Minimum Wages Increase Prices
Artificially imposed minimum wages, like those mandated by the government through the implementation of minimum wage legislation, will cause prices to increase. This increase will inevitably cause the government to react with still more increases to the minimum wage. This cycle, over time, reduces the value of any pay increases by increasing the cost of goods and services. The cycle defeats the purpose of the ill-conceived minimum wage. While the minimum wage may sound good on it's surface, it is partially responsible for the increased price of goods and services.
A company, that intends to stay in business, grow and hire people, must incorporate the costs of doing business into the price at which they sell their products or services. This includes, but is not limited to, cost of raw materials, rent, taxes, utilities and wages. Employee compensation makes up the lion share of most businesses expenses. When there is an increase to any of a businesses expenses they must, in order to to remain in business, increase what they charge for their goods and services.
When an artificial means of raising wages occurs, such as a governmental or union imposed minimum wages, an artificial, but no less real, increase in the prices of goods and services occurs. At this point the increased wages are offset by the increased prices. This cycle continues the upward spiral of price increases. While it is not the only factor in this economic "smoke and mirror" game, it is one of the three main reasons along with taxes and over regulation.
To show this more clearly, lets assume Company A produces Product X. Product X costs $5 dollars to get to market. This factors in raw materials, rent, utilities, marketing, taxes, wages and any other cost factors. At this price, Company A stays in business and perhaps can even expand and hire more people. Now let's assume that people have willingly agreed to work for Company A for $6.50/hr. Then, through government intervention, a minimum wage is instituted at $7.50/hr. There is an immediate cost increase to Company A and, therefor, the need to raise the price of Product X. It now cost that same customer more for Product X as well as for every other product and service they purchase. The artificial wage increase is eaten away by the necessary price increases.
But, it doesn't stop with the immediate cost increase in Company A's payroll. All of Company A's cost go up as a result of their vendor costs going up because of the wage increases as well. Utility costs, raw materials, insurances all go up. Now the artificially increased wage is completely wiped out. And the cycle continues. The buying power of each dollar goes down.
If the market were to dictate wages then prices would remain lower. If a business could hire people, willing to work, for the wage needed to produce the products and services at a lower price point, then there would be no need for artificial minimum wages. Those with great skills and special talents would get paid more based on the market needs for those skills and abilities. With lower prices, more goods could be purchased with same dollar.
Expanded and Extrapolated
If a government mandates that the minimum wage is to be increased by only $.50 per hour and a business employs 25 full-time people, this is the reality of that increase:
1. 40hrs/week x $.50/hour x 25 people = $500/week in increased costs for running the business without any increase in either productivity, sales or profit. This does not even include the increases attributed to the increased taxes and the previously recorded increases from their suppliers and utilities, which increases the costs even further.
2. $500/week x 52 weeks = $26,000 minimum (more when factoring other costs mentioned in 1.) annual increase in cost without a connected increase in productivity, sales or profit.
3. If the business was employing people at $12.50/hour and it employed 25 people at those wages they would each be earning $26,000/year.
4. The arbitrary increase in wages, without an increase profit, will cause the business owner to either let one person go or to reduce incentives such as insurances and retirement. If they did not decrease their workforce, then they would need to increase the price of their goods or services. This would cause the cost of goods to their employees and others to go up, thus eliminating the "good" of the mandated increase in hourly wages.
5. This increases unemployment, whether through layoffs or the inability to hire new people in an expanding population.
Those Already Making More...
There are two more areas in which this artificial wage increase will affect both the costs to businesses and the cost of goods and services to the end consumer. It involves the baseline concept, which sets the bottom level from which all other levels are set upon. If it is artificially raised, regardless of intent, it will cause other levels to rise as well, and this includes the prices of goods and services.
The first is the existing employee who has been employed for a period of time and has, through time and effort, attained an hourly wage above the current government dictated minimum. For instance, lets say the current minimum wage is $7.25 per hour. Now Employee X has worked at his place of employment for a period of time and has excelled at his position and has had his pay increased to $8.25 an hour. Now, the government decides to arbitrarily raise the mandated minimum wage to $8.25. The new, entry level employee will receive the new $8.25 wage which is the same as the existing employee's wage after having proved himself at his position. This is not fair to the existing employee and will be rectified by the employer being effectively forced to raise the original employee's wages by the same $1.00 per hour. This, as explained earlier, will increase the cost of goods and services to the end consumer.
The second area where this type of increase occurs is in the union based positions. Most unions base pay, including the union leadership, is tied to the federal minimum wage. When it goes up, so does the base pay of union workers. This is one reason union leaderships fight for government mandated minimum wages. When their pay goes up it also increases the costs of goods and services to the end consumer.
A Reduction in Liberty
Finally, the government mandated minimum wages is an attack on liberty. It removes the ability of a citizen from being able to accept a wage lower than that which is federally mandated, even if the person applying for the job chooses to do so. Why would someone choose to take a lower wage? If the minimum wage was $10 and a person felt confident that they could effectively succeed in a position and move up in the company if they could just get their foot in the door they should have that option. They should have the freedom to negotiate their own deal with the company if they so choose. The free-market works on both sides of the equation and that freedom should not be taken away by the government.
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