“Money is your work in paper form,” my high school history teacher told my class way back in 1987. Then he pulled out his wallet and showed us a piece of green paper. “This ten dollar bill represents about 30 minutes of value that I created by teaching you. It is 30 minutes of my work represented in a piece of paper.” He then explained that by spending the money, he is trading the value of his work for the value of another person’s work.
Years later, I believe his two-minute presentation was one of the most important lessons I learned in high school. He succinctly summed up what is one of the most landmark inventions of civilization: money. Money is all of our work morphed into a purely transferrable form of value. It’s the invention that lets desk jockeys like me – the senior health care policy analysts of the world – contribute to society. Without it, I would face the daily struggle of trying to trade my white papers on health reform for food.
I’m often reminded of this lesson when public discussion turns to raising the federal minimum wage. Through his short talk, my history teacher brilliantly explained a very basic principle of economics that explains why raising the minimum wage can be risky.
You see, the trick to getting paper money to function properly is to make sure that every dollar in circulation represents exactly one dollar’s worth of work. If you print twice as many dollars but don’t work twice as much, the value of each dollar is cut in half. The soda that cost you $1 before you printed the money now costs $2 afterwards. The value of the soda didn’t double, it’s because your dollar is now only worth 50 cents. Likewise, if a person is paid $1 an hour for a dollar’s worth of work, and then is suddenly paid $2 while working the same amount, those two paper dollars are actually only worth $1. This is why sane countries don’t print money to solve economic problems. It leads to inflation and makes their currency worthless.
So assuming a country doesn’t print any more money, the value of each dollar still must remain equal to a dollar’s worth of work. Under these circumstances, giving the worker an extra dollar therefore means the worker must either: 1) produce twice as much in that hour; or 2) be given the dollar from the value produced by somebody else. The first usually means the employee must perform the work of another employee; that other employee loses his job. The second means that somebody must work an hour for free. Usually that’s the employer, who’s unwilling to do so. Instead, the employer takes that hour’s worth of value from the customer in the form of raising prices. That customer is often the employee who just got an extra dollar.
This is why raising the minimum wage has never worked as a solution to poverty. It can’t work unless production is increased, the dollar is taken from somebody else, or government enacts price controls on businesses. There is no way to get around this. You can’t create wealth by increasing the minimum wage any more than you can pour two gallons of water from a one-gallon bucket.
What I write isn’t meant to detract from the need to have a minimum wage. If the minimum wage is not raised every so often, inflation ensures that the poorest workers eventually start receiving less money than the value of what they produce. In fact, a good argument might be made for tying the minimum wage to the inflation rate. I only hope to make people realize that when they discuss raising the minimum wage, that it’s not the paper that makes money valuable. It’s work that makes money valuable.
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