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The Truth About Minimum Wage

Updated on October 31, 2017

Is enough ever enough?

Since the dawn of mankind there has existed a great divide between those in the upper class who have plenty, and those in the lower class who have very little. In an effort to reduce the gap between the rich and the poor, many advocates have lobbied the government to raise the minimum wage for lower earning workers. On its surface, an increase in minimum wage will help to increase the stability of the less fortunate, which is often times, the focal point of nearly all debates about it. However, the long term effects can and will have a profoundly different result.

Minimum Wage in the short run

Have you ever said to yourself, "I could sure use a pay raise"? Sure you have. As have most Americans. This is the fundamental core of why the government chose to increase the minimum wage in America in the first place. Even further, many states have chosen to adopt a minimum wage that is higher than the Federal minimum wage. The cost of living in many places has simply exceeded the earning power of the average impoverished US citizen. The idea behind increasing the minimum wage was to create a more competitive job market whereas employers could attract more skilled workers who were capable of performing certain tasks as well as raise the baseline income of the less fortunate family to be able to afford the higher cost of living.

Hooray! Victory for the little people.

I am certain that after New York decided to make their minimum wage $12 an hour, there were a lot of minimum wage workers that felt a huge relief come upon them. The idea, in many cases, that their income doubled, and they would now be able to feed their families, created a sense of hope that I fear will be short lived.

What is your opinion?

Do you feel that raising the minimum wage helps people in the long run?

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Now for the real impact

The US economy has doubled in the last 6 years since we began to come out of the Great recession in 2011. We saw a significant boom that occurred after the raising of the minimum wage. This was mostly due to, as economic forecasters predicted, the new disposable incomes that lower income families now have. This is a good thing right? Wrong. Simply put, people are spending more money due to the fact that they now earn more but the prices of goods are creeping up. This can most clearly be seen in the fast food markets. Oh the glory days when a Big Mac Meal at McDonalds was only $3.99. Did you know that the minimum wage back then was $4.75 per hour? That same meal today is $7.99. The cost to the consumer has doubled.

The Meat of it All

The fast food markets are only one example of how higher wages have driven higher costs to the consumer. Simply put, a company, despite the government's effort to increase the baseline wage for their workers, will not shrink their margins. Meaning that if a company holds that sixty five percent of their earnings be paid out for payroll, then whether at $4.75 per hour, or $8.25 per hour, that number still remains sixty five percent. Let's do the math. Let's assume that a company makes one product per employee per hour. That means their cost is $4.75 per unit of the product. Now assuming that sixty five percent is their margin, then the cost of that product is $7.31. Now let's assume the same rules apply at $8.25 per hour. The company has to raise their price to $12.69 per unit of product. More than a sixty eight percent increase.

Think about it

I want you to take a moment and let that sink in.

The Sum of all Fears

Ok, so I do not want to bore you to death with a bunch of math, but I do have one more number to share with you. The government's futile attempt to reduce the divide between the rich and the poor leads to this. Assuming the same numbers and rules I used in the example above, at a minimum wage of $4.75, this company makes a profit of $2.56 per unit. With the new minimum wage, the company now makes $4.44 per unit.

To sum it all up

The difference in the percentage increase between the worker and the company is very small, however it goes to show that we cannot solve this problem by merely changing the minimum wage that workers earn. I am in no way advocating for lower wages or stopping the conversation about minimum wage, however, in order to solve the problem, we have to create a culture of growth where workers are encouraged to and aided in seeking education that can lead to higher paying jobs. Invest in a social system that seeks to build our less fortunate into highly productive performers in the work place. As long as we keep putting the minimum wage Band-Aid on our income class system, the rich will continue to get richer, and the poor, well, they will just stay poor.

I would love to hear your thoughts.

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