Monday, April 12, 2010

Raising the minimum wage (Part 2)

In Part 1, I pointed out that by arbitrarily ignoring productivity and increasing the cost of production (by raising wages) the government effectively creates money out of thin air. No new wealth is created by producers, but costs have increased. Ultimately more money must be printed (injected into the supply of money) to adjust to this new situation which devalues the existing supply of money and adds to what we call the inflation of our currency.
As for employers (the creators of wealth), their labour costs have been increased by government edict, and in order to stay competitive they must raise their prices or reduce there input costs by releasing staff.  This effectively prices the lowest skilled workers out of the "legal" workforce. In Ontario this month, employers must decide to either pay their bottom rung of employees $10.25 per hour, let them go, or shorten their hours worked. Alternatively employers may keep wages for their more skilled workers lower than they may otherwise be, creating a class of under paid skilled workers that cannot secure a decent living wage (more about that later).
I'm sure this Ontario government action, raising the minimum wage,  is motivated by the best intentions of helping the working poor; the irony is that it may be doing exactly the opposite.
The people of Ontario are fortunate to have one of the most robust and wealthy economies in the world and as a result we have one of the highest standards of living in the world. And yet by my strictly unscientific measure, poverty seems to be increasing.
In my experiences living in the Greater Toronto Region (GTA), one of the fastest growing regions in the country, poverty was something I was always aware of. While my own family struggled as I was growing up, I don't ever remember being hungry. In 1983 one of the first food banks was created to address the problem of hunger in the GTA. Now 27 years later, this and other food banks have sprung up and food donations during key holiday periods has become a ritual in our society. The food banks have persisted during good times and bad and they don't just cater just to the unemployed. Today in the midst of the Great Recession over 30% of food bank users are employed earning an average $10.90 per hour working an average 20 hour week. Food bank users have increased in those 27 years (by the way inflation went up 103% in that time!!) despite government programs to address the issue of poverty, and despite raising the minimum wage. In fact Ontario began a poverty reduction strategy called Breaking the Cycle in December 2008 with a set goal of reducing poverty in children by 25% in 5 years. All of this in my view is the wrong approach.
In my view raising the minimum wage increases inflation, increases unemployment and creates an underclass of workers that cannot earn a living wage. To get a better understanding of some of these issues let me direct you to some of these sites:
The Ludwig von Mises Institute; Economics in One Lesson; and the Freeman Online.    

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