Sunday, October 26, 2014

Minimum Wage

Increasing the minimum wage would be good for business. Here is why. If a business increases its wages by 10% it increases their total cost by much less than 5% because rent and inventory are a much bigger share of cost than labor. The employee however enjoys an increase of 100% in his discretionary disposable income. Money he is likely to spend as soon as he can, boosting all local business. This works best if all the businesses in the community do it at the same time, or a major employer like Henry Ford did in 1914. Ford doubled factory wages to $5 a day. The workers became consumers and the economy took off like a skyrocket. Minimum wage has been stuck at $7.25 since 2009 and we wonder why the economy is stalled.

Money has an important property called velocity.  It refers to how often or how fast it changes hands. Give $100 million to the 1% and it sits in the bank waiting for an opportunity to do a deal. Distribute $100 million in the form of a dollar an hour and that money will change hands before the sun goes down because poor people always have unmet needs. Chances are it will change hands again the next day or two as storekeepers restock or tradesmen buy materials.  Within a month that $100 million will result in half a billion of revenue while Mitt is still lining up a deal to put more people on unemployment.

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