OPINION: Increasing minimum wage is a short-term solution for a long-term problem

Those expected to benefit will suffer when minimum wage increases to $15 per hour.

The supply of workers and businesses’ demand for workers determines the price of labor. The law of supply suggests that as prices increase, the amount of people looking for work will increase. The law of demand indicates that as the price of individual units of labor increases, the amount of labor a business demands decreases. Minimum wage restricts the supply and demand of the labor market.

An invisible hand guides supply and demand toward an intersection known as “market equilibrium.” This point is where employers and employees receive and consume the highest level of production. Moral philosopher Adam Smith outlines the invisible hand theory in his book “The Wealth of Nations” and asserts government interference with unintended consequences.

Lawmakers and academics say increasing minimum wage can alleviate the suffering of the working poor. Should the minimum wage rise above market equilibrium, unemployment will rise because labor supplied increases while labor demanded decreases.

The invisible hand has not found the market equilibrium, it implies that increasing minimum wage enables market efficiency because it brings demand closer to equilibrium. This causes demand for goods and services from other markets to increase, which leads to higher prices.

Minimum wage causes a temporary increase in GDP, until employers increase prices to prevent inventory loss and higher profits. The long-run supply suggests that supply side inflation will wipe out gains made by minimum wage. Short-term growth from demand accounts for no increase in the supply of goods demanded.

Minimum wage must continue to increase for wages to keep pace with inflation, which causes negative externalities for businesses. Inflation affects creditors because inflation wipes out return on investment and favors debtors over the creditors. This may slow economic development because businesses now lack financiers to invest in their business’ expansion.

When companies expand, they require more workers to manage accounts and run their business efficiently. If capital flow is restricted by inflation, less wealth is created, leading to fewer opportunities.

As noted in “The Wealth of Nations,” policies done with good intentions have unintended consequences. A minimum wage hike is a proposal that sounds good on paper, but lacks evidence to support its success. Supporters use the “appeal to pity” fallacy to validate their claims. 

Knowledge and skill determine wages, which explains why underwater welders earn more than entry-level employees. Many can flip a burger, yet few wield the skill to weld. Minimum wage typically fills entry-level positions by providing knowledge and skills for those entering the labor force. Workers take with them the knowledge and skills and apply them to better paying jobs. These jobs pay higher wages because of the knowledge employees have. The process continues and wealth is accumulated as workers develop specialized skills. Nineteenth century Scottish immigrant and industrialist Andrew Carnegie noted, “The first third of your life should be spent learning all you can, the next third earning as much as you can, and the last third should be spent giving it all away.”

Carnegie’s example is worth mentioning because he came from poverty, but amounted to one of the richest individuals throughout history. It is a mischaracterization of capitalism to suggest that people get rich through exploitation. Bill Gates is derived from providing products people wanted, not robbing consumers and workers of their dignity. While some Microsoft workers struggle to make ends meet, increasing minimum wage will not change reality because scarcity determines labors value.