Increasing Minimum Wage

One of the political battles currently being waged here in Minnesota is an increase of the state mandated minimum wage:

Minnesota’s legislative Democrats have struck a deal to raise the wages of the state’s lowest-paid workers.

Details of the agreement are expected to be released by House and Senate leaders Monday morning, but two sources with knowledge of the deal said Sunday that the minimum wage would rise to $9.50 an hour and future increases would be linked to increases in inflation.

The first question I have to ask about this deal is which inflation metric would minimum wage be pegged to? There are several different measures of inflation. Inflation numbers reported by the state are heavily doctored to make things appear better than they are. If this deal uses any state-approved inflation metrics pegging minimum wage to inflation will be meaningless.

As an individual who subscribes to the Austrian tradition of economics (also known as the only tradition that actually knows what it’s talking about) I will point out that increasing the state mandated minimum wage will also lead to an increase in unemployment. And as an agorist I believe an increase in unemployment will lead to an increase in the minimum wage.

How can I make such lofty claims? Because there exists an “underground” economy. Being unemployed doesn’t mean a person isn’t making money. Most people faced with the prospects of starvation or breaking the law will choose the latter. That means people who are officially unemployed will seek employment in the “underground” economy. The biggest advantage of working in the “underground” economy is that any income received is off of the books. Income acquire off of the books cannot be tracked by the state and therefore cannot be taxed. By working in the “underground” economy individuals need not spend half of the year working for Uncle Sam.

Without having to pay taxes the average person would enjoy an sizable increase in their wage. Increasing the state mandated minimum wage also increases unemployment. Increasing unemployment causes individuals to seek “unofficial” employment. Income from “unofficial” employment is untaxed. Therefore laws that increase state mandated minimum wage can increase the actual minimum wage but not through the mechanism that statists believe.