One of the ballots that passed in Colorado on Tuesday was an increase in the minimum wage.  I also saw that Pelosi wants to have the Federal minimum wage boosted (which would knock it up a dollar more than the increased CO level).

Yesterday, I spoke with a co-worker who voted for increasing the minimum wage.  I gave him my reasons why I disagreed with his decision, and at the tail end of our friendly discussion, a different co-worker came by.  She caught the topic and asked, “Did the mimimum wage initiative pass?”

I told her it had, and her face dropped.  She said told me that she and her husband own a couple of small businesses.  I asked her, “Do you have any employees?” and her response was a very telling: “Not anymore.”

There are two things that raising the mimimum wage will do to the economy.  The first is that it will directly harm small businesses.  This is rather easy to demonstrate with a little math.  Suppose you own a bakery.  You have an employee who gets you $6.00 every hour in income.  You have to pay this employee $6.15 every hour.  This means that you are losing $0.15 every hour.

You have two options: you either increase the prices of everything or you fire your employee.  Here’s the problem with increasing the prices of everything: most people don’t earn minimum wage, and therefore their income is going to remain the same.  As such, they won’t have as much disposable income (unless or until a cost of living adjustment happens during their raises) but everything will cost more.  This means that, at least right off the bat, people will buy less; and if they are buying less then the employee that used to get $6.00 an hour for his employer is now making less.

This leaves the unpleasant option for many small businesses that they will have to axe their employees.  Thus, unemployement will go up.  However, buisnesses have to have a mimimal level of employement in order to provide services; so when all the jobs that can be cut are, the prices will then go up to compensate.

This brings us to the second point.  The stores that are least affected by this will be the mega-stores, like Wal-Mart.  They have enough products that they can spread around the cost of the increased pay raise.  As such, their prices will not go up nearly as much as those of the small buisnesses.  This will create even more of a gap between what the mass-producers can charge and what small businesses can charge.  In short, more small businesses will be forced to close.

In other words, those who claim to support small businesses, and those who claim to hate Wal-Mart, are seeking to enact legislation that will benefit the very thing they hate at the expense of those they are trying to spare.  Yet most people sit there and think, “Ooh!  Pay raise!”  They do not realize that money doesn’t grow on trees–it comes from the sale of goods and services.  And simple economics are in play: if expenses go up, the price must go up too.