Democrat politicians and “economists” have found a wonderful populist issue for the the current election cycle – raising the minimum wage. The economists (including Krugman, Goolsbee, etc) make the argument that the most obvious, serious problem — loss of entry level jobs and non-hiring at new entry level positions — is not a significant factor, and they have even been able to marshal some studies to support this.
They then argue that the higher minimum wage puts more money into needy families and therefore strengthens the economy. This argument just happens to have a wonderful political effect for these Democrats: it makes them seem sensitive to the plight of the needy, while making Republicans look like shills for those greedy Republican businessmen who are only trying to squeeze every last dollar out of their poor employees.
Just one problem — the Democratic position is baloney, and the economists know it, because it is simple economics 101. No businessman would be willing to pay an employee more than the economic value of the employee.
Let’s assume that the rise in the minimum wage puts the cost of employee in excess of the value of that employee. The employer may then 1) terminate the employee (saving the excess of cost over productivity) or 2) buy equipment which, at that price, becomes cheaper than the employee.
But let’s say the employer keeps the employee, just paying him more for the same work he did before. The employer will then either a) earn a smaller return on his investment, reducing the amount he will be able to invest in the business in the future; b) he will raise his prices, which will maintain his profit margin, but will reduce his sales volume, or c) some combination of a) and b). In either case, economic growth of the economy will be hurt.
By citing narrow studies where short-term noise could easily hide the effects of small changes in the minimum wage, these political “faux-economists” are abusing economic appearances to serve a political end.
Furthermore having a national minimum wage when price and wage levels vary so markedly across the country is truly nonsensical.
The country will be better off when economists remain true to their profession.