“By the authority vested in me as President by the Constitution and the laws of the United States of America, I hereby mandate the following: the economy will grow at 4% every year going forward, unemployment will fall to 1%, and we’ll be a prosperous nation.”
Barack Obama, I wouldn’t be surprised to see an executive order from him with a similar language.
The more he implements his economic policy, the more I believe he knows nothing about how economies work. It seems he truly believes the government is so powerful that it can change some basic economic principles.
In economics 101, we all learn that when the price of something goes up, demand goes down. But the current administration is now proposing a law that completely ignores that principle. Let me explain.
President of the United States of America
In his State of the Union Address, President Barack Obama asked Congress to raise the hourly minimum wage from $7.25 to $9 to help fight poverty. Besides that 24% increase, he also wants to anchor it to inflation.
The truth is, labor also follows basic economic principles. When the price of labor goes up, demand goes down.
In other words, increasing the minimum wage would make hiring more expensive for employers. So they would try to cut down on hiring.
Federal Reserve economist William Wascher and David Neumark, director of the University of California’s Center for Economics, have reviewed several academic studies on this issue. Almost all of them concluded minimum wage
laws end up increasing unemployment.
So if Congress approves this new minimum wage, the jobless rate will likely go up, and not down as the government expects.
The Economist once described Milton Friedman as “the most influential economist of the second half of the 20th century… possibly of all of it”.
His position on the minimum wage law was clear. He thought it was a law that says “employers must discriminate against people with lower skills.”
Imagine someone whose service is worth only $8 an hour. With the new minimum wage law, hiring that person would become illegal. Here’s how Friedman explained why nothing good can come out of minimum wage laws:
“Do-Gooders believe passing a law saying nobody shall get less than [a minimum wage] is helping poor people who need the money. You’re doing nothing of the kind. What you’re doing is to ensure that people whose skills do not justify that wage will be unemployed. It is the exact people who the do-gooders are trying to help that are hurt the most – the poorest!”
Barack Obama claims a higher minimum wage law will help the poor. But as Friedman explains, such law would backfire in a big way, hurting the poorest and less-skilled the most.
And it gets worse…
Since retirees no longer work, a new minimum wage law wouldn’t impact them in any way, right?
Here’s a shocker: a new minimum wage law would also be bad for retirees!
The Federal Reserve won’t even think about hiking interest rates until the unemployment rate drops below 6.5%. Since a new minimum wage law would probably increase unemployment, it would delay the Fed’s interest rate hike.
For retirees, that means traditional sources of income will continue to pay nothing for a very long time and will continue to be dead money.
If you’re looking for retirement income, my advice is to invest in companies that have a stable history of paying dividends. Companies such as Intel offer super-safe dividends.
The chart below shows the price of Intel (left scale) and its dividend yield (right scale). It’s best to buy shares of great dividend companies when the dividend yield is high. That normally indicates the shares are cheap.
I think it is quite probable that the minimum wage and ever increasing employment legislation combined are having a major effect on employment and out growth rates, what do you all think, have your say by commenting below.