Unintended consequences


From: Herbert W. Peter


It appears that the minimum wage will be increased from $5.15 per hour to $7.25 over the next two years. I believe there will be unintended consequences because of this. No one likes to work for the minimum wage. The first year the increase will be 20%. The second year it will be 17%. Employees not making the minimum wage will also expect their employers to make similar increases in wages and salaries. Union contracts may also have automatic increases.

Uninformed people say that employers should take the increases out of their profits because they make a lot of money. Small business owners are not likely to make a lot of money, so price increases can be expected. Senior citizens would have to make harder choices on where to spend their money. It is human nature to increase prices if wage increases are dictated by law. But then, many politicians don't understand human nature or economics.

Some analysts think the Federal Reserve Board will reduce its interest rate to 4.75% next year. With increases in wages and prices, don't expect that to happen. The board may increase the interest rate if inflation exceeds their benchmark of 2%. An important factor that would mitigate an increase in inflation is an increase in productivity, which may be attained by employers laying off some employees.

Those on minimum wage now would have only temporary gains. Increases in prices would eventually put those on the lower income level in the same relative position as before the wage increases. There would again be a clamor for the next increase in the minimum wage. The only question is if it would take more than two or three years for that same relative position to occur.


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