Artificially imposed minimum wages, like those mandated by the government through the implementation of minimum wage legislation, will cause prices to increase. This increase will inevitably cause the government to react with still more increases to the minimum wage. This cycle, over time, reduces the value of any pay increases by increasing the cost of goods and services. The cycle defeats the purpose of the ill-conceived minimum wage. While the minimum wage may sound good on it's surface, it is partially responsible for the increased price of goods and services.
A company, that intends to stay in business, grow and hire people, must incorporate the costs of doing business into the price at which they sell their products or services. This includes, but is not limited to, cost of raw materials, rent, taxes, utilities and wages. Employee compensation makes up the lion share of most businesses expenses. When there is an increase to any of a businesses expenses they must, in order to to remain in business, increase what they charge for their goods and services.
When an artificial means of raising wages occurs, such as a governmental or union imposed minimum wages, an artificial, but no less real, increase in the prices of goods and services occurs. At this point the increased wages are offset by the increased prices. This cycle continues the upward spiral of price increases. While it is not the only factor in this economic "smoke and mirror" game, it is one of the three main reasons along with taxes and over regulation.
To show this more clearly, lets assume Company A produces Product X. Product X costs $5 dollars to get to market. This factors in raw materials, rent, utilities, marketing, taxes, wages and any other cost factors. At this price, Company A stays in business and perhaps can even expand and hire more people. Now let's assume that people have willingly agreed to work for Company A for $6.50/hr. Then, through government intervention, a minimum wage is instituted at $7.50/hr. There is an immediate cost increase to Company A and, therefor, the need to raise the price of Product X. It now cost that same customer more for Product X as well as for every other product and service they purchase. The artificial wage increase is eaten away by the necessary price increases.
But, it doesn't stop with the immediate cost increase in Company A's payroll. All of Company A's cost go up as a result of their vendor costs going up because of the wage increases as well. Utility costs, raw materials, insurances all go up. Now the artificially increased wage is completely wiped out. And the cycle continues. The buying power of each dollar goes down.
If the market were to dictate wages then prices would remain lower. If a business could hire people, willing to work, for the wage needed to produce the products and services at a lower price point, then there would be no need for artificial minimum wages. Those with great skills and special talents would get paid more based on the market needs for those skills and abilities. With lower prices, more goods could be purchased with same dollar.
Expanded and Extrapolated
If a government mandates that the minimum wage is to be increased by only $.50 per hour and a business employs 25 full-time people, this is the reality of that increase:
1. 40hrs/week x $.50/hour x 25 people = $500/week in increased costs for running the business without any increase in either productivity, sales or profit. This does not even include the increases attributed to the increased taxes and the previously recorded increases from their suppliers and utilities, which increases the costs even further.
2. $500/week x 52 weeks = $26,000 minimum (more when factoring other costs mentioned in 1.) annual increase in cost without a connected increase in productivity, sales or profit.
3. If the business was employing people at $12.50/hour and it employed 25 people at those wages they would each be earning $26,000/year.
4. The arbitrary increase in wages, without an increase profit, will cause the business owner to either let one person go or to reduce incentives such as insurances and retirement. If they did not decrease their workforce, then they would need to increase the price of their goods or services. This would cause the cost of goods to their employees and others to go up, thus eliminating the "good" of the mandated increase in hourly wages.
5. This increases unemployment, whether through layoffs or the inability to hire new people in an expanding population.
Those Already Making More...
There are two more areas in which this artificial wage increase will affect both the costs to businesses and the cost of goods and services to the end consumer. It involves the baseline concept, which sets the bottom level from which all other levels are set upon. If it is artificially raised, regardless of intent, it will cause other levels to rise as well, and this includes the prices of goods and services.
The first is the existing employee who has been employed for a period of time and has, through time and effort, attained an hourly wage above the current government dictated minimum. For instance, lets say the current minimum wage is $7.25 per hour. Now Employee X has worked at his place of employment for a period of time and has excelled at his position and has had his pay increased to $8.25 an hour. Now, the government decides to arbitrarily raise the mandated minimum wage to $8.25. The new, entry level employee will receive the new $8.25 wage which is the same as the existing employee's wage after having proved himself at his position. This is not fair to the existing employee and will be rectified by the employer being effectively forced to raise the original employee's wages by the same $1.00 per hour. This, as explained earlier, will increase the cost of goods and services to the end consumer.
