There has been a lot of talk recently about raising the minimum wage and why or why not it should happen. Seattle decided to take a step in the populous direction and raise their state minimum wage. So, were they right or wrong to do this? Unless you are a fan of inflation, this is completely the wrong decision.
Reason 1: Unemployment
Prior to the year 1912 there was no minimum wage, at the state or federal level. The result? Unemployment consistently stayed below 5 percent(NBER). I can hear the minimum wage advocates now. "Sure there was low unemployment but there was still a lot of people in poverty and a widening income gap." Whats that? You mean even without a minimum wage there was rampant poverty and a wide income gap? Logically, it makes since. The goal of capitalism is to turn profit and become as wealthy as possible. Unfortunately, not everyone can do that. In capitalism there are two types of people, management and labor; it is must unadventageous to be the latter.
But, I digress, the reason unemployment remains low when there is no minimum wage is because business can keep their cost as low as possible, expand, open new plants, and conversely hire more workers. The issue is not the low wage of the employee. It is the high profit of the business in conjunction with the low wage which upsets the masses. Long story short if we raise the minimum wage unemployment will increase. Both in the short and long runs.
Reason 2: CPI Increases
No matter what school of economic thought you are from, you should be able to acknowledge that raising the minimum wage will also raise the prices we pay on our goods. If you believe that prices are "sticky" then you only see the prices increasing in the long run. If prices are not "sticky" then prices will change in the short run as well. What will happen when these prices increase? This will trigger another call for a raise in minimum wage because wages are relative to the price of consumable goods. (Ie. Expect to see $8 lattes at Starbucks the next time you are visiting Seattle.)
So what do we do? We are attacking the problem from the wrong angle. The issue is not that low rung employees aren't getting paid a high enough wage. The issue is that they feel they cannot consume as much as they deserve in comparison to their upper management buddies. There are two ways to lower prices, decrease demand or increase supply. Demand is defined as, what consumers want and CAN buy. So buy raising the minimum wage we will again actually increase prices. How do we lower demand? Get rid of the minimum wage. Well that doesn't sound like a viable option either. Actually, the best way to combat the issue is to flatten out the demand curve. That cannot be done through manipulating the minimum wage. To increase the quality of living of those living on minimum wage an entirely different discussion needs to be had. Perhaps over an $8 latte on a bench atop Capitol Hill.