From a political perspective anywhere in the world, the raising of minimum wages has always been popular. Why? Because it give the poorest voting segment of the population a break in their though life. It is also popular with politicians because it allows them to buy the maximum amount of vote with the minimum government expenditure, namely zero. This is so because minimum wages always burden the private sector, not the public sector who can afford to pay over-minimum wages since they have the magic machine to print money out of thin air. Let’s take a look at the real cost of this exercise.
DEVELOPED NATIONS
From an industrialized-nations point of view (this is roughly G8’s), the raising – scratch that- the existence of minimum wages creates all kinds of problems that impacts us all. Namely:
- They raise prices. Businesses are compelled to pass on to the customers their extra expenditures since people needs to keep buying necessities (in economic parlance, the demand is elastic).
- The create unemployment. Any person whose skill level is under the minimum wage won’t be hired. Why would any business pay more for less skill if they can get a better skilled person. The hardest hit is the youth.
- They increase taxes. As the minimum wage is insufficient to support life, the government steps in providing subsidies and welfare… which are obtained through taxes or inflation (a hidden tax).
- They decrease economic activity. As taxation (and inflation) increases, people have less money to spend, therefore economic activity decreases and we all lose.
- They create more unemployment. As economic activity decreases, less people are hired and raises are frozen. This creates even more unemployment.
- They increase taxes yet again. As economic activity decreases, the government receives less income from taxes therefore they raise them.
- They reduce worker’s productivity. A worker earning minimum wage has no incentive to improve oneself and therefore better his/her economic stand. This means that worker productivity remains flat at minimum wage levels.
UNDER-DEVLOPED NATIONS
In the rest of the world the rules are vastly different. If we take a look at any so-called “second” or “third” world countries, you will find that minimum wages (if any) are patently insufficient to support life. Furthermore, there are no meaningful government subsidies of any kind. Therefore, for any intent and purpose, those nascent markets are minimum-wage free. It would be only fair to see how people are doing in such markets. Let’s remember that the real test of a theory is how well it does in the worst-case scenario, not in the best one. And so, if we take a look at the lives of the middle class (going towards ¼) in such countries, we find out that it is incredibly and unspeakably harsh. Should then a minimum wage be justified in such conditions? The answer is still no. Two reasons:
1 – In such countries prices are critical. People can barely afford to buy minimum necessities. Any price increase of any kind will do more harm than good.
2 – We must remember that such countries are typically inflicted with the most devastating economic force there is: inflation. If we study their boom and bust cycles we notice that as soon as inflation is brought close to zero, wages increase naturally!
We can see this in the following picture:
Phase #1: Starting point for wage’s Purchasing Power
Phase #2: As inflation increases it spurs economic activity and wage’s Purchasing Power increases.
Phase #3: As inflation begins to hamper economic activity, wage’s Purchasing Power begins to decrease.
Phase #4: After the crash and the “economic stabilization du-jour” a relative inflation-free period sets in, where wage’s Purchasing Power increases.
OTHER SOLUTIONS
Slow increase of minimum wages
This solution has been proposed based on faulty economic studies. The reality is that increases in minimum wages respond to Purchasing Power decreases and these are clearly caused by inflation. Slow increases in minimum wages only decreases economic activity, which decreases tax collection, which hits budgets, which prompts governments to print, which increases inflation. At this point we have come full circle.
A slow increase in minimum wages, particularly in under-developed countries, only creates more misery for those on minimum wages.
Education
Education is not the answer. Most successful entrepreneurs lack higher education and they are doing just fine.
CONCLUSION
And so, even in under-developed countries minimum wages are a terrible idea. What is required is honest money which creates growing economies. These, in turn, naturally raise wages.
And yet again we reach the same conclusion. It is the government’s doing that creates the conditions that would “necessitate” minimum wages. The solution is not to increase them, but to get rid of governments, or at least switch to a non-counterfeitable, honest money: gold.
Note: please see the Glossary if you are unfamiliar with certain words.