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Basic Economics: $5 Coke Cans and Minimum Wage Laws

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One of the biggest enduring economic myths is the notion that the minimum wage laws only help workers and have no real negative effects. The fallacy inherent in this line of thinking becomes immediately clear if we simply propose a $1,000 per hour minimum wage. After all, if $15 is good, $1,000 would be fantastic, right?

Of course, nobody would pay somebody $1,000 per hour to perform a low-skill task. It’s obviously unaffordable. A $15 per hour minimum is just as unaffordable.

The smaller scale of a hike to $15 makes the effects much less obvious – sometimes completely invisible. But the same fundamental economic reasons a $1,000 per hour minimum wage would never work make a $15 minimum just as economically unviable. We saw the negative impacts in Seattle with the minimum wage hike there a few years ago.

Nick Giambruno did a good job of explaining the problem with minimum wages in an article published by the International Man.

First, it’s critical that you understand a wage is nothing more than a price. As Giambruno put it, “Employees sell labor. Employers buy it.” A wage is the price of labor.

Like any other price, wages are dictated by the laws of supply and demand. We call them “laws for a reason.” You can ignore them. You can try to wish them away. But they will always remain in operation. You can’t disregard supply and demand any more than you can disregard gravity. You can claim gravity doesn’t work in your given situation all you want. You’re still going to splat on the ground if you jump out of a 10th story window.

As Giambruno explains, minimum wage laws are price controls.

In this case, a control on the price of labor. And price controls always create destructive distortions in the market. Here, that means unnecessary unemployment and artificially high prices passed on to consumers. Even the Congressional Budget Office admits that 500,000 jobs would be lost if the US government raised the federal minimum wage from $7.25 to $10.10.”

Giambruno illustrates this point by making a comparison that pretty easy to wrap your head around. Imagine if the government set the minimum price for an aluminum can at $5. In that scenario, Coca-Cola would have to charge over $5 for a can of Coke. Would you shell out more than five bucks for a can of Coke?

Me neither.

In this scenario, we’d end up with a glut of Coke cans sitting on store shelves.

In this scenario, the problem isn’t that people don’t want Coke. They do. The problem is the artificially high price of aluminum cans… which leads to the artificially high price of Coke… that just sits on shelves, gathering dust, until eventually, Coca-Cola drastically cuts back production because of lack of demand.”

In all likelihood, Coca-Cola would just switch to exclusively using glass or plastic containers. The $5 minimum can price that was supposed to help the can companies would actually hurt them over the long-term.

Now, just substitute aluminum cans for labor and you have the exact same scenario.

A similar dynamic plays out when the government mandates the price of labor. But instead of Coke cans, potential employees sit on the shelves while employers eliminate jobs they otherwise wouldn’t, and are forced to pass on higher prices to consumers when they otherwise wouldn’t. The plain truth is, not every job generates $15 an hour worth of output. And some workers would much rather accept jobs that pay less than $15 than have no job at all.”

Minimum wage advocates seek to solve a legitimate problem facing American workers: their dollars buy less and less every year. But simply mandating employers fork over more dollars is a little like putting a band-aid on an amputation. It doesn’t do anything to address the underlying problem. We don’t have a wage problem. We have a money problem.

Federal Reserve and government monetary policies continue to devalue our money. The average wage rate has gone up 2.7% in the last year. Meanwhile, the Consumer Price Index (CPI) has increased by 2.9% during the same period. The CPI almost certainly understates the cost of living, but even if you take that number at face value, Americans are losing ground. Inflation is civilization’s death spiral. You aren’t going to fix the problem with wage laws.

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