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Skills vs. Wages

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People with different job skills and responsibilities get paid different amounts. That’s no surprise to anyone. No one thinks it’s strange for the President of the United States to earn more than the president of your local school board after all. But it’s something that often gets forgotten in the debate about people who earn the minimum wage.

Let’s say you own a home with a large lawn and there are several teenagers in the neighborhood interested in mowing that lawn. You might pick the one who will charge the lowest price or Ned… well, because he asked first. Because the skills needed to mow the lawn are pretty basic, you’re confident the job will be done to your satisfaction.

Now let’s say the government passes a law that says you now need to pay at least 40% more than you intended. What do you do? You might simply decide to start mowing the lawn yourself or you might become a lot pickier in deciding who gets the job. You may switch to the person who does it with the most attention to detail, which isn’t Ned’s strong point. So now Ned is unemployed.

Well the same thing happens when the government increases the minimum wage. In accounting terms, a higher minimum wage means employees are more expensive. When this happens, business owners often lay off workers simply because they can’t afford the added expense and it makes good business-sense to keep the most skilled employees (like our lawn-mowing scenario).

Unfortunately, it’s the lower-skilled workers who may need the raise the most who are out of the job and are often the ones hurt by the unintended consequences.