Monday, December 30, 2013

Ron Paul: Raising Minimum Wages Appeals to Those Who Do Not Understand Economics

Government Policies Hurt Low-Wage Workers
By Ron Paul

Fast-food workers across the county have recently held a number of high profile protests to agitate for higher wages. These protests have been accompanied by efforts to increase the wages mandated by state and local minimum wage laws, as well as a renewed push in some states and localities to pass “living wage” laws. President Obama has proposed raising the federal minimum wage to ten dollars an hour.

Raising minimum wages by government decree appeals to those who do not understand economics. This appeal is especially strong during times of stagnant wages and increased economic inequality. But raising the minimum wage actually harms those at the bottom of the income ladder. Basic economic theory teaches that when the price of a good increases, demand for that good decreases. Raising the minimum wage increases the price of labor, thus decreasing the demand for labor. So an increased minimum wage will lead to hiring freezes and layoffs. Unskilled and inexperienced workers are the ones most often deprived of employment opportunities by increases in the minimum wage.

Minimum wage laws are not the only example of government policies that hurt those at the bottom of the income scale. Many regulations that are promoted as necessary to “rein in” large corporations actually hurt small businesses. Because these small businesses operate on a much narrower profit margin, they cannot as easily absorb the costs of complying with the regulations as large corporations. These regulations can also inhibit lower income individuals from starting their own businesses. Thus, government regulations can reduce the demand for wage-labor, while increasing the supply of labor, which further reduces wages.

Read the rest here.


  1. Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?

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    This is just a partial list of how the New York Fed is unique among its peers:

    Over the past several years, Wall Street On Parade has identified for its readers a raft of conflicts of interests at the New York Fed that would not be tolerated at any other financial regulator. For example, its Board of Directors has routinely included the CEOs of the very same Wall Street firms it regulates.

  2. The article makes no sense. He claims the minimum wage reduces the demand for labor and hurts the poor but then claims "the most significant harm to low-wage earners is caused by the inflationist polices of the Federal Reserve."

    Inflation lowers the real minimum wage. If you increase the minimum wage 5% and inflation is 10%, then the real minimum wage has fallen 5%. Based on his understanding of economics, the demand for labor increases.

    Also, like most Austrian school economists, he does not realize the demand curve can shift up and down. If you ever actually studied economics, you would know that economics analysis is not as simple as price goes up demand goes down. Changes in the economy can shift the demand curve so that more is demanded at the same price. People who claim a minimum wage increase will not increase unemployment believes putting more money in the hands of lower increase people will generate economic activity and shift the demand curve so that more labor is required at the higher price. If you want to claim they know nothing about economics, then you need to explain why the demand curve will not shift.

    1. Are you suggesting that inflation lowers unemployment?

    2. @Jerry - you have to look at the whole picture, that money that gets put into the hands of the poor people has to be made up somewhere, just because the min. wage employee's wage goes up, doesn't mean the employer's employee budget rises, he has to make up the difference somewhere. This generally comes from 2 places, either he reduces the amount of min. wage labor he employs, or he raises his prices.

      In the first solution, unemployment rises, as he lets more min. wage employees go, they will have a harder time finding a job because many other companies will be doing the same thing. These workers don't have the extra income to spark economic activity you speak of.

      In the second solution, prices are raised. Now let's take a look for a moment at what kind of jobs are minimum wage. The first two most people think of is grocery stores and fast food restaurants. These are precisely the stores that the poor go to the most.

      If prices are raising in places they spark economic activity, then their struggle really doesn't lessen any, and the unemployed looking for work now have to scrounge up more money to pay for the goods they need to survive.

      But of course all of this is easy to dismiss, because you have a graph with a curve on it.

    3. Third, profits of these huge corporations get cut to pay for the upgrade to throw poverty line. I think they can afford it. Their profits do come from our labor after all.