It’s not employers who pay for minimum wage hikes – it’s you and me, the consumer

WAEX: Reality can be so annoying at times, as any number of social reformers have found out over the years. People should work harder and better in an equitable and equal society, but that’s not what the Soviets found out. Of course the foreigners would prefer to be ruled by us enlightened types, but the break up of the British Empire didn’t seem to show that – especially in 1776. And, sad as it is to say, minimum wages don’t mean that the capitalist exploiters lose profit to increase the incomes of the workers.

Sure, we’d all like to see low-end incomes rise – this is the very point of our having an economy at all, to improve the life of the average Joe and Jane. The question is, how? We can indeed tell everyone that they cannot sell their labor for less than some magic price. What happens then? More importantly, who now pays these higher wages?

We theoretically have three different groups. It could be that the workers pay. Those who keep their jobs get more, those who get fired or laid off lose, their loss meaning that they’re the people who pay. Certainly, we see some evidence of this at high minimum wages.

It could be the employers who pay – those capitalist pigdogs just get to roll in less profit in their basement strongrooms and wouldn’t we all weep bitter tears at that? We don’t in fact see any evidence of this being true.

The third group is us consumers. If prices rise to cover the higher wages then it’s us paying those higher wages. A new paper tells us that this is indeed what happens. “Our results suggest that consumers rather than firms bear the cost of minimum wage increases in the grocery sector “

Oh, right. The full paper is here. “We find that a 10% minimum wage hike translates into a 0.2% increase in grocery prices. This magnitude is consistent with a full pass-through of cost increases into consumer prices.” That is, all of the cost of the higher minimum wage is paid by us consumers out here.  READ MORE

4 Comments on It’s not employers who pay for minimum wage hikes – it’s you and me, the consumer

  1. The author (Worstall) is correct that there are bad effects from minimum wage laws, and increasing the minimum worsens the effects. However, the situation is more complex than he seems to realize.

    Higher costs are passed through to consumers only when demand is relatively inelastic. “Inelastic demand” means that consumers may grumble but will buy at the higher price anyway. “Elastic demand” means that as prices go up, demand goes down, and less product is sold.

    For example, look at food. Of course, people will always continue to buy food, assuming it is for sale, because failing to do so results in starvation and death. Duh. But as prices go up, consumers alter their food purchases and buy lower priced items. Steak too high? Buy hamburger. Hamburger too high? Buy peanut butter.

    More to the point, demand for non-essential goods tends to be highly elastic. And for elastic demand goods, it isn’t that production costs determine selling price, it is the other way around: selling price, or the price at which people will exchange their money for the goods, determines production costs. If current production methods cost the producer more than consumers are willing to pay, he must lower his production costs if he wants to stay in business.

    When the cost to run a fast food restaurant goes up, if the owner raises prices some of his customers will start making their own sandwiches at home and the restaurant will lose their business entirely. Fast food demand goes down, ultimately to the point where fixed costs to the restaurateur (real estate, taxes, equipment) not only prevent him from making any profit, but cost so much that remaining in business cost him money from out of his own pocket. The rational decision then is to close the business, resulting in 100% of his employees having their pay cut by 100%.

    By raising the minumum wage, the govt makes labor a (more-or-less) fixed cost, one he cannot lower in order to keep his prices low enough to attract customers in sufficient volume to make a profit.

    And this is why, to a large extent, it is prices that determine costs and not the other way around.

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  2. “Fight for $15”

    Ever thought about fighting for some education, and then fighting for a better job, numbnoos?

    INSTEAD of just sticking your hand out and saying, “GIMMEE!!!” 🙄

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  3. Minimum wage in MA prior to 2017 was $8.00/hr. On Jan 1, 2017 it shot up to $10/hr. Jan 1, 2018 it increased again to $11/hr. It is due to increase again to $12/hr on Jan 1, 2019.
    As a direct result of this wage increase, plus the increase in Workman’s Comp insurance (severely increased due to issues in other areas of the country like the deep south and California) that took our premium from $14K a few years ago to $22K this year, my VFW-run public bar and grill will be closing its doors and going out of business. We have been bleeding money for the last three years as costs increase but sales continue to stagnate.
    As of Feb 2019, instead of six employees earning $8.00/hr plus tips (which on a good day could add up to $15-$20 per hour in reality), we will have six unemployed people looking for new jobs while they collect state unemployment.
    Thanks Dems!

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