As of yesterday, the state plans to raise the mandated minimum wage to $9.25 by 2018. Despite Michigan being (surprisingly) run by Republicans both in the State House and in the Governor's Office, this horror of a bill passed the House 76-34, and the Senate 24-12. (For the record, the House has 64 Republicans to 46 Democrats and the Senate has 22 Republicans to 16 Democrats)
The Republicans didn't do this blindly. There was, and still is, a planned ballot initiative to raise the minimum wage in Michigan to $10.10 an hour by 2017. Clearly, this bill is better than that alternative, but that does not make it good or wise.
Not really. All the minimum wage does it make it harder for business to employ people. Sure, some people will be making more than they otherwise would have. That's the effect that everyone sees. But, as Bastiat famously said, we have to look at the unseen effects of an action, the secondary consequences, just as we have to look at the seen effects.
The second fallacy relies on the false conception of businesses. Many politicians, along with others in the general population, think that businesses (often pejoratively referred to as "Big Business" or "the corporations") are sitting on a vault of cash and profit that they're selfishly hoarding for themselves. First, most businesses don't have that. Businesses have expenses, including their payroll, utilities, rent, and other costs they incur just in the process of operating the business. A grocery store has to buy the groceries they later sell, that money didn't come out of thin air. Most business revenue has to cover expenses, only after that is there any profit.
By making labor more expensive (raising the minimum wage), the government is forcing additional costs on a business. Someone's wage is reflective of the productivity of their labor. Right now, even with a smaller minimum wage than will come within the next few years, there are certainly some workers paid more than their labor is worth. If the minimum wage is even further raised, the problem will only be greater. Raising the cost of doing business, without simultaneously raising the productivity of labor, is bad for the economy.
Moreover, the idea of "excessive" profit, or profit as a bad thing in itself, is ludicrous. Profit is just a sign that a business has done what consumers want. In other words, a business that earns profit creates value in the eyes of the consumer, that is, the people. The people decided that whatever good or service that business provided was worth their hard-earned money, reflected in profit. A business making a profit is a good thing for everybody.
The last fallacy is that of the multiplier principle. This, among many other things, is a reflection of the Keynesian bias in much of modern economics. Essentially, Keynes believed that there exists a Marginal Propensity to Consume. What does that mean?
It means that with any increase in income comes an increase in consumption, following a mathematical model. So, advocates of the minimum wage argue that since people now have more money, they'll spend more on consumption. This increased consumption expenditure leads to more revenue for businesses, and thus more profits. They argue these profits exceed the increased costs incurred by having to pay their workers a higher wage. I actually heard this argument almost verbatim by a Democratic Representative on the radio about a week ago.
This model assumes a lot about the human being. Though some economists also advocate the Marginal Propensity to Save (the increase in saving that comes with an increase in income), both these models assume there is some mathematical proportion that perfectly covers the workings of millions of individuals. If I were to receive a raise, the degree to which I would save and spend, both proportionally and numerically, would likely radically differ from someone else receiving an identical raise.
Moreover, there's no guarantee that I'd be increasing my consumption on businesses within the state. Suppose I bought a nice book on Amazon. That book was manufactured and stored in another state. What business in Michigan gains from that?
Businesses would be forced to charge more for their products to cover the additional costs imposed by the state. While it's true there are certain things I, and everyone else, would buy regardless of price, that's not true for everything. If that same book suddenly costs $50 where it had once cost $10, I probably wouldn't buy it.
Obviously that's an extreme example, but still. The multiplier effect simply does not hold water as a mystical cure-all for any economic ills.
The increase in the minimum wage is bad for Michigan, and I'd like to end with a quote by State Representative Tom McMillin that sums a lot of this up. He voted against the bill.
"Requiring business to pay more than the market can bear is just very bad policy. This is the kind of thing that sends jobs to China. We need to keep American jobs here."
I like this. Very good. Especially liked your quote "The multiplier effect simply does not hold water as a mystical cure-all for any economic ills". Awesome.
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