Saturday, June 03, 2006

Minimum wage bunkum

Yesterday, the News & Observer had an article praising the North Carolina Legislature for passing an increase in the minimum wage. At one point they say "a raise might enable some of those workers to buy more goods and services themselves, thus stimulating the economy for everyone." Typical of the N&O they fail to see the total effect of this policy.

Increasing the minimum wage, all things being equal, does nothing to increase the supply of goods and services. So, the increased consumption which they consider a benefit will actually have the effect of increasing demand for the current supply of goods and services, thereby putting an upward pressure on prices. In the end those people who the policy intends to help will have higher nominal wages, but their real wages will be the same or lower.

We should be looking to increase real wages by increasing the supply of goods and services, which will put downward pressure on prices. Raising costs for producers will do nothing to achieve this goal.

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