Minimum Wage on Steroids

Maybe we should just go to a $150/hour minimum wage with no phase-in period and let the Fed figure out how to make it work.

 

You'd have a big burst of inflation, nobody would lose their jobs, a lot of old debts would be wiped out, and we'd be better off for it.

Matthew Yglesias, Twitter

This may just be a thought experiment or a way of demonstrating the general folly of the minimum wage.  Many respondents took this seriously and Yglesias may mean it seriously.  I hope not.  But, for the sake of discussion, let's suppose the government set the minimum wage to $150/hour, effective immediately.  How would that work?

Bob owns a McDonald's franchise where his labor cost is $8,000 a week.  That covers part-time and full-time employees who average out to $10/hour.  Tomorrow, his labor cost will rocket to $17,142.86 for that day.  He will need $120,000 for the week.  Bob's entire cost structure has been thrown into chaos.  No problem.  Bob has kept $120,000 in reserve in case of emergencies and he uses it to pay labor costs for the week.  He raises his prices to reflect the 15 fold increase in his labor costs.  The Dollar Menu is now called the $15 Menu.  During that week, Bob has virtually no business.  In fact, by the second day, he has sent all the employees home since business is so slow.  That afternoon, the delivery truck with the bags of fries, meat patties, paper cups, straws, and all the rest shows up.  Rather than thus usual $5,000 invoice he gets, this one has a $75,000 invoice; costs have skyrocketed for his supplier as well.  Bob refuses the shipment, just like the last 5 McDonald's franchise owners refused theirs.  This same scenario is playing out across the country as the economy grinds to a halt.  After all, every full-time worker is now earning $300,000 per year.

 

A couple of weeks later, the Fed has flooded trillions of dollars into the economy.  The value of the dollar crashes, now worth about what a dime was worth before the minimum wage increase.  People who were holding cash take a big financial hit.  Banks suffer a huge hit as borrowers pay off loans with deflated dollars, thus wiping out the 'old debts' as predicted.  Gold goes through the roof.  Debtors and those holding assets that appreciate would benefit.  Lenders and those holding dollars would suffer greatly.

 

Yglesias has offered an extreme example of raising the minimum wage that demonstrates the destructive power of government setting arbitrary price floors without consideration of the ripple effects of those decisions.  The $150/hour minimum wage would obviously be catastrophically bad but what about the $15/hour minimum wage?  It generates the same negatives just to a much lesser degree.

 

It should be noted that the minimum wage was created with the Davis-Bacon Act of 1931.  It was passed because blacks from the South were migrating north and working for lower wages than white workers.  Even racists want to save money.  With the minimum wage set, the racists couldn't save money by hiring blacks and thus just hired whites.