President Obama’s proposal to increase the federal minimum wage is a case of what Nobel laureate economist Paul Krugman calls “zombie economic ideas.” According to Krugman, “a zombie idea is a proposition that has been thoroughly refuted by analysis and evidence, and should be dead—but won’t stay dead because it serves a political purpose, appeals to prejudices, or both.”
A fundamental law of economics—the law of demand—states that when the price of anything (including labor) increases, the quantity demanded will decrease, assuming other things affecting demand remain unchanged. In the case of labor, this means as the price of labor (the wage rate) increases, the number of jobs will decrease, other things constant. Moreover, the decrease in employment will be greater in the long run than in the short run, as employers shift to labor-saving methods of production.
Economic growth, not price fixing in the form of a federally mandated minimum wage, is the only path to prosperity. Economic freedom and limited government are paramount in the process of wealth creation through mutually beneficial market exchanges ..
The minimum wage has the most serious impact on the least productive workers who are likely from poor families. Increasing wage rates by government fiat is not a solution to the problem of poverty; increasing economic freedom so people can lift themselves out of poverty is a better alternative to zombie economics.
Reducing the size and scope of government, lowering taxes on labor and capital, ending corporate welfare, lowering the costs of doing business, and safeguarding freedom of contract are the best practices necessary for a harmonious society and future prosperity.