Minimum wage

The New York Times reported this morning that a number of liberal Democratic politicians want to increase the minimum wage from $7.25 to as much as $10.

This proposed increase is in the midst of the weakest economic recovery since the Great Depression and stubbornly high unemployment. Under classical economic theory, an increase in wages leads to decrease in employment. So an increase in the minimum wage would cause the unemployment rate to increase and national income to decline.

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However, the liberals have perverted classical economic theory. They maintain that an increase in wages will not reduce employment but will increase employment because low-income workers will have more money to spend and that will increase jobs.

They fail to recognize that increased wages must come from somewhere. It will either come from the employer or consumer. If it comes from the employer, their retained profits to finance growth will be reduced. Hence their investments will decline, and their ability to hire new employees reduced. If it comes from the consumer in the form of higher prices to finance the higher wages, they will buy less with their money.

There is no free lunch. If the liberals’ theory of increasing the minimum wage would increase employment and national income, why not raise the minimum wage to $100 per hour? Clearly it would bankrupt most businesses and price most consumer products and services out of the reach of consumers.