The minimum wage is currently $7.25.
The unemployment rate is currently 7.4%.
These figures have more than the number seven in common.
The idea behind FDR’s 1938 establishment of the minimum wage was simple: increase the earning power of workers. In theory that sounds great; I mean, who wouldn’t want more money? But why don’t we raise the minimum wage to $20? Heck, why stop there? Why not raise it to $100?
Numbers like these help to more clearly illustrate the red headed step brother of minimum wage: Unemployment.
Behind every worker is an employer. Businesses will only operate when revenues are greater than expenses. In other words, they need to make a profit:
Revenues- Expenses = Profit
When hourly pay is increased, expenses rise accordingly. For some businesses, expenses become greater than revenues. If that trend continues for a prolonged period of time, the businesses will eventually close their doors and layoff their workers. As fewer businesses operate, fewer workers are needed.
Note: The difference between Supply for workers and the Demand is Unemployment.
If the minimum wage was lower- or better yet, did not exist- more businesses would be able to afford workers. Cheaper businesses would operate, and the forces of supply and demand would determine the “minimum wage.” Given the choice between unemployment and a lower wage, I venture to say workers would select the latter.
Legislation like the Fair Labor Standards Act of 1938 is often enacted with good intentions. Unfortunately, good intentions are not synonymous with good ideas; the fallacy of the minimum wage is an unfortunate example of this fact.
Like this post? Then you’ll love A Common Sense Guide to the Economy by Thomas Sowell.