Part of the “COVID relief” plan being pushed by the Biden team and the Democrats includes a provision to increase the federal minimum wage over the next several years. It would eventually hit $15 and then increase by the rate of inflation (as calculated by the government) after that.
If you follow free market economics, I don’t need to tell you that this is a bad thing. All else being equal, a higher minimum wage will increase unemployment, particularly for those with fewer skills. This is assuming that the minimum wage is high enough to mean something. A minimum wage of $2 per hour in the United States would have virtually no impact.
Having a minimum wage job doesn’t mean that an employer has to give a job to an employee. It only means that the employer has to pay at least a certain amount in order to abide by the law ifthe employer hires someone. In other words, a minimum wage doesn’t guarantee anyone a job. It just guarantees a minimum wage if you can get a job.
It’s also interesting that a minimum wage can sometimes lead to worse working conditions. An employer has to account for all costs, including benefits and working conditions. If an employer is forced to pay more for someone than the market demands, then the employer may reduce other benefits or not provide as good of working conditions.
This is easier to see in third-world countries. Think of a group of people working in a factory. The employer can get air conditioning installed to make it cooler, but it would mean lower pay. Most employees will not choose the lower pay, especially when they are barely able to afford food and clothes for their children.
Someone working in the United States may not realize that their pay is impacted based on better working conditions. Employees in an office automatically assume they will be working at a comfortable temperature in a comfortable chair with reasonably pleasant surroundings. If some employer offered a dumpy office for a workplace but paid a little more, most people wouldn’t accept it. They would work somewhere else. An extra couple of dollars per day in pay wouldn’t be worth it because most Americans with a job can put food on the table and more.
One Size Fits All
A federal minimum wage is particularly bad, as it does not take into account differences between regions. We live in a country of about 330 million people. Does a $15 minimum wage mean the same thing in Silicon Valley as it does in rural Alabama?
Perhaps this is the Democrats way of thumbing their nose at the red states. Maybe it is payback for Trump eliminating deductions for people living in high-cost and high-tax blue states. It certainly would seem that a higher federal minimum wage will disproportionately hurt red states more than blue states.
Many people really do support this measure just because they are ignorant in economics. They think wages can magically be raised through the law (i.e., government force). Wages, as a whole, can only be raised through productivity.
A similar minimum wage measure was recently passed in Florida in the 2020 election. The minimum wage will eventually be raised to 15 dollars per hour.
The interesting thing is that, in order for the amendment to pass, it needed at least 60% voter approval. In 2020, Trump won the state of Florida. This means that at least 20% of the people who voted for Trump also voted to massively hike the minimum wage, and this is based on the assumption that everyone who didn’t vote for Trump voted to hike the minimum wage.
Good News, Bad News
At this point, I don’t think that a $15 minimum wage will pass Congress. The Senate is split 50-50. They would probably need every Democrat to support it. There are a handful of senators from conservative states (not to be confused with conservative senators), who have to show some restraint to their constituents. They would more likely support some kind of middle ground. Maybe we’ll end up seeing something like a $12 minimum wage phased in over several years.
Even if a $15 federal minimum wage is passed, I have some good news, although it is probably very bad news in other ways.
I said that increasing the minimum wage will increase unemployment, all else being equal. Well, fortunately or unfortunately, not all else is equal.
The Federal Reserve has exploded its balance sheet by over $3 trillion in less than 12 months, and its stated goal is to continue to create new money by at least $120 billion per month for the foreseeable future.
While this is very bad economic policy, one bad policy may end up negating another bad policy. If monetary inflation continues to explode, and price inflation eventually follows to some degree, then the dollar will massively depreciate.
If prices double over the next five years, then the whole increase in the minimum wage is effectively nullified by Fed policy.
Even more, if a built-in cost of living increase is included once the minimum wage hits $15, then it will be reliant on the government’s statistics. The government has a habit of understating price inflation figures, especially when they have to pay out Social Security checks based on this. So if price inflation is at 5% and the government says it’s at 3%, then the minimum wage will increase by 3%, which will actually be a reduction in real terms.
And the government will have difficulty coming in and saying their inflation numbers have been wrong, because it will just make Social Security recipients mad that they’ve been cheated. When was the last time you heard a government official with any power say that the inflation rate is understated?
Congress could set the minimum wage to a cost-of-living adjustment right now, and I would see that as positive. It makes it harder for them to come back in the future and change it while the minimum wage is slowly going down in real terms.
So while the Fed is wrecking the economy and making most everyone poorer in the long run, at least they are negating one bad policy coming out of Washington DC. The minimum wage will become the depreciated wage.