Tuesday, December 19, 2006

Minimum Wage Silliness

Raising the minimum wage is pure silliness. State governments are falling over each other to raise the wage floor, preempting the federal government. This should have a minor economic impact in the current economic environment because they are not raising it above the equilibrium wage rate (true for most areas). Illegal immigrants picking vegetables in California make more than the federal minimum. Why? Because their output is worth more. The equilibrium rate has naturally risen above the minimum through efficiency which creates greater output.
The problems will start when we experience growth stagnation. When the next recession hits the higher minimum will cause a boom in unemployment. Why? Because if a worker is worth 6 dollars an hour and a business is forced to pay them 7 an hour they will cut their labor force.
In the short term teenagers will enjoy higher wages; in the long term unemployed bread winners will not be able to find a job.

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