Mandating higher minimum wage bad for business, bad for low-skilled workers, bad for the economy

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Amendment 70 will increase Colorado’s minimum wage from the current $8.31 per hour, in stages, until it reaches $12.00 per hour in 2020. After that, it will be subject to an annual cost-of-living increase. Except, if the cost-of-living ever declines, the minimum wage will not decline.

It is a one-way upward ratchet, locked in to our state constitution, that will destroy jobs for the very people it purports to help.

Nickels and Dimes

Nickels and Dimes

In a free-enterprise economy, wages are determined by market forces. Predominant among these market forces is labor productivity. If labor is more productive, it is worth more to employers and they will bid up wages. Passing a law cannot make people more productive. Raising the price of labor by government decree cannot create prosperity. Although it may sound good and feel good as an attempt to help low-income workers, in many cases it will price them out of the labor market.

If an employee is only adding $8.00 to the value of a business, who in their right mind will pay them $12.00? They would have to lay off workers or go out of business.

Or, they may substitute capital equipment for over-priced labor, as is happening in the fast food industry. It doesn’t take long to find horror stories of small businesses leaving San Francisco, Portland, and Seattle, where government has forced minimum wages to be higher than the productive value contributed by labor. It defies economic logic as well as common sense to believe that a higher price for labor, for any given level of productivity, will cause buyers of labor to purchase more of it. In reality, they will purchase less.  It is higher productivity, and higher productivity alone, that leads to higher wages.

The demand for labor is what economists call a “derived demand”. This means the demand for labor is derived from the market for which the labor is used. Carpenters’ wages are derived from the market for what they build. Farmworker wages are derived from the market for agricultural products. Wages for fast-food workers are derived from the market for fast-food.

This is true fIcon_2016_Op_Edor all goods and services in any economy. When workers become more productive, they add more value to any business. The business can afford to pay them more, and will do so willingly since they contribute more to the bottom line. Nearly every business has some form of incentive pay-for-performance, which is just another way of saying higher wage for higher productivity. Decades of economic data show that wages rise with productivity over time.

The economic “Law of Demand” is characterized by an inverse relationship between prices and quantities purchased. It is true for purchase of goods and services, as well as for purchase of the labor that is turned into goods and services. If the price of labor increases, other things being equal, people will purchase less labor. Government imposition of a minimum wage above the market wage results in less employment and more unemployment – a labor surplus. One can try to ignore the Law of Demand, just as one can try to ignore the Law of Gravity, but one does do so at one’s own peril.

Every dollar a business pays its employees is a dollar it cannot spend elsewhere. Amendment 70, which uses the guns of government to force a higher minimum wage, redistributes money from other places in the economy to the low-wage labor market – for those few who will be lucky enough to keep their job.

Amendment 70 does not, indeed it cannot, lead to increased prosperity for the State of Colorado. It will in fact hurt the very people it is intended to help.

Paul Prentice is a former economist at the U.S. Department of Agriculture and a Senior Fellow at the Independence Institute, a free market think tank in Denver.

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