(L120 & 125) The Broken Window Fallacy: Minimum Wage Requirements

Why wouldn’t someone voluntarily offer you a job at twice today’s minimum wage?

Story time! Let’s say that a small business opens up selling handmade jewelry and other goods in the middle of a New Hampshire town. Let’s also say that the current minimum wage in New Hampshire is $10.00 an hour. At this rate, the business owner can really only afford to hire 5 employees (in total). So the owner hires his employees, and business is alright; they are new in town, so large profit margins and excessive foot traffic are not to be expected.

After about 6 months of being open, business is rapidly growing. The owner is finally getting out of the red, and into the black! There is so much business in fact, that the owner needs to hire more workers just to keep up. He decides to add 2 more people to the team; it won’t quite cover all of his needs, but because of the high minimum wage, it is all that he can afford right now.

The night that he interviews for his two new employees, a woman comes in asking for nearly $20.00 an hour. Her skills are extensive, and she would be able to bring brand new products into the shop without any training whatsoever. Not only would she save him time, but she would make him money! He thinks back on his other employees; no prior knowledge or skills, no new ideas, nothing even nearly as valuable as this employee would be worth to him. If it were up to him, he would be paying his employees exactly what he deemed their skills to be worth; maybe that would mean $8.00 an hour for a cashier, $8.75 an hour for an opener and a closer, etc. However, since he was forced to overpay for their basic services due to government intervention, he cannot afford to hire this valuable and worthwhile prospective employee.

In short, he is in need of two more workers. He would be able to afford both the above average woman and another cashier/clerk if it was not for minimum wage requirements. With these requirements however, he must choose between superior product and a shortage of man power, or basic work and enough workers to scrape by. In the end, a shortage of workers is just not something that a business (owner) can afford, and so he must kiss this great opportunity goodbye. This issue could have been completely avoided had he and the employees been able to come to an agreement on a fair hourly wage without government intervention or mandate.

When an owner is forced to pay someone more than they’re worth, they lose out on opportunities to hire higher quality employees for a greater cost. This is the broken window fallacy; the seen and the unseen. While we do see that an average worker is being paid very well, we do not see that a better worker is being paid less than they deserve or not being hired at all (because of the average worker’s forced wage).

(L45) Loans & Depreciation

Why shouldn’t I borrow to buy something that depreciates?

I will never borrow money to pay for an item that depreciates in value because in the long-run, the item will end up costing me even more than it should have in the first place. Say, for example, that I borrowed money to buy a brand new car. Well, not only will I be paying interest on the loan that I used to buy the car with, but the car will also immediately drop in value the second that I drive it off of the lot.

In short, this means that I am going to pay more than the car is actually worth from the minute it’s mine. On top of the extra money I am paying to own the new car which will only decrease in value over time, I am paying money to the person I borrowed from. Added together, I am paying a great amount more for the car than it is physically worth. Five years down the line, the car will sell for even less money than it would have the year before. Basically it is just a great loss to me in terms of the future.

Another reason not to borrow money for something that depreciates in value is the issue of repayment to the lender. Borrowing money to invest in a business for example would be a great future oriented decision. A business would bring in more income (hopefully) than it cost me, and I would be able to repay the lender with the least amount of interest costs possible. However, borrowing money to pay for an item that loses value over time will only make it more difficult for me to repay the lender because I am losing money (value) each day. This will also result in me paying more money in interest than I would had I invested in something that has increasing value over time.

(L30) How Much Is Television Really Costing You?

How much money won’t I have at age 70 if I keep watching TV? Is TV worth this?

For the past week, each day I have recorded the amount of time I have spent watching television. I had estimated that I would be watching around 15-20 hours of television a week; the total ended up being extremely close at 15 hours and 2 minutes. Now to calculate how much money I would be losing in this time, I decided to multiply 15 hours (a week) by 4; this left me with 60 hours a month lost to television. I then plugged this information into a compound interest calculator at $1200 dollars a month (assuming I would be making $20 an hour at the very least running my own business), with 53 years to grow at a 10% interest rate. (I am 17 years old right now, so in 53 years I will be 70 years old. Because the compound interest calculator does not accept $0 as a current principle, I was left to enter $1.) At this rate of television viewing, by the time I am 70 yeas old, I will have lost $22,355,756.67! Now that is a lot of money!

Exercises like this help people such as myself realize how valuable time really is, and more specifically, how much downtime will cost you in the long-run! Who needs a few hours of relaxation every night if you can spend the better portion of your life relaxing because you spent those extra hours working. Television is absolutely not worth the cost, however to be fair, I do find myself watching more sermons, speeches, and outreach missions than meaningless television shows. I use the majority of my television time to learn, and expand my understandings of The Bible and God’s world around me. This learning time is important to me; it has a lot of value to me in an informational sense, as well as a relaxation sense. There will always be trade offs between time and money throughout each persons lifetime; value however is subjective, and so this is a decision each person needs make for themselves.