Saving our economy is only a minimum wage hike away, according to James Galbraith. Galbraith is not the first to commit such a basic economic error, as we have pointed out. In Galbraith’s words:
“Raise the U.S. minimum wage. By a lot — let’s say, to $12 an hour, from the current rate of $7.25.”
At first glance, this sounds pretty good. But further analysis reveals it to be disastrous. Take the example of a teenage fast food worker. His boss happily pays them $7.25 an hour, the young worker increases revenues by $8 an hour with a winning smile at the register. At $12 an hour, the employee becomes unemployable, they are simply too expensive to hire.
This is nothing short of what actually happens when the minimum wage rises (everything else constant): unemployment. There are workers willing to work for less and employers willing to pay less, but the government keeps them from voluntarily trading labor for money. People willing to work for low wages now earn no wages thanks to government price fixing.
Galbraith, brushing aside such concerns, lists the perceived benefits of a $12 an hour wage.
“What would workers do with the raise? They’d spend it, creating jobs for other workers.”
Or, workers may save it. And don’t forget all the people who just lost their jobs, they now have no money to spend.
“Would this hurt competitiveness? Not at all. That’s an issue for manufactured goods and traded services like insurance and banking, sectors in which everyone already earns far more than $12 an hour. The jobs we’re talking about are in non-traded services like checkout clerks, haircutters, domestic help, and food-service workers — you can’t run a deep fryer in Terre Haute from Bangalore.”
A good point, but where is the increased money to pay for all of these high wages? Firms providing these services would have to raise prices so that revenues exceed costs. And this would would hurt everyone who used these services. Enjoy fast food? Have fun paying $12 for a hamburger and fries.
“Would prices go up? Some would. But rich people can afford it — and workers would have extra income to pay the higher prices, so most of them would come out ahead.”
Sorry to everyone who was laid off as a result of the wage hike, but you’re out of a job and prices just went up wherever people are employed at minimum wage.
Also, if prices go up, its not like the rich will keep spending money blindly, they’ll simply buy less. The less the buy, the less revenue, the more the firms have to cut costs, like expensive labor. If Galbraith’s logic is right, then why stop at $12? Why not go to $50! or $100!
People are getting serious about unemployment. Unfortunately, with this economic fallacy still around unemployment is here to stay.
For anyone who is interested, Fuller had a similar post a few weeks ago.