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.
Perhaps the most significant harm to low-wage earners is caused by the inflationist polices of the Federal Reserve. Since its creation one hundred years ago this month, the Federal Reserve’s policies have caused the dollar to lose over 95 percent of its purchasing power—that’s right, today you need $23.70 to buy what one dollar bought in 1913! Who do you think suffers the most from this loss of purchasing power—Warren Buffet or his secretary?
It is not just that higher incomes can afford the higher prices caused by Federal Reserve. The system is set up in a way that disadvantages those at the bottom of the income scale. When the Federal Reserve creates money, those well-connected with the political and financial elites receive the newly-created money first, before general price increases have spread through the economy. And most fast-food employees do not number among the well-connected.
It is not a coincidence that economic inequality has increased in recent years, as the Federal Reserve has engaged in unprecedented money creation and bailouts of big banks and Wall Street financial firms. As billionaire investor Donald Trump has said, the Federal Reserve’s quantitative easing policies are a great deal for “people like me.” And former Federal Reserve official Andrew Huszar has called QE “the greatest backdoor Wall Street bailout of all time.”
Many so-called champions of economic equality and fairness for the working class are preparing to confirm Janet Yellen as next Chairman of the Federal Reserve. Yet Yellen is committed to continuing and even expanding, the upward redistributionist polices of her predecessors. Washington could use more sound economic thinking and less demagoguery.
By increasing unemployment, government policies like minimum wage laws only worsen inequality. Those who are genuinely concerned about increasing the well-being of all Americans should support repeal of all laws, regulations, and taxes that inhibit job creation and economic mobility. Congress should also end the most regressive of all taxes, the inflation tax, by ending the Federal Reserve.