Sometimes the duty to give money advice journeys into remote areas. This is one such example of that truth. Many people think that the debate over minimum wage won’t effect them at all, that is except those who make the minimum wage. The truth is that these laws are destructive and only sound good on the surface to those who don’t understand their consequences. In this post, I will explain two significant drawbacks to having a minimum wage law.
First, minimum wage laws decrease both the productivity and efficiency of businesses. For business owners, it presents a real conundrum. Imagine that you own a restaurant and you have to pay your chef the same wage as your dishwasher. Does that seem right? Does one employee have more important skills to the business than the other? The dishwasher only gathers and washes dishes, a skill that many people qualify for. Your chef can cook various high quality dishes and produces a product that makes most of the money for the business. Not everyone can cook well, so there are less people that could fill this role. The problem is that you have to pay both employees the same wage even though they’re not equal in terms of importance to the business. Worse, the business might be able to hire more people if it could set wages based on free market principles. There is historic proof that wage control laws create more unemployment than would exist in a free market.
The second negative consequence is inflation. Every time wages are raised, it increases costs for businesses because they have to pay more money to their staff. To maintain their profits the businesses are forced to react. These costs are then passed on to consumers in the form of price increases on all their products. This creates inflation for not only the people making minimum wage but also the general public. Because most minimum wage jobs are present in essential businesses like grocery stores, restaurants and retail outlets, it means wage costs rise for all of these businesses. This means that prices increase for everyone on most everyday items. This leaves everyone with less money that they can save and actually produces no net change in wealth in the end. What I’ve written here will shock most people but it’s 100% true.
Although almost everyone thinks that the minimum wage is a good thing, the result has historically proven to be higher levels of unemployment and higher prices on everyday goods. Truly free markets regulate themselves better and prevent these artificial consequences that were born out of good intentions. So as the minimum wage law debate rages, think twice about “watching what you wish for”. I encourage you to think about what you’ve read here and draw your own conclusion after your own self study. I am confident however, that you’ll arrive at the same conclusion that you have read here.
Jamie has an MBA from Rutgers University and a Professional Certificate in Real Estate Finance, Investment and Development from NYU. He’s traded stocks since he was 13 and bought his first property within a year of graduating college. He also flipped properties and got out before the 2008 mortgage meltdown because he was able to see the market turning before it happened. He’s started two companies and also has experience in investing in antiques, collectibles, gold, silver and trading futures.