Does Minimum Wage Lead To Communism?

We all think that we should have minimum wage laws, that we should raise it and that the poor can’t live on the current wage level. I’m here to expand your mind.

What’s Communism?

Communism is the political model where the government controls the entire economy and owns everything. Meaning, private citizens don’t own anything. Here the government intervenes in the economy at will, inconsiderate of whether the economy wants something, doesn’t want something or is ready or not ready for something. 

When The Government Intervenes in the Economy via Minimum Wage, Is That Communism?

Yes, because there is no longer a free market pricing labor anymore. In capitalism, which is the opposite of communism, everything has a market. Meaning, that everything has a supply and a demand. This includes jobs, wages and salaries. For jobs, this translates to employers who supply jobs and employees who demand jobs.

When the labor market is free, everyone is allowed to bid (demand) for the price he wants and everyone else is allowed to sell (supply) at the price she wants. Not only is this allowed, but this happens every day!

Once the seller of time and the buyer of time come to an agreement, a transaction is made. This is a transaction of time for money (in the employee’s point of view) or money for time (in the employer’s point of view). This is capitalism. Let’s define it quickly.

What’s Capitalism?

Capitalism is the political model where almost everything is controlled by private citizens, like you and me. The government is allowed to control very little and owns almost nothing. It controls things as which numerical system we’re allowed to use (imperial or metric), which currency we’ll trade in (dollars or gold), which contracts will we use, etc etc. Here, the entire economy is in the hands of private citizens and not the government. That’s capitalism.

So, How Does Minimum Wage Control The Economy?

In 2010 there were 27,900,000 small businesses and 18,500 big businesses in the U.S. If the government decided to raise or lower the minimum wage by $0.50, do you think that would affect the economy? What if it raised or lowered it by $2.00, would that affect the economy? Yes. In both cases, it would. Any rise or decline, no matter how small or large, would have a proportionate impact on the economy. It’s just basic math.

What’s The Math? Give Me An Example.

Let’s say there’s a burger place that sells burgers for $5 and has only one employee whose paid $10/hour. If the government decides to raise the minimum wage by $2, what would happen? Well, the employer whose is paying the employee will have to raise the employee’s wage by $2, making it $12. Does this affect the employer? Yes. That 2$ might have been what was keeping the restaurant profitable.

So, What Choices Does The Employer Have?

He can become more efficient in his business (as in bring the business costs down), he can charge more for his burgers or he can close down the business. Let’s examine each option.

1) If he makes his business more efficient, great! He continues to make money which allows him to keep the restaurant running and the employee employed.

2) If he raises the price of his burgers, that’s not so great. Let’s say he was selling one burger per hour at $5 while paying $10 for the employee. Now, he has to sell one burger at $7 to pay $12 to the employee. It’s a proportional increase.

Here’s where things get bad. If the employer does this, he’ll start to lose customers to a point where he’ll have to eventually close down the business. In fact, a small business who can’t hold on while the economy rebalances will have to close its doors. However, when a big burger chain does the same thing, it will also lose customers. But, it will have more cash and assets to be able to wait out the current chaos.

On top of that, raising the price of burgers will artificially inflate the GDP of the economy. This can be seen in the chart below, where minimum wage (in blue) is correlated with GDP (in red).

If our burger place was the only business in the country, it would artificially inflate the GDP by 40%! ($5 minus $7, the difference divided by $5)

3) The third option is to close the business, move to a country more favorable to businesses and start one there —since he can’t afford to give the employee a 20% raise. This hurts the economy.

Let’s Scale This Thinking

Let’s apply this model not only to one restaurant but to 1,000. How many do you think will become more efficient? How many do you think will raise their prices and lose customers? And, how many do you think will close their business?

Now, take this model and apply it not only to 1,000 businesses but to the 27.9 million businesses in the U.S. Now, I hope you can see that a good portion will get efficient, a good portion will raise their prices and lose customers and a good portion will close their businesses.

In other words…

When the government raises or lowers the minimum wage, they intervene in the economy which is by definition a communist act.

Minimum Wage & The Cost Of Living

Today, the minimum wage in the U.S. is $7.25. And, the Consumer Price Index (CPI), which is the cost of living, is 244. This can be seen in the chart below where the minimum wage is in blue and CPI is in red.

As we can see, they are both correlated. In other words, a rise in minimum wage is correlated to an equal rise in the cost of living. And the opposite, a decline in the minimum wage is correlated to a decline in the cost of living.

The Fair Labor Standards Act (FLSA), also called Wages and Hours Bill, was enacted in 1938. Though it did raise the minimum wage, the minimum wage didn’t rise above the cost of living. As in, we aren’t making more than the cost of living. As in, the FLSA doesn’t benefit us.

What Does This Mean For Us?

It means that a rise in minimum wage would eventually equal to a rise in food, oil and homes. And, the opposite, a decline in the minimum wage would eventually equal a decline in food, oil and homes.

