In the never ending advance of democracy and majority rule in our land, enough people from Colorado signed their names to a petition to put a minimum wage law proposal on the November ballot. Whether the proposed new law passes depends upon how many people end up being winners under the terms of the new law. If there are more winners (those who make more for their labor services than they are worth) than losers (those who are forced to pay money to the winners) the proposal will pass and business owners will be saddled with another business stifling law.
Currently the minimum wage in Colorado is somewhere around $8/hr and change. The proposal would increase it to $12/hr, with the eventual goal being $15/hour shortly thereafter. As is always the case in politically charged proposals like this one, economic ignorance abounds. A front page story in my Denver Post this morning declared that raising the minimum wage by almost 50% will create thousands of new jobs and "pump $400 million into Colorado's economy." How a minimum wage increase could be responsible for such positive economic outcomes was not described. Neither was it described why, if a 50% increase in the wage is so beneficial, we should not vote to have a 500% increase in the wage. After all, if a little is good more must be better.
Tim Gaudette of Denver is in favor of the proposal. He offers up two primary arguments in support of his position. His first argument goes like this: "A new report showing an increase in Colorado's minimum wage won't in fact be a job killer came as no surprise. This research reinforces what many small business owners are saying -- that an increase will stimulate our economy by putting more money in the pockets of consumers who will spend at local businesses."
Timmy's first argument is classic Keynesian economics. Keynes taught that it is possible to create wealth by spending money. Despite the fact that every person who is a member of a family, and that would be everyone I believe, knows that you do not increase your wealth by spending money, Keynes held that when government spends money everyone grows rich beyond their wildest dreams. As an offshoot of his argument Tim believes that when government rules force business owners to spend more on labor than the free market would bear everyone becomes rich beyond their wildest dreams.
Timmy is dead wrong about the minimum wage and jobs. Raising the minimum wage will both destroy existing jobs that are on the margin and prevent the formation of future jobs that were also on the margin. That is economic reality and economic truth, despite what some government financed "study" might determine. Just where does Timmy think the money being paid in excess of the market rate for labor comes from? Money does not grow on trees. Money is not free. Businesses do not have stacks of money lying around to give away for free. His argument that government laws forcing business owners to pay more than the market rate for labor will "stimulate our economy" and create wealth is ridiculous. It is based upon the fallacious notion that spending money creates wealth, something every home budget planner knows is patently false.
Economic wealth is created when people invest money in capital and capital productive industries. Those industries produce goods and services that they hope people will be willing to purchase. When people purchase those goods for a price that allows the business to make a profit the business is able to continue operating. When the business is unable to realize a profit it goes bankrupt. The costs associated with the production of goods, including the cost of labor, determine if the business will succeed or fail. Government laws forcing the business owners to pay more for labor than the market will bear harm the businesses. The belief that putting more money into the hands of the laborers will cause then to spend more money on goods produced by businesses, thus increasing economic growth for all, is exactly backwards. Without prior investment there will be no goods to purchase.
Timmy's second argument is incredibly naive. He writes, "I talk to small business owners all over the state, and many say they support a higher minimum wage because it reduces turnover and increases productivity, which is good for their bottom line. What's more, Small Business Majority's opinion polling found 60 percent of small businesses nationwide support gradually raising the minimum wage to $12 per hour by 2020." So let me get this straight. Timmy says that a strong majority of business owners already believe that paying more than the market will bear for the labor they employ is good for their businesses because it retains employees and "increases productivity," whatever that means. If that is true, Timmy, why don't these business owners just raise their wage rates from $8/hour to $12/hour or $14/hour or $2000/hour on their own? Why do they need a state law to force them to do something they believe is good and beneficial for their businesses? They are free to pay whatever they want right now. Why do they want a law forcing other business owners to pay more to their employees when they are free to pay their employees more voluntarily?
The last question above gets to the heart of the matter. Even if it is true that a strong majority of business owners want to pay their labor service providers more than they are currently paying them and even if it is true they believe paying their labor service providers more for their services than they are currently paying them is good for their bottom line, the only reason to demand a law enshrining a higher wage permanently is to do harm to their competitors. These businesses compete with other similar businesses for the consumer's dollar. If they have somewhat higher profit margins they are able to pay a higher wage to their laborers. On the other hand, if their competitors have a lower profit margin they will be driven out of business by the new minimum wage law. The reason these altruistic business owners favor a higher wage has nothing to do with economic growth, productivity, or helping the economy grow. It has everything to do with using government hegemony to force their competitors to the sidelines, thus increasing their own profits. As I said initially, government intervention into the marketplace always creates winners and losers. Business owners who support the new minimum wage law expect to be the winners.