Monday, May 6, 2013

Minnesota Needs Mises Not Minimum Wage Laws

The Minnesota House of Representatives passed a bill last Friday that could give Minnesota the highest minimum wage rates in the United States:
"Under the plan, Minnesota’s minimum wage for companies with $500,000 or more in earnings would go to $8 this summer, $9 a year later and $9.50 in 2015. After that, it would rise according to inflation, with possible yearly bumps up to 2.5 percent."
Although the bill is not law yet, its legislative advancement is no doubt celebrated by many as a victory for low wage workers. However, minimum wage laws actually achieve unintended results that end up hurting the entire population.

Economist Ludwig von Mises skillfully explains the situation in only 12 words: "As wages rise, so must the costs of production and also prices." Workers gain an increase in pay due to individual performance towards a productive end. By not allowing wages to rise and fall naturally as businesses attempt to produce to meet consumer demand, minimum wage laws simply make production, labor and consumption more expensive.

Companies are forced to compensate for a government-mandated higher wage rate by setting higher prices in order to maintain their cost of production. This makes prices go up for every class of buyer, including the minimum wage earner who recently saw the now-fleeted raise in his or her pay. The increase in prices forces everyone to consume less and subsequently causes demand to fall. This decrease in the consumer's demand for products sees an equal decrease in an employer's demand for labor. Many of the workers who initially supported the State-enforced increase of their minimum wage now find themselves unemployed because companies can no longer afford to keep them. Meanwhile, current job-seekers cannot gain employment because employers cannot afford to employ new workers at the higher wage rate. Since inflation is seemingly endless, this specific bill will continually "bump" up wages in accordance with inflation and reengage this cycle of unemployment and higher prices for years to come.

Proponents of this minimum wage bill are incorrect when claiming that its only effects will be an increase in pay for minimum wage earners. Raising the minimum wage will result in higher unemployment and higher prices which will hurt workers (especially low wage earners) but also businesses and consumers alike. Clearly, Minnesota should heed the economic guidance of Ludwig von Mises and not bow to more legislative interference into the market.

Thanks to Oakdale Patch for also running this piece.

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