Wednesday, 20 July 2016

The economics of the minimum wage in one diagram



UPDATE: The dinosaur has a follow-up question to ponder: Why, or why not?


[Hat tip Keith Weiner, Tom Woods]



  1. Just for interest sake: the "dinosaur" meme is refered to as the Philosoraptor.

    Yes, I I heard that from a millenial.

  2. Amazing, even before evolution of the thumb, the idea of telling others what to think
    and do was alive in its mind.

  3. Great diagram. Though it disproves the Business Cycle theory "that interest rates are key"

    If minimum wages shut the factory then it dont matter what level the state sets interest rates.

    The key is can i borrow and make more than the cost of capital? Doesnt matter what the actual rate is.

    Given the size and scope of the state increasingly more people are not borrowing even if the interest rates are negative.

    1. It is assuredly a great diagram. But I think you misunderstand the [Austrian] business cycle theory.

  4. There is of course another option that the diagram missed: Taking a slightly lower profit margin.

    This is why in the real world minimum wage laws have not been a big deal for businesses at all. Forget about the nonsense non-falsifiable Austrian theories and focus on what actually happens in reality.

    1. Which of course leads to the next step of seeking either a new business or new processes (or new machinery) in which profit margins are restored -- which is simply a subset of all of of the above. So, no, really.

    2. No it doesn't 'lead' to initiatives to increase profit - management of every business does that 24/7 regardless.

      That diagram was no doubt made by a dumbass American theorising what would happen if a minimum wage was introduced in his state. But what we've seen in NZ and everywhere else is that minimum wage does not cause the sky to fall in.

    3. Ben - Money tends to flows towards where it gets greater returns. If for instance a business owner is having to work extremely hard to make a small profit, the owner one day might one day stop and ask himself is he better off investing his time and effort into something else (buying a rental property for instance). Even if he sticks with what he's doing because he loves it, he won't be motivated to expand, and nor will the bank be motivated to lend him money to expand - and lend instead to less risky (more profitable) businesses. If you don't understand that you're the dumbass.


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