The Real Minimum Wage is $ZERO!

You read that right. The actual real minimum wage is $ZERO. No matter what minimum wage the government sets, a business will look at the cost of the employee versus the amount of revenue the employee can generate or assist in generating and if it’s less than the arbitrary number selected by the government, the person won’t be hired. An unemployed person has a wage of $ZERO. When the government purports to set a minimum wage, they are pricing anyone who cannot add at least that much value to a business out of the job market. This hurts the lower-skilled, less-educated people the most. In fact, it hurts the very people it purports to help!

Every business has a cost structure. When the government steps in and artificially changes the cost structure, there are several possibilities:

  • The owners reduce their income/profit and eat the increased costs
  • The owners pass the increased cost to the customers
  • The owners reduce staff or increase individual productivity

There really isn’t another option. The money has to come from somewhere. Let’s look at the options and how they play out. In the first option, the owners decide that they will simply bear the cost, reducing their own income or profit. While this might be possible for some businesses, most small businesses do not make a tremendous profit. The owners have their own expenses and bills and in the end, there is a limit to what they can afford. It’s entirely possible that the minimum wage increase will make their business unprofitable at current prices, and they won’t be able to reduce their income, since there won’t be any! They will have to raise prices.

The second option is to increase prices. Here again, there is a limit to how much prices can be raised (or value reduced) and continue to have sufficient sales. If the cost of a fast food meal rises too high, people will simply reduce the number of times they eat out (not a bad thing health wise, but not so good for those who work in these lower-skilled jobs). If the cost of groceries, sundries, car washes and every other service provided by low-skilled workers rises, people will simply reduce their consumption. If prices rise too much, businesses will close and the entire economy will suffer.

The third option is to either find a way to increase productivity so that the workers do generate sufficient value for their wages, or reduce the total number of staff and either cease certain activities or find ways to do them with fewer people (automation, for example). Certain businesses are already extremely efficient (fast food, for example). There is very little in the way of productivity gains available. If a process can’t be automated, and the number of staff can’t be reduced, then the price will have to rise.

Do you see the common thread here? In the end, either someone loses their job or prices rise (or value is reduced by, e.g. cutting portion sizes). There is no way to escape this, the handwaving by progressive economists notwithstanding. So, the next time someone says they want the minimum wage raised, remind them that the real minimum wage is $ZERO and nothing anyone does or says can change that!

About Stephen Adams

The founder of this site, he has a Bachelor of Science degree in history from Elmhurst College. He is an IT Director that has worked for several major global companies. He has studied the Constitution and Founding Fathers extensively and his hobby is Constitutional Law. He blogs under the “Founder’s Blog”.