Kook of the Week: Governor of the Bank of Spain

by wisdomhunt

If something costs less money, you can afford more of it. If something costs more money, you can afford less of it.

In case this isn’t self-evident, consider a simple example. You have $3 and go grocery shopping. You would like to get 3 apples to eat. At the grocery store, one apple costs $1. You buy three of them and leave happy.

The next week you go back to the store to buy three more apples with your $3. Unfortunately, there has been a mandate that apples must cost $3.50 each. You can’t afford even one. Instead, you can either buy 2 pears for $1.50 each, or leave with neither fruit.

Now consider the labor market because it completely turns the examples I just gave upside down. Many economists agree that the labor market uniquely defies the economic law of supply and demand. The labor market is unique in that setting a minimum price that must be paid does not affect how many people are employed. Everyone is better off with a minimum wage.

Suppose that you own a restaurant and would like to hire someone to help clean the floors. A government mandate exists that you must pay them at least the minimum wage of $7.25/hour. The difference between this example and the fruit example is that there is no pear alternative when it comes to labor. You can either hire someone for $7.25/hour or you can not hire them.

Now the reason why minimum wage laws are so good is that, according to wise politicians, every business can easily afford the $7.25/hour. That rate is not going to make or break a single business. You, as a restaurant owner will still hire that person to sweep the floors for you at $7.25/hour. In fact, I have argued in the past that if $7.25 is good, then $50 is better. You would still undoubtedly hire someone to sweep your floors at even $50/hour.

How many times have you seen a local store going out of business? Rarely, if ever, and especially rarely in the industry that hires many minimum wage workers: restaurants. Restaurants make money hand over fist and can easily afford to hire anyone at $7.25 and even $50/hour.

This is why you also see Wal-Mart recommending a raise to the minimum wage. They can afford it.

But apparently the Governor of the Bank of Spain, Luis María Linde, disagrees with the law of supply and demand for labor. He has come out advocating the removal of the minimum wage to increase employment.

Obviously this is nonsense. No business hires more workers just because they are willing to work for less than the minimum wage. This would allow a business to take advantage of people that have no skills and no prior work experience, allowing the worker to get a foot in the door and learn some skills and discipline and build their resume. It is better to have those people just not work at all even if they want to work for $5/hour.

We can chalk this up as another example of why the United States is the best economy in the world.

And we will only get better if we increase the minimum wage to $50/hour.