There are many types of employment markets which exist at present.
1) Fungible work can be done by any person with a very low replacement cost.
2) Skilled work can be done by most people but there is a high cost to entry for new skiled workers. Replacement cost of a skilled worker with an already skilled worker is low.
3) Regulated work can be done by many people but there is a very high cost to entry for new workers. Replacement cost of a regulated worker with an exisitng regulated worker is low.
The current minimum wage directly affects businesses and employees which participate in the fungible work market or which employ trainees for skilled or regulated work. The effect of the minimum wage is to increase the cost to businesses of hiring workers that perform fungible work and to increase the cost of hiring workers to train for skilled or regulated work. The only way that a business can exist is if it is profitable so any affected business will have to try to increase the price of its products and/or services. If the products and services are offered in a competitve market with competitors that do not have to pay a minimum wage, then demand for the products and services provided by the business will fall as the price increases and the business will have to cut production which will commonly include eliminating some of the fungible work jobs. If the products and services are offered in a market in which all of the participants are affected by the minimum wage, then the cost of the products and services will raise everywhere in the market. If these products and services are unnecessary, then demand will fall when the price increases and businesses will have to cut production and therefore workers. If these products and services are necessary (like food and shelter) then the demand will not fall, but the purchasing power of the currency used to pay the minimum wage will fall. Thus the effects of a minimum wage will be the following two things:
1) Production will be decreased and fungible work or training jobs will be eliminated.
2) The cost of necessities produced by fungible work will raise and thus the purchasing power of the currency will decrease.
These effects may initially benefit the minimum wage employees that happen to get to keep their jobs, but harms every single other person in the market. The worse off are the employees whose jobs are eliminated, because they lose their income and inflation increases the prices for all necessities. Workers in the skilled and regulated markets are hurt to a small degree by having to pay more for their necessities.
However, even the benefit to the minimum wage employee also is questionable. Businesses have to try to maximize profits, and have to be able to predict future profits. The businesses that produce basic manufactured goods like lumber and steel have a low profit margins to begin with and must operate at the highest efficiency. These businesses, when hit with something like a minimum wage increase (sometimes combined with a clean air act and other regulations) will decide and largely have decided to move their operations to different labor markets in other countries. This has destroyed thousands of jobs and has ruined many urban centers of the US. In all of these cases, the minimum wage workers expected to get the benefit, but instead got the worse consequence of a minimum wage hike: Increased inflation and loss of income.
In addition to companies packing up and moving to another country, there is the alternative of automation. An automated process replaces one or more fungible workers with machines. In order to automate a process, a business must pay a high initial cost and then a reasonable periodic maintenance cost. Thus the “wage” of a machine is the loan payments for the installation cost plus the periodic maintenance cost. If this “wage” is less than the minimum wage of the employees that would be replaced, then the business would be sacrificing profit if it did not install the automation. In a market without minimum wage, the wages for fungible workers would be at their lowest level, and thus the job eliminating replacement with automation would be delayed until the cost of the automation decreases or until workers are no longer willing to accept the low wages.
Thus, the minimum wage provides only a small benefit (increased income but decreased purchasing power) to some workers in the fungible work market, but eliminates many of those same jobs by forcing a decrease in production, encouraging outsourcing, and encouraging automation. In a sense, the minimum wage for the workers is like a bunch of steers fenced in a small area being given a required minimum feed by ranchers. As the required minimum feed is increased, the ranchers have to shovel more, which makes them hungrier. A higher required minimum feed thus benefits the steers little and causes some of the steers to disappear to the butcher. Smart steers thus wouldn’t want increased feed, smart steers would want lowered fences.
Copyright © 2017 Jonathan Hart