The second area where this type of increase occurs is in the union based positions. Most unions base pay, including the union leadership, is tied to the federal minimum wage. When it goes up, so does the base pay of union workers. This is one reason union leaderships fight for government mandated minimum wages. When their pay goes up it also increases the costs of goods and services to the end consumer.
A Reduction in Liberty
Finally, the government mandated minimum wages is an attack on liberty. It removes the ability of a citizen from being able to accept a wage lower than that which is federally mandated, even if the person applying for the job chooses to do so. Why would someone choose to take a lower wage? If the minimum wage was $10 and a person felt confident that they could effectively succeed in a position and move up in the company if they could just get their foot in the door they should have that option. They should have the freedom to negotiate their own deal with the company if they so choose. The free-market works on both sides of the equation and that freedom should not be taken away by the government.
Does this affect you...
Mitch Alan (author) from South Jersey on November 17, 2014:
The actual facts are that if the cost of doing business increases, especially artificially, then the cost of goods and services produced by those businesses goes up...it's simple.
Now if you can explain how increased cost, that are not directly tied to increased production or efficiency, do not increase the costs of doing business, then please share...
Site the part of my article that are factually incorrect and I will address those points...please be specific.
Margo Arrowsmith on November 17, 2014:
I note that you used a lot of speculation and "common sense" in your article, but not one spec of actual fact. Of course, you couldn't do that because then you would have to come to a different conclusion.
Mitch Alan (author) from South Jersey on May 16, 2014:
LazyCPA, Thank you for your comments...agreed...
Minimum wages by government are "feel good" gimmicks to "buy" citizens and further manipulate both the economy and the people...
LazyCPA on May 16, 2014:
Our politicians (and many individuals) seem to employ a limited analysis when talking about raising the minimum wage and the idea that no one should work and live in poverty. While an employer may seek to keep wages as low as possible, there are costs to that strategy. Higher turnover, poor performance, etc. may very well lead to the employer deciding that it is worth the extra cost to pay a higher wage to attract more skilled labor, more motivated employees, and reduce turnover, etc. Meanwhile, the employee wants to earn as much as possible in return for their labor. This should motivate the employee to take action to develop job skills that the employer desires, prove their worth to the employer so that the employer will want to take steps necessary to keep that employee. Introducing a higher minimum wage, will probably have the unintended side affect of causing the employer to seek other less costly substitutes for that now more costly labor. The employer may invest in technology or other labor saving devices and reduce the level of jobs available. Unfortunately, in this argument what is normally lost in the discussion is how important that first job is (no matter how poorly paying) to getting that young person into the labor force to begin learning meaningful skills. While flipping burgers or stocking shelves in and of itself will not provide a pathway to higher paying work, the knowledge gained from working as a team member, learning to take orders, learning to be reliable, etc. - all help to move a person forward.
Mitch Alan (author) from South Jersey on March 03, 2014:
The business should be the one who determines what they offer in trade for labor...and the potential employee should have right to accept any offer...
chel reyes on March 03, 2014:
who is responsible in wage increase?. the government or the employer?
Mitch Alan (author) from South Jersey on March 24, 2013:
wba, agreed...thanks for reading.
email@example.com from upstate, NY on March 24, 2013:
Any time the government intrudes in the marketplace, market distortions occur. One important consequence of raising the minimum wage is that employers hire less people. Minorities, poor and young people also fail to gain valuable work experience necessary for stable employment,especially early in their career's. All this does is feed into the cycle of dependancy, which in turn calls for more government intrusions in the future.
Mitch Alan (author) from South Jersey on February 24, 2013:
"lifestyle they've decided their entitled to"? First, why shouldn't a person who starts a business and invests their capital, both financial, sweat and knowledge, into a business not expect to reap whatever rewards there are? Secondly, you do realize that many small to midsized business owners, the majority of businesses in America, don't live in excess...and if they did, so what, it's their money.
What other than the agreement between employee and employer should decide the "distribution" of money? If you are forced to pay someone more than your feel they are worth to you business, is that not theft?
If there is no increase in production or profits where do the funds come from? Take the Expanded and Extrapolated section of my article and apply it to a business AND to their suppliers business and see where it leads. There will either be a reduction in employees, as the most costly part of most businesses, or the increase in the prices of the goods and services they provide. There is no way around this fact of economics unless you believe in a socialist, government run market. I for one do not.
