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.
The other lawn care providers are upset and begin protesting they can't make a living wage because others are willing to undercut what they claim is a fair price. They spend money lobbying elected officials and a minimum wage law is enacted that requires at least $17 per lawn. It's obvious that the increased demand from those unwilling to pay $15 but are willing to pay $10 will evaporate.
Some of the homeowners willing to pay $15 will not accept $17 and the market will contract to the relative degree. There's another impact that isn't easily identifiable, but economic theory dictates will happen. The prospect of making $17 a lawn instead of between $10-$15 entices others to enter the lawn care business. As a result, the competition for lawn care services intensifies from a greater supply of workers and decreased demand for service and a smaller pie dividend into smaller slices for each.
As the above example illustrates, minimum wage laws remove the freedom of suppliers and consumers to negotiate a market-based wage, and replace it with a centrally planned wage that ignores the needs of employees and employers.
Minimum wage proponents always fail to mention or take account for the absolute truth that a person or business placing a $1 value on a given unit of a product/service will either not buy above $1, or will actively seek out alternatives. Regardless of the input costs, businesses can only charge what the market is willing to pay.
Businesses must adjust their model to match what the consumer wants. If a country implements a minimum wage, production will move and/or consumer demand will fall. It's not just theory -- it's obvious in practice by observing container shipments. Seaspan (SSW), Hyundai Merchant Marine, and other container shipping companies arrive with full containers into U.S. ports and return to Asia at 20%-25% capacity.
Minimum wage laws have made it illegal for low-skilled (and many not low-skilled) employees to compete, and they are forced into unemployment. Adding salt to the wound, competition is increased because a higher wage naturally increases the supply of willing workers. At $7 per hour, based on their individual situation, some will determine that it's not worth it but others wanting $7 and job skills or a chance to demonstrate their abilities to move up will take it.
However, at $8 per hour, many not willing to work for $7 will enter the labor pool, displacing the lowest-skilled workers. The same people that many minimum wage advocates wrongly believe they are helping with their well-intended, albeit incorrect, strategy.
Unfortunately for entry-level job seekers, a minimum wage also results in foreigners competing for jobs right here at home. We live in a connected world and the higher the minimum wage, the more incentive illegal immigrants have to enter our labor pool. It's a one-two punch that helps explain why low-skill unemployment is higher than it should be.
Placing limitations on workers and what they are allowed to charge may have justification if at the end of the day a minimum wage actually helped those earning it. Alas, there is no Santa, and we cannot simply wish for a magical wealth gift to arrive in a pretty package. The additional above market wages cost to business is passed on in the prices charged. The net result is higher costs for everything from rent, food, electronics, and even lawn care service. We can loosely measure it through the McDonald's (MCD) Big Mac index.
It costs much less to buy a Big Mac in Hong Kong and Singapore compared to New York City. Comparable wages are lower in Hong Kong and Singapore, but so are relative costs of living. It should be obvious to all, including the Walmart (WMT) and McDonald's protestors that if retail employees are forced to charge more for their services, the costs will get passed on in the form of higher prices and or lower customer service.
The point is, all perceived gains from increasing the minimum wage are lost through increases in living expenses. Additionally, a whole host of unintended consequences are introduced. Hidden costs including increased border and immigration compliance costs, a lower standard of living for most wage earners paying higher prices while still having to compete in a global environment, higher unemployment compensation costs, and employee skillsets moving to other countries.
I can fully appreciate people wanting to help others, and so do I. The best way to accomplish a higher standard of living is to allow the free market to work its magnificent, not-so-invisible-hand magic that has lifted more people out of poverty than any other form of capital allocation and control. Central planning destroys wealth and jobs and is the last thing a low skilled worker needs if they want to improve their lot in life.
At the time of publication the author had no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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