Think about it for a second. If a burger cost $500,000 and a home cost $100 billion, do you think people would be working for $7.25/hour? No. Why? Because they’re we wouldn’t be able to feed ourselves. What about if a burger cost 75 cents? Then, people wouldn’t be working for a minimum wage of $100/hour. Why? Because the price of a burger would either go up or the minimum wage would have to come down. The former is more likely

This is why we sometimes hear people say, “Back in my day, a can of coke cost 10 cents.” And, we automatically assume that life back then was cheaper and the people were richer. However, we fail to ask, “How much were you making per hour?”

In the 1940s, a can of coke cost 5 cents. Guess what the minimum wage was? 25 cents…..

If Minimum Wage Was 1$/hour, Why Would A Company Lower Their Prices? Why Wouldn’t They Just Keep The Prices High & Pay Employees 1$/hour?

Let’s take a company like Coke for example. Coke would lower its price because people would stop buying. Who would work for 1$/hour and pay 1$ for a can of Coke? No one. By the laws of supply and demand, Coke would be forced to lower its prices if it wants to stay in business.

And if the other beverage companies, like Nestle, started lowering its prices before Coke, then it would capture a bigger market faster. And so, Coke is really forced to change its prices because of 1) it wants to sell its products and 2) because of competition.

Thus, through competition, everything would re-balance. In other words, if minimum wage didn’t exist, prices would still be balanced.

“But, Poor people wouldn’t be able to survive on 1$ a day…”

If you were thinking, “poor people wouldn’t be able to survive on 1$/hour,” I hope you can now see how the economy would rebalance itself to reflect the new price of labor. And eventually, everything would be correlated again.

In short, the higher the minimum wage, the higher the price of goods and services. And, vice-versa.

How Does Minimum Wage Affect The Economy

If wages go up and the currency maintains its current standing, products will become more expensive not only at home but on the global markets. This will slow down exports, which will hurt our economy and GDP. However, lower wages would mean lower product prices at home and abroad. This means we could export more products which in turn keeps more workers employed. This is why jobs are moving to China and why China rose to the second largest economy.

So, Why Does The Government Raise The Minimum Wage If Eventually The Cost Of Living Will Catch Up?

There are four reasons why the government raises the minimum wage:

1) Because people want it. Give the people what they want, they’ll be happy and you’ll continue holding your job, remain in power, and get re-elected.

2) Because it artificially inflates the economy. By raising the minimum wage, we raise the price of products sold thus raising the GDP. Now, the president can say, “During my term, I increased the economy by $500 billion.” Why does a president want to be able to say this? So, that he can get re-elected.

3) Because people think businesses are cruel and evil employers who are preying on the downtrodden, oppressed and poor people. So, we need to stop them and raise the minimum wage so that, the profit sharing is fairer.

But like I showed above, raising the minimum wage will make the employer get more efficient, raise prices or sell the business. In two out of those three options, as in 66% of the time, it doesn’t help the employee because it leads to loss of customers or no job. Both lead to the employee having no job.

In fact, if the employer is sophisticated, he’ll sell his business and move to a country where the minimum wage is lower. There, he’ll have a higher profit margin. I talked about this in this article: “Is the Manufacturing Decline A Myth?” where globalization is putting big downward pressure on American wages. 

Can you blame the employer for moving his business to a country with lower minimum wages? No, of course not. He was losing money while working. How would we feel if we went to work every day knowing we’re getting poorer? If you’re sophisticated you’d quit and find another place to work.

4) And the fourth reason why governments do this is because by raising the minimum wage, this puts people in higher tax brackets. Which means the government will collect more money via taxes. It’s interesting here to point out that Swiss voters happily rejected an increase in the national minimum wage. They refuse to follow what most bankrupt western nation has done or proposed.

In Conclusion

The economy is run by employers and employees. It has and always will be. They both live in this well-balanced tandem called supply and demand —which are often more powerful than laws made by legislators. But, when legislators intervene at force, it creates unnecessary chaos.

Anytime the government tries to control minimum wages, which is unconstitutional, the employer will have to get more efficient, raise prices or quit the business. Plain and simple.

I hope you enjoyed this blog. I know a lot of you are having epiphanies, some may even be furious. But, entertain the idea. Put yourself in the shoes of the employer. Think beyond the fact that you may work for minimum wage. Think on a global scale.

Remember, the mark of an intelligent citizen is the ability to understand both sides of the argument. And today, you were given the point of view of the other side the employer side.

To your success,
Nikhil Mahadea

  • Great read and conveyed the message spot on. From my understanding of economics, whenever the government gets involved in anything, from housing to business, it tends to leave a mess of things. I can understand their good intentions, but the world doesn’t work that way and it’s better if they sit back and play by ear when it comes to these sorts of things. Anyway when it comes to minimum wage I completely agree with what you are saying but I believe the primary reason for the demand is that the cost of living is increasing. In the end people don’t need raises, people need to manage their money better. Someone who clears $1000 a month (which is a little less than minimum wage actually since in Canada you get roughly $600-700 every 2 weeks roughly) can live off of that if they’re smart with their money.