Minimum Wage Goes Up, Hours Go Down

How the minimum wage works in the real world.

A.G. (who asks me to use, in this post, only his initials) is a regular reader of Cafe Hayek. He’s 28 years old and is an entrepreneur in Charlotte, North Carolina. His firm employs 25 people, 21 of whom are low-skilled workers. A.G. just sent this memo to his employees:

To All Team Members:

The schedule for next week has been posted. You may notice that hours have been cut back on your schedule. This is across the board, not just you. I don’t want anyone to think they’ve done something wrong to deserve a cut in hours, so I wanted to explain why it’s happening.

There are a couple of reasons for this:

1) May and September are very slow months for our business. Anyone who has worked Sundays recently has seen the drop off in traffic. Now that we’re entering May, that drop off will continue on to other days as well, and it will get worse.

2) The recent increase in the minimum wage to $7.25/hour. Since we’ve opened, I’ve had a lot of people ask why they can’t get more hours, and it’s a great question.

I would LOVE to give everyone all the hours they want, and then some. Our customers would be happier across the board, we could accomplish much more every day, our business would grow, I could hire even more people, and on and on. However, we operate on a tight budget just like any other business, and in order to survive, we have to make money. That means our labor cost (the total amount you are all paid) must stay below a certain percentage of our total sales. If it doesn’t, we go broke and everyone loses their jobs.

Our brilliant Congressmen in Washington, D.C. decided a couple years ago that it would be a good idea to raise the minimum wage by about 40% to $7.25/hour. It just took effect last year. That probably sounds like great news for everyone – more money in everyone’s pockets can only be good, right?

Unfortunately, it doesn’t work that way in the real world. If I’m forced to pay everyone 40% more, I can’t afford to schedule as many employees for as many hours, since our sales aren’t going up by 40%. Remember, I can only afford to pay you guys a certain percentage of all the money coming in the door. That means hours get cut, and everyone ends up poorer.

In a perfect world, it should work the opposite way: you should be free to choose how much you think your skills and time are worth (since you know best), and I should be free to pay you whatever that amount is if I want to hire you. Everyone wins in that case. I get as many good employees as I want that I can afford to pay, and you get valuable job training, references, and relationships to carry into the future.

To prove how bad of a deal minimum wage is for you guys as hard-working job-seekers, just look at this way:

I’m not being forced to pay $7.25/hour; YOU are being forced to accept $7.25/hour no matter what, even if you’d be willing to take less in order to get (or keep) a job.

You can thank our elected officials in Raleigh and Washington for sticking you with such a raw deal.

If you have any questions about any of this or want to talk more about it, please feel free to come see me, the door is always open.

Our leaders have the mistaken belief that by mandating a certain hourly wage, our low-skill workers will earn more money, when in reality they will just work fewer hours.

Of course we shouldn't expect our Congress critters to understand that--whenever they run out of money, they can just (legally) steal more from the American people.

[Cafe Hayek via Instapundit]

Why Economic Stimulus is Pointless

And how minimum wage laws do more harm than good. Also, why Paul Krugman is an idiot. From 'Underconsumption is not the problem':

The problem in our economy is not that we are “producing too many goods,” or that “people cannot buy back what is produced” because they are not paid enough, or that government has not flooded the economy with enough new money. No, the problem is that much of the structure of production has been geared toward generating projects that cannot be sustained.

The only way that the economy truly can recover is for us to permit these malinvestments either to be liquidated or be directed toward other, sustainable lines of production. Instead, the government tries to throw new money at us and claim that we just are not spending enough.

That’s a prescription for disaster.

Keynesians would have you believe that the problem with our economy is that there are too many goods and not enough buyers, and that with a large enough stimulus we could take up this economic slack, and kickstart the economy back to life.

The problem is that economic slack, or 'underconsumption,' does not cause recessions, but is rather a symptom of a malinvested economy. The problem is not that people are not buying the fruits of production, but rather that production is making things people don't want.

By 'stimulating' the economy, we merely put off necessary shifts in production. We do not allow unproductive firms to fail and be liquidated, and we do not allow successful firms to use that excess capital to rise up.

Economic recessions are a sign of changing times. We can fight against them, but doing so is as useful as trying to stop the tide from coming in. Instead, we must learn to flow with recessions, to allow capital to move from one industry to another, freely and quickly, so that we can reorganize our economy quicker, and get back to business faster.