The cry to increase minimum wage has been sweeping the nation. Of the proposed increase, President Barrack Obama said, “It would lift millions of people out of poverty right away. It would help millions more work their way out of poverty right away.”
While Obama’s argument that it would decrease poverty immediately could prove to be true, economics suggest this solution will prove to be fatal in the future. When minimum wage is increased, it creates a ceiling in the labor market. Ceilings create two problems:
1) More people are interested in jobs than before, which causes a shortage. There are not enough jobs available for the number of people who want to work. Essentially, the price of labor is too high for organizations to afford.
2) Increasing wages at the bottom of wage bands compresses the value of wages higher up in the organization. They would need to raise the wages of all their employees to make the minimum wage shift “fair.” This overall wage increase leads to inflation and, in the long run, job loss.
While the $10.10 hike could, as Obama suggests, lift millions of people out of poverty right away, in the long run the hike would cause further damage. The same people would fall back into poverty as inflation devaluates their earnings.
I hope I don’t sound too callous. I would love to see the poverty levels fall and to see more people happy and healthy. However, my knowledge of economics argues that raising the minimum wage to $10.10 is not the fix we need. We need a solution that will help, not hurt, America in the long run.