for my investors, or for capital improvements, or for the company Christmas party, or whatever.
Now, let's say the government passes a law, requiring that all workers be paid a minimum of $15 per day. What happens?
The first thing that happens, the day I begin complying with the new minimum wage, is that my factory loses money: $5 per day, in fact. Not much, but it will add up quickly.
Why I Hate, #1: The minimum wage hurts the economy, creating deficits instead of surpluses for any employer on a tight profit margin. It punishes employers for being competitive or generous in their hiring and employee compensation practices. Thus, it is bad for both employers and employees.
Of course, I can't keep operating my factory at a loss each day. I need to make some adjustments.
One thing I could do is raise the price of my widgets, to cover the increase in my payroll costs. Of course, this would tend to nullify the value of the minimum wage in the first place. Sure, my workers get paid more, but--surprise!--their cost of living just went up, too.
Why I Hate, #2: The minimum wage promotes inflation. By increasing the operating costs for employers, it drives increases in the costs consumers must pay for goods and services. Pay raises are offset by price increases. Instead of a Better Tomorrow for my employees, they get inflation. And inflation is bad for the economy.
But as bad as inflation is, a price increase may be my best option. Let's see what else I can do...
Well, I can fire one of my employees. This brings my factory back into profitability--improves it, even, since I go from a $2 profit to a $10 profit.
Why I Hate, #3: The minimum wage promotes unemployment.
Of course, my profit margin just improved dramatically, from $2 before the minimum wage law to $10 after the minimum wage law. And my employees even got a raise (the ones I didn't have to lay off got a raise, anyway)! On the other hand, that profit increase isn't real, because the factory's efficiency just went down. Now, instead of having 7 workers producing $100 worth of widgets, I have six workers producing about $85 worth of widgets. In fact, at $15 per day, my workers cost me more than the value of the widgets they produce.
Why I Hate, #4: The minimum wage promotes massive unemployment by driving companies out of business. It also hurts the economy by making whole sectors unprofitable.
But maybe I can keep my factory in the black. Let's say I lay off my least efficient worker. Instead of a 14% efficiency loss, maybe I only have a 9% efficiency loss--that's the maximum I can afford, anyway. Now my factory is making $91 of widgets every day, but at least that's better than my payroll costs of $90 per day for my remaining 6 employees. I'm down to a $1 profit from a $2 profit before the minimum wage, but it's better than going out of business, laying off more employees, or driving inflation, isn't it?
Why I Hate, #5: The minimum wage harms the economy by reducing profits.
Summary:
1 The minimum wage increases deficits and decreases surpluses.
2 The minimum wage accelerates inflation.
3 The minimum wage increases unemployment.
4 The minimum wage puts employers out of business, hurting the economy and increasing unemployment at the same time.
5 The minimum wage makes employers less profitable, without improving the economy or the lives of employees (who must now work harder to keep their employer profitable; sure, they get paid more, but they have to work more, too. You could call this another kind of inflation.)
Question: What do I not understand about the minimum wage, that makes it such a great idea?
[1] After accounting for the cost of raw materials and support services like water and power, but not payroll expenses.
