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Resources Are Scarce In All Cases

Here I elaborate on this post in which I argue that, if you understand that cutting the funding for a government program results in a scaling-back of that government program, then you should also understand that raising the minimum wage has the same effect on the operations of employers of low-skilled workers.

The obstacle to seeing clearly that the two cases are parallel is that, if employers respond to a hike in the minimum wage in the way that most of minimum-wage’s champions believe employers respond, then the total amount of money spent by employers, per period of time, on the operations of their firms isn’t reduced.  Indeed, this sum seems to increase!  Most minimum-wage champions imagine that employers simply raise their employees’ wages in response to the minimum-wage hike.  End of story (they fancy).

But of course if employers do respond in this way, then the portion each period of employers’ revenues that is paid to workers rises and the portion remaining to cover other expenses falls.  Employers have less money to spend to buy non-labor inputs and to employ higher-skilled workers.  If we cast aside, as we should, the possibility that employers of low-skilled workers are (1) all very wealthy and (2) will each choose to maintain indefinitely his or her firm’s level of operation as a matter of personal consumption (that is, by spending his or her personal wealth simply to maintain an unprofitable level of operation of his or her firm), then raising the minimum wage will reduce the amount of output produced by employers of low-skilled labor in the same way that cutting the funding to government programs will reduce the services supplied by those programs.  And as employers of low-skilled workers reduce their outputs (as they scale back their operations), these employers will employ over time fewer low-skilled workers than otherwise.

The impetus to cut funding for government program X is to ensure that some persons get, or retain, more resources than otherwise.  If, for example, the impetus to cut government program X is to ensure that taxpayers keep more of the money they’ve earned, think of minimum-wage workers as the equivalent of these taxpayers.  Just as the cut in funding for government program X is done with the intent of ensuring that taxpayers’ (after-tax) incomes rise, a hike in the minimum wage is done with the intent of ensuring that low-skilled workers’ incomes rise.  In both cases – the cut in funding for program X and the hike in the minimum wage – the goal is to ensure that some individuals have more money to spend as they wish, money that would otherwise be available for different individuals to spend as these different individuals wish.  Therefore, if ensuring that taxpayers have more money to spend as they wish (through cuts in government funding of programs) causes a contraction in government programs, then ensuring that low-skilled workers have more money to spend as they wish (through a hike in the minimum wage) should be readily seen to have the same effect on the operations of employers of low-skilled workers.

Of course, with the above analysis I do not mean to draw any parallel, other than the very particular one that I drew, between tax (or government-budget) cuts and minimum-wage hikes.

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