NEW YORK (TheStreet) -- A year ago I explained why the minimum wage hurts those it's designed to help. The article generated over a thousand comments on Yahoo! Finance and a response in Huffington Post.
With the recent ill-conceived agitation by proponents, it's a good time to revisit the issue.
Many don't understand or ignore the various negative impacts of a minimum wage. I leave emotion at the door and focus on logic as I explain why a minimum wage above fair market rates is bad policy.
Most people think of the minimum wage backwards. They think it's a law placed on consumers (businesses) when, in fact, it's a law that restricts the sale of services from providers (employees). The confusion is understandable because the consequences of violating minimum wage laws fall exclusively on the purchaser. It's akin to the police witnessing an illegal drug buy on the sidewalk and only punishing the buyer and letting the seller keep the cash received.
To better understand the impact of minimum wages on employees, let's look at an everyday example that can be applied to any business, large or small.
Rocco wants to go into business and start a lawn care service. He knocks on doors and places ads in Facebook (FB), Google (GOOG), Craigslist, and tweets on Twitter (TWTR) that he charges $10 per lawn to mow and trim. He knows most of his competition is charging $15 per lawn and to get started he will offer a competitive price.
Rocco also knows there are some people who aren't willing to pay $15 but are willing to pay $10 per hour. I think we can all agree that anyone who isn't willing to pay at least $10 isn't going to call. They may have a cheaper service or choose not to use a paid service. We can also agree that the lower price expands the market demand from buyers willing to pay $10, but not $15 -- simple economics 101.
Homeowners are happy because they can now afford to have their lawns cut and can spend their time with leisure activities and or more productive endeavors. Rocco is happy because he is busy making what he believes is fair compensation for his services and everyone is smiling. Well, almost everyone.
While the market does expand, resulting in more lawn care demand, Rocco places pricing pressure on some of his competitors. Some of his competitors' services are not superior enough to justify the higher price, and soon Rocco is taking business away.