Thursday, November 16, 2006

Free Ice Cream and Longer Recess!!

In what comes as little surprise, Democrats are using their new found majority status in Congress to push for an increase in the federal minimum wage, which has remained stagnant at $5.15 for nearly a decade.

To be fair, I agree that an increase is appropriate. However, Democrats have gone overboard in their proposal to raise the minimum wage to $7.25 an hour. They suggest that a family cannot live on $5.15 an hour, to which I reply "of course they can't". But the minimum wage isn't designed to be a "minimum family wage". It's a pay rate commensurate with new entrants into the job market, such as high school students and recent graduates, part time college students, etc. The general idea of our free market economy is to provide incentives for people to learn, grow, and obtain marketable skills so that they are able to earn higher wages. Any attempts to convert the minimum wage to a living wage are doomed to cause economic havoc. After all, why not just make everybody rich and make the minimum wage $500/hour?

In addition to the negative impact on inflation, an increase to the minimum wage will also put more people out of work, as marginally profitable employers choose to employ 5 people at $7.25 as opposed to 7 people at $5.15.

Although a pure free-market economist would argue that the minimum wage should actually be $0, and that employees and employers should be free to negotiate any salary, I'm not quite that hard core. So let's look at the simple economics. Inflation over the course of the past 10 years has averaged approximately 2.53% (according to this site). Adjusting for inflation, $5.15 10 years ago is equal to $6.61 today ( =5.15*(1+0.0253)^10 for the Excel challenged). So any increase up to that amount has some basis in economic reality. Anything more than that and we're talking grade school Student Council politics.

Ted Kennedy's call for a $7.25 minimum wage here.

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