Raising Minimum Wage Won’t Raise Prices

Paul KrugmanPaul Krugman’s column today is on the minimum wage, Better Pay Now. Basically, he says that given how popular raising the minimum wage is even among Republicans, it just might be possible to do. It is true that 57% of Republicans claim to be in favor of raising it. But give Fox News just one week of coverage and see that number plunge down to the low 20s. So I don’t know about just how politically feasible it is.

But I was struck by the very first comment to the article by one bck453 from Wall, NJ. He made a counter argument that I hear from conservatives all time. On the surface, it sounds reasonable. But it actually shows the typical complete misunderstanding of how business and economies work.

If we raise the minimum wage, then something else has to be taken away. So companies will be forced to raise prices, demand more output from their employees, find a way to cut costs by laying off some of the higher paid employees or a combinations of all of these. Mr. Krugman, turns a blind eye to this inevitable outcome.

For the umpteeth time, repeat after me:

Prices are not determined by costs!

Every conservative would-be economist thinks that a company just passes on higher expenses to their customers. If they are selling a hamburger for one dollar and their costs go up by 15¢, then the price of the hamburger will go up to $1.15. If that’s the case, why was the restaurant not selling the hamburger for $1.15 all along? After all, they could have made an extra 15¢ profit on every burger they sold!

Markets don’t work this way. Most conservatives think that businesses sell their products at the lowest prices possible. This is exactly the opposite of the truth. They sell their products at the highest prices possible. The only reason that markets work is that there are multiple businesses who compete with each other. Our hypothetical restaurant owner above is selling his burger for one dollar because that’s the price that allows him to make the most money. If he had charged $1.15, much of his business would have gone elsewhere.

So if the minimum wage goes up, will prices increase? Yes, they probably will go up a bit, but nothing comparable to the increase in wages. Will companies demand more output from their employees? Yes, just like always! And will companies fire their higher wage employees? Not at all. Commenter bck453 is just an idiot.

In the end, bck453 claims to be for an incremental approach to slowly raise the minimum wage to $15 over the next ten years so as to not shock the economy. There is some sense to this. But raising wages either will cause low wage workers to lose their jobs or it won’t. It turns out, it won’t. But bck453 is as confused about how the economy works as he is about whether or not he is for raising the minimum wage. Unfortunately, his thinking on the subject is the most common that I run across.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

3 thoughts on “Raising Minimum Wage Won’t Raise Prices

  1. [quote]It is true that 57% of Republicans claim to be in favor of raising it. But give Fox News just one week of coverage and see that number plunge down to the low 20s.[/quote]

    So is Faux News the media wing of the Republican Party as so many people like to say, or is the Republican Party the political wing of Faux News (and, for that matter, other powerful institutions)?

    P.S., is there some way to subscribe to articles that I comment on so that I can get an e-mail notification when you or other readers reply or comment? I don’t always have time to visit the site, and sometimes it can be difficult to remember what articles I’ve commented on or asked a question about.

  2. @JMF – I think it is a bit more complex than that. [i]Fox News[/i] doesn’t really act like a news network, but the Republican Party doesn’t really act like a political party. Both are pushing a certain conservative ideology. But I really think they both do it more because they are trying to make money rather than anything else. Like last year: Newt Gingrich didn’t want to be president. He just thought that running would bring in more money, which it did. The same thing goes for Cain. There were maybe four Republicans really running for political reasons. Two of them dropped out early because they weren’t crazy enough. And Santorum was just pushing his social conservative ideology. BTW: I’m rather fond of Santorum’s economic rhetoric. He at least understands what’s going on. It’s his religion that keeps him in the Republican Party. (I bet he’s fine with the new Pope, actually.) I know he would be a disaster as president, however.

    As for your second question: I will look into it. I’ve been making major changes to the site that can’t be seen. In particular, I’m trying to get Bing to crawl the site properly. And I’m working on getting Google to not index my indexes, which change many times a day. (After hours of programming this morning, I think I fixed that. But it will probably take Google some time to catch up.)

    More and more, I’m just coding the blog myself. I’m not going to be able to upgrade it over time. Unless I get involved with the official development team, which I don’t want to do.

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