Is More Money Really More Money?

Attempting to ease the pressure on the poor by increasing the minimum wage is a fallacy. Raising the minimum wage makes poor people poorer. On the surface, this seems incorrect. After all, they have more money. Or do they? One must recall that one dollar today is worth far less than one dollar was worth a hundred years ago.

But, but, you’re talking inflation! This would be immediate!

I know, I know. Let me break down for you why you have less money if companies are forced to pay you more. Companies are not going to eat the cost of paying their minimum wage employees more. They are going to pass that extra cost into their product’s purchase price.

AHHA! I got you now! The price would just go up by the same amount they are paying out! You’re dumb!

Nice try, my imaginary alter ego. Unfortunately, business doesn’t run this way. Every business functions within the rules of their business projection, which is edited every year. These projections do not state that the business must make $x.xx in profit. Instead, they say that the business must make x% in profit. This number is typically somewhere between 3% and 8% depending on the business. I’m going to use very small numbers to illustrate my point. What would happen is exactly the same, only the numbers are typically in the millions or billions.

Let’s say that a company spends $92 to produce their product and pay their employees. From this expense, they generate $100. Their profit goal is 8%. Have they made their goal in this situation? The profit is $8. 8/100 = .08. Move the decimal and you have 8%. They are dead on their profit margin.

Now, Congress just initiated a minimum wage increase that resulted in this company’s expense being $92.10. Logic would say they just need to increase the price by ten cents and generate $100.10 to make up the difference. Let’s do the math. We still have an $8 profit, so it should work out the same, right? Wrong. 8/100.10 = .0799. Move the decimal and you have a 7.99% profit, which means the company did not meet its goal and somebody is likely getting fired. Management, who would like to stay employed, will instead increase the price by a number that will still result in an 8% profit. This means that the overall price will have to increase. Another penny will do the trick, which will increase profit to $8.01. 8.01/100.10 = .8.

So what does all of this mean? It means that you overall have less money. You gained 10 cents in wages but now pay 11 cents more than previously. You have a bigger number of dollars in the bank, but you have less monetary value. The poor get poorer.