Wednesday, August 02, 2006

Minimum Labor Cost

An increase in the minimum wage will always result in lower employment because the demand curve slopes downward. However, a wage increase now will probably not reduce employment as much as expected, most of it will be passed on to consumers. We have recently had an extinction event. We had a bubble where labor costs rose out of control until the bubble burst. The fittest companies that could control costs survived, the rest did not. Most employers now can control costs well, and will just pass on an increase in labor costs to consumers. Those employers that cannot control costs and would have to pass them to investors or reduce employment died in the bust. This is why profits have reached record highs and will continue to be strong for a long time.

The minimum wage is paid disproportionately by the poorest consumers. Poor families will be hurt more as consumers than they will gain as workers. A single mother of two, for example, will benefit once from a wage increase but will pay for it three times. Raising the minimum wage will also make legal workers and employers even more uncompetitive against illegals.

A minimum wage increase is an increase in the cost of living of the poorest Americans.


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