Minimum Wage, Why?

The news this morning tells us that congress killed the minimum wage bill that would have raised the minimum wage by $2.10 over the next two years. Many people are up in arms over this news. Minimum wage hasn't increase for over a decade, but is this news bad?

The minimum wage was established with the Fair Labor Standards Act of 1938. It was sold to Americans as a way to guarantee entry-level workers a fair wage. The real reason the minimum wage was established was to help hide the currency inflation that was already underway in this country. Remember that the Federal Reserve was established in 1913 and America was in the middle of a depression.

The government under Roosevelt was spending money on government programs in order to provide jobs for unemployed Americans and there were a lot of them. Something in the neighborhood of 25% of all Americans were out of work in the 1930's as a result of the depression.

As I have mentioned many times here, the government has over the years, maintained a policy of moderate inflation of the money supply. And as you know if you have been a reader of these pages, if you increase the supply of dollars, you reduce the purchasing power of the dollar and prices increase. The minimum wage laws were put into place to help the common worker maintain their standard of living in the face of a constant currency devaluation.

What most people today do not understand is that raising the minimum wage causes a whole host of problems, none of which are pleasant. Let's take for example a plan in Chicago to require "bog box" stores (Wal-Mart, Sears, Kmart, etc.) to pay a minimum wage of $10 per hour plus $3 dollars per hour in benefits. The government in Illinois has called this a "living wage." Yes, you can certainly live better on $10 an hour than on $5.25 an hour, but what will happen is that those stores will only hire one person instead of two. You will end up with fewer stockers, fewer checkers, and longer lines. You will also end up with higher prices.

You see, these benefits have to be paid for somehow. The government expects the stores to pay and the only way they can is by doing one or both of the things above.

The bottom line is government intervention never works. It causes problems in other areas. The latest unemployment figures look fairly good until you look at the U-6 rate. This is the rate of unemployed plus underemployed. Underemployed workers are those with college degrees that cannot find work in their fields and as a result go to work at low-level jobs like convenience store clerks or burger flippers. That U-6 rate is running 8.8%.

If you increase the minimum wage, the U-6 rate will increase into double digits and the costs of goods that you and I buy will increase by double digits.

So, what is the solution? The solution is to start reducing the supply of currency to cause deflation instead of inflation. I know Mr. Bernanke has set his heels against deflation. He will fight it to the bitter end and believe me, it will be a bitter end. He was quoted as saying he would drop money from helicopters in an effort to fight deflation.

The government has made deflation out to be a bad thing, but it is not. Deflation is not depression and don't let anyone tell you that it is. It means that the money you earn today will have the same or more value tomorrow. It means that saving money would be rewarded, not with just interest, but with currency appreciation. It means that your retirement accounts that were based on a currency 20 years ago will have equal or greater value when you are ready to retire. You would no longer have to worry about the purchasing power of your defined benefit pension plan. In a word, you could enjoy your retirement years.

Does that sound like a bad thing? Of course not, but the government does not want the value of our money to increase because they have borrowed so much money from the world that they would go broke paying it back in dollars that are worth more instead of less. I have news for the government they are already broke.

If the government raises the minimum wage it will not create a living wage, it will create more price inflation and we will all be worse off, not better off. Let's let the markets decide a fair wage.