I had an argument with someone yesterday about minimum wage. He was going on and on about how much easier it will be for working people now that the minimum wage has increased in New Hampshire to over $7.00 an hour. People will have so much more money in their pockets for the things they need he exclaimed.
This is a fallacy and I will try to show you here. Suppose I own a small business. I am buying raw material from another small business. It takes that business one hour to produce the material I need, being a small shoestring business they hire high school kids to produce the material and pay minimum wage for an entry level position. So two weeks ago the labor cost of that material was $6.50, now die to the increase of minimum wage it goes to $7.50 so an increase of $1.00 per unit. Now suppose he has uses a basic profit margin calculation to make his money on the product and he figures 10% for profit, so now his product has raised $1.10 in cost to me for my product.
My material cost just went up $1.10 overnight, and it takes an hour to produce my product, so I have to pay my entry level high school employee an extra dollar to produce my product, so now my cost of production has gone up $2.10 per unit. In order to stay in business I need a 10% margin to stay in business, so to cover my increase in material , and labor increase, I have to raise my price by 21 cents per unit on top of the $2.10 for a total of $2.31 increase in my product., and this does not even include the increased cost of employing people such as my share of employment costs, insurances, energy increases. But for the sake of simplicity I will just stay with my original supposition. Now my product goes out on the market at it's increased cost of $2.10, and the retailer adds their markup on the product a minimum of 25% so this brings the cost of the item up (I'll make it simple here) another 50 cents so know my product costs another $2.60. Now the person who makes minimum wage has to pay another $2.60 to buy my product, and guess what they are no further ahead then they were before the wage increased.
Now you have another unintended consequence. You have a person who has worked several years for a small business and his wage has increased $1.00 per hour over that time, now he is back to making minimum wage again, his employer is not obligated to giving him another raise so he is actually taking a step backwards, because in order to buy some products his dollar does not go as far. We could increase minimum wage to $20 an hour and we would still be in the same position, maybe even worse because a lot of small businesses would go out of business because they could not pass the added costs on and keep selling their products or services, so more of our jobs go overseas to countries where workers make pennies a day.