Greg on February 24, 2013:
As for the criteria about what a living wage is, it shouldn't be figured at what will get a single person by if your society's aim is to encourage reproduction in any way. The minimum should make the assumption that you are married, have maybe 2 kids, 3 tops if you ask me. If you choose to reproduce like rabbits, society at large shouldn't have to eat the cost, but minimum incomes should guarantee working people with reasonably modest sized families are paid enough to afford food, shelter and the means to get to work to continue to earn money.
Sort of a moot point to argue here in the US though, since healthcare costs could clean out the bank accounts of even lower middle class people.
Greg on February 24, 2013:
You even said it yourself: the businesses "compensating" is the act that actually raises the price. It's not the raising of the wage, it's the reaction of people who are upset about losing money that actually raises prices.
In part, I'd admit this isn't entirely just the reaction of a spoiled greedy tyrant taking back what they want (though in some ways that's part of it). A big part of the problem is that most businesses are corporations which are legally mandated to increase profits--and a law raising the minimum wage conflicts with that because it orders the business to PAY OUT more than it planned to. The law is almost giving conflicting directives then, because labor is usually a companies biggest expense and you won't find many decisions that offset that increased cost.
Greg on February 24, 2013:
We can argue about what is statistically a "livable wage" all the livelong day, but the conditions that make it livable will change while we do.
The reason the minimum wage drives up prices is because it was invented as a way to force a more fair distribution of profit but doesn't prevent people from turning around and charging more just because they know lots of people have more money afterwards. We basically justify the act by saying to wealthy: "You're living comfortably by forcing others into poverty and we won't allow it" but then do nothing as they do whatever they have to to recoup the money they perceive as unjustly redistributed away from them. Problem is, when every business raises their prices to make that which was "stolen from them" back so that they may again live the lifestyle they've decided they're entitled to, EVERY BUSINESS is taking "just a little more" from everybody to compensate, which collectively winds up taking more money out of everyone's pocket than before the point the minimum wage was raised.
Mitch Alan (author) from South Jersey on February 24, 2013:
Greg, Can you define "living wage" by giving a specific dollar amount? Is this a wage for a single person? One of two parents working? What factors determine this wage?
What happens when this artificial wage increase is instituted by force without an increase in sales or productivity and the prices to the end consumer go up to compensate and the "raise" gets eaten up? Do we then pick an other arbitrary number to raise the wage to?
Greg on February 24, 2013:
Actually, since "entry level jobs" account for the vast majority of the workforce, and the exponentially less common skilled positions become occupied long-term, preventing the upward mobility of anyone beneath, I'd say entry level jobs damn well BETTER pay a living wage. A lot of people will never get out of them, and not for a lack of effort. It's simple statistics.
Mitch Alan (author) from South Jersey on September 09, 2012:
March of 2011...why?
mak on September 09, 2012:
when was this article published
Mitch Alan (author) from South Jersey on September 06, 2012:
You have to remember that initially the reason companies offered things such as paid vacation, insurance, car allowance etc as "perks" were to entice the best person for the job. If you owned a business you would try to attract the best people for the positions you had available, right? You would offer more than your competitor IF you saw the value in a certain person and what you believed they would bring to the table. YOU would be deciding their worth to YOUR business. Would you offer Person A more than your competitor if you thought that Person A would increase your business by that amount or more? Of course you would. That is capitalism at it's best.
Also, it is important to remember that entry level jobs are just that...a start. They should not be used as the barometer for "living wage".
Angelina-D on September 05, 2012:
It all makes sense..I am sure mandated minimum wage DOES cause price increase.. but would you want to leave it up to a company to offer fair wages on its own??? I don't believe the majority of them would.....too greedy.
Mitch Alan (author) from South Jersey on March 20, 2011:
A few questions:
Can you, using logic and real world economics, show a scenerio where price do NOT go up as a result of increased costs of production?
And, do you honestly believe that free market of supply and demand is the same as slavery? On system allows all individuals to freely decide what pay to offer and what pay to accept, while the other allow does not allow freedom at all.
Your conclusions and accusations are neither logical, nor historically grounded.
Ryan on March 19, 2011:
If higher wages equal higher prices, I assume you subscribe to the opposite: lower wages equals lowers prices. Perhaps we should make slavey legal again. Those Confederates were onto something.