Why Raising the Minimum Wage is Not A Panacea

I've read lots of dry, dull economist drivel regarding why raising the minimum wage isn't the cure-all many folks (mostly Democrats) make it out to be, and how it ultimately ends up hurting most the people it purports to "help" (i.e., lower-class low-wage earners). Mrs. DuToit has said it easily and in understandable English in a single post better than any economist I've seen, so enjoy her Minimum Wage chapter of Economics 101.

"So, say the Democrats, Let’s give them more money!

The minimum wage is raised to $7.50 an hour, which increases the family’s net income to $28,000 a year, or $630 a month.

That $2.00 an hour increase represents a 26% increase.

Great! They can buy more stuff!

Except, of course, that every business owner just had a 26% increase in their costs of minimum wage labor. The businesses that have the lowest wage workers are also the businesses that make the categories of items that the family already had very little wiggle room (housing, food, clothing, and transportation). Since a business owner, especially in something like grocery or food, doesn’t have the profit margins to absorb that, they have to make some changes in their prices.

The other way the business owner will respond to the increase will be to reduce his labor costs by cutting staff, or reducing hours. Across the board, that will represent about a 5% reduction in hours. So our minimum wage worker, who was working full time (2,080 hours a year), was just reduced to 1,976 hours.

That means that the family’s $639 a month increase, just got cut to $520, a net increase of 24%.

But his costs went up by 25%, a net loss of 1%.

And the death spiral begins.

In spending power then, the minimum wage earner is the one who experiences the greatest loss.

But they got a raise! We forced those greedy business owners to give them more money, and they’ll remember that come election day!

And the Evil Party retains power."