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Why Raising the Minimum Wage Will Increase Inflation and Hurt the Economy

Economics / Inflation Sep 04, 2014 - 06:28 PM GMT

By: Jeff_Opdyke

Economics

It goes to show that even the president of the United States doesn’t understand why America’s economy is structurally flawed these days, despite the recovery.

At a Labor Day rally in Milwaukee on Monday, Mr. President said that if he had a service-sector job and “wanted an honest day’s pay for an honest day’s work, I’d join a union.”


For the man charged with making America a competitive country in a global economy, taking sides against business owners by espousing solidarity with the socialist ideology of American unionism isn’t so wise. But I’ll overlook that for the moment,  because the real story is that, once again, the words from our leaders underscore the fact that the people we place at the highest levels of government — and the officious and academic minions they surround themselves with — often don’t have a real-world understanding of the game they’re playing.

For our economy, it’s all very bad news. It means we cannot grow to our potential, a distinct weakness for an economy addled by long-term joblessness and obese with debt. For each of us personally, it means we are forced to suffer financially and find ways to protect our wealth from what we know is coming.

Tomorrow, fast-food workers will go on strike or conduct sit-ins in more than 100 cities across the country. For whatever reason, these workers have concluded that they should be paid $15 per hour to fry chicken, flip burgers or take an order.  As a service-sector worker in Cleveland told the New York Times earlier this week, “We deserve a good life, too.”

Ok. But not every job skill deserves $31,200 a year.

Deserving a good life and earning a good life are not interchangeable. I think I deserve a factory-correct Aston Martin DB6 like Sean Connery’s James Bond once drove … alas, I do not earn enough (yet) for a factory-correct Aston Martin DB6 like Sean Connery’s James Bond once drove.

The crowd that Obama speaks to loves to yabble about income equality and bringing more Americans into the middle class. They think that raising the minimum wage is the answer to that noble cause, though they apparently don’t stop to consider that old saw about pushing on a balloon in one area only makes it bulge somewhere else.

In this case the bulges that pop out elsewhere on the balloon are the signs that American service-sector workers, encouraged by the Economist in Chief, are ultimately working toward their own demise. They are pricing themselves out of a job.

Salaries do not grow on the magical salary tree. They come from what would otherwise accrue as profits to the capitalist, the business owner. Raising salaries, therefore, raises the cost of doing business, which has two direct, interrelated impacts:

  1. It means you and I pay more for whatever we’re buying, since business owners — the ones who put up the capital to open the business in the first place — are not going to reduce their share of the business to any excessive degree. To keep their profits at an adequate level, they will raise prices to afford the higher wages … and, thus, begets inflation.
  1. It makes America less competitive globally. If we lived in a closed economy, we wouldn’t care about the cost of labor in Brazil or Mexico or Malaysia. But because we operate in an open economy in a globalized world, we compete with global labor … and globally there is a glut of labor, which means certain categories of American workers are already overpaid relative to their peers overseas. So, every time we raise the cost of labor we are making America a little less competitive.

Cutting Out the High-Paid Burger Flipper

True, none of us are ordering cheeseburgers from Bangalore or Bangkok, so Point #2 might seem moot. Yet raising the cost of labor at the lowest end always trickles up because of Point #1 — those who risk their capital want a return on their investment. As low-end labor earns more money, higher-level labor rightly wants a raise, too, to maintain economic separation based on perceptions of worth, education or skill set. Plus, there’s that wage-induced inflation bugaboo that means all employees will want more money as the cost of burgers and other stuffs go up.

As costs rise for skilled labor and middle managers, the capitalists always find ways to do reduce headcount, typically replacing them with technology. Back in April I wrote that burger-making machines are soon to replace the burger-flipper, while new order-entering kiosks I came across in Madrid earlier this year indicate that the fast-food order taker is an endangered species on the road to extinction. Even radiologists here in the States are losing their jobs these days to low-cost radiologists in India who can read an x-ray delivered by email.

If I’m a Mickey D’s franchisee, I’m already preparing to load up on kiosks and can my breathing, $15-per-hour order takers; therefore ridding myself forever of the labor cost, the benefits cost and the headache of dealing with employees who have “issues” to manage and a misguided belief that they deserve $15 every hour for simply asking customers if they want to supersize their meal.

The Gold Lining to Higher Prices

We are now on the cusp of increasing interest rates as the Federal Reserve winds down its excessive easy-money campaign. We’re already seeing minimum wages rise across America with certain cities mandating higher pay, and workers, in general, are angling for higher wages now that they perceive the U.S. economy to be healthier than it has been in recent years.

Inflationary pressure, as a result, is clearly visible, since wage-pressure has been the missing ingredient every pundit has pointed to in the last several years to explain why we’ve not yet seen inflation ramp up.

Well, inflation is ramping up. On an annualized basis, the last three months of consumer price index (CPI) readings indicate an inflation rate exceeding 3%, and that will go higher as increasing salaries begin to flow through the economy.

In short, we’re at an inflection point in America. Seven years of anemia is about to give way to higher and higher prices. That will reduce expectations on Wall Street, leading to stagnating share prices, and it will boost the fortunes of gold.

But at least the people frying your chicken will be earning $31,200 a year.

Until next time, stay Sovereign …

Jeff D. Opdyke
Editor, Profit Seeker

As a lifelong world traveler, Jeff Opdyke has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. These days, he is Investment Director and the editor of the Profit Seeker and The Sovereign Investor, The Sovereign Society’s exclusive monthly research newsletters.

http://thesovereigninvestor.com
© 2014 Copyright  Jeff Opdyke - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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