Over the past two weeks both the House of Representative and Senate have passed their own versions of a minimum wage increase. Both houses must now meet to reach a compromise bill to send to the White House. Whether the President Bush will veto the proposed legislation has yet to be decided. The small business tax breaks built into the Senate plan will surely produce some favorability with the administration.

But will the minimum wage increase benefit the nation as a whole? This is yet another divisive issue where each side has experts that tout the benefits.

I, as always, am reminded of a cartoon I watched when I was a kid. Ducktales followed the exploits of Disney favorites Scrooge McDuck, Donald, Huey, Dewey and Louie. Scrooge of course having his fortune which he kept inside his collosal money bin. During one episode an inventor, Gyro Gearloose, created a coin which would duplicate every time a bell would ring. Once the coin made it into general circulation the problem began. With the town clock ringing every hour on the hour, the exponential growth of the coin allowed everyone to become virtual millionaires within a week. The most memorable seen occurred when two characters were enjoying a cheeseburger at the local cafe, the price an unbelievable $10000, unfortunately the tower bell rang during the meal and the price doubled.

This is the same situation many economist envision with raising minimum wage, although not quite as significant. Service industries and manufacturing organizations that pay minimum wage will pass the additional cost onto the consumer, including those who have just been given the wage hike. The market is the best driver of wages based on supply and demand, unfortunately many still argue that the net benefit will favor those who receive minimum wage. The following must be considered however,

The conventional wisdom among economists is that minimum wages are bad because they “artificially” lower demand for low-wage labor, by making it more expensive, thereby leading to a loss of low-wage employment. And who makes up most low-wage labor? Younger, unskilled, and inexperienced workers. Hence, the frequent refrain is that minimum wage laws hurt the very people they are intended to help, by reducing their overall employment opportunities.

The next question, then, is where will the extra money needed to pay for the higher minimum wage come from? It will come from employers, who will pay relatively more of their gross revenues in wages, and from consumers, who will pay higher prices for the products produced by the now more expensive workers. Who ultimately will pay the most will depend on the nature of the business operations, the nature of the products, and the various factors that determine the supply and demand, both for the workers and the products. Surely, as Keating points out, small businesses, especially, will be hurt by a minimum wage hike. “At the margin,” as economists like to say, some businesses will find they cannot remain in business at the higher wage rates.

Consider the following study where

economists David Neumark and Olena Nizalova documented the long-run negative consequences of following the Democrats’ favorite policy. They began with the insight that minimum wages are particularly tough on young adult workers; the literature shows that lengthy unemployment can have a “scarring effect” on them, the economists noted. That is, young adults unemployed for a long period have significantly morenegative labor-market experiences well into adulthood.

So will the wage increase proposed by Congress have the desired benefit? Will it lead to improved automation and cost reductions to offset the predicted unemployment and increase in prices? Or will it have more detrimental effects? Should the President sign the bill, we will have the opportunity to find out.

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