In this post, I examine the economic adjustments ensuing in the aftermath of a hyper minimum wage. First, businesses would be able to pass on some of their higher cost to their downstream buyers. That way they spread around, at least in part, the redistribution in purchasing power I was talking about. So this passing on of cost gets measured as the inflationary effect of the hyperwage. This is a one-off price increase, unless (as I explained earlier) driven by money creation.
So far it sounds like redistribution of purchasing power, but the same economic output. Sorry, it's not as benign as that. Let's look at the second effect.
As labor becomes more expensive, employers cut down on their use of labor. (The problem is worsened if the minimum wage is set in real terms; even the offsetting effect from cost-push inflation will fail to materialize.)
This is because demand curves for labor slope downward. It really can't get much simpler than that. Many middle class households will have to say goodbye to their helpers. Too costly. What will they use instead? In the home, substitute household help with work done by household members themselves. (Poor Mommy!) In the factory, substitute with machinery or computerized systems. Or just simply shrink your business if you can't afford this either.
So the economic output will not remain the same. Because workers have been thrown out of work, economic output falls. Hyperwage theory is really better called hyper-unemployment theory.
Why would output fall? Because resources are idle. Why are resources idle? Because labor has been made artificially expensive by the minimum wage law. Workers would be willing to work at a lower wage than the minimum. (This is an unquestionable fact, look at the market right now.) They would prefer it to having zero labor income from being unemployed.
It gets worse - who would be the workers who remain in the work force? Why only the best and brightest, from whom employers are getting their money's worth at the hyperwage. The brunt of the unemployment problem would fall on the unskilled, i.e. the poor. So we can also call hyperwage a hyper-poverty theory.
This concludes our lesson on Basic Economics in Action: the case of the Hyperwage theory. Class dismissed.