Wednesday, January 26, 2005

Minimum Wage Lunacy

This week the State's Democrats proposed increasing the state minimum wage from $5.15 an hour to $7.15 an hour over two years.

We're dumbfounded. We can't understand what they are thinking. The Democrats in Michigan (with the help of the Republicans) are responsible for the over-protection of unions in this state. Those unions have created a business atmosphere where wages are so high that manufacturers are fleeing the state in droves. Artificially high wages have created unemployment.

Michigan's unemployment rate stands at 7.3%. That ties us with Alaska for the highest unemployment rate in the nation. The failed economic policies of union favoritism are coming home to roost.

But now, what do they propose? More of the same! Raising the minimum wage increases employers' costs. When employers are forced to pay more for labor, they will hire fewer people. This will further increase unemployment and decrease economic productivity.

See: Unemployment: Causes and Cures.

As an example: suppose you're a small business owner. You have four employees making $5.15 an hour. That's about $164 a day in labor cost (plus the expense of payroll taxes). If the minimum wage goes up to $7.15 an hour, that's $228 in labor cost a day. What is a small business owner to do? That's a 40% increase in labor costs. His choice is to either raise prices (probably close to that 40%, which most business owners know is suicide) or to fire one or two people. If he fires one person, his costs go down by about $57 a day, reducing the total to $171. That's a lot easier to recover in price increases. Plus, a little more productivity from those three remaining employees will probably cover the loss of one.

What just happened? The increased minimum wage accomplished two things:

1) it increased unemployment
2) it increased prices

Particularly hard-hit are black and latino minorities, which already have higher unemployment rates. So what the Democrats propose to do disproportionately harms the very people they claim to want to help most.

We are forced to conclude that Democrats' behavior is motivated by one of the following:

1) Complete ignorance of economics, or
2) A desire to further harm the economy of Michigan, or
3) A desire to look like the party of the poor people.

We believe it's probably a combination of 1 and 3. However, their economic ignorance (or ideological bankruptcy) causes the opposite of the desired effect. Is Michigan consigned to a perpetual state of economic funk?

See also: Michigan Wage Hike Threatens Already Fragile Economy.

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