The first thing to understand about the minimum wage is that it is a classic case of understandable emotionalism and frustration versus concrete data and economic reality. So the clearest explanation is a pros-and-cons listing.

On the pros side of increasing the minimum wage, people who are making it and who keep their jobs will make more money. Their increased earnings improve their purchasing power.

The cons side is a little lengthier.

Sharp increases in the minimum wage reduces the number of entry-level jobs

This, in turn, reduces the opportunity for unskilled workers to start getting experience. This is common sense. You cannot climb a ladder without stepping on the first rung. Minimum wage increases eliminates that first-rung opportunity for a certain number of mostly young or unskilled workers by making automation more affordable. It falls under the law of unintended consequences. The more a company must pay an unskilled worker, the more automation technology that was previously too expensive to make sense becomes affordable. Nine out of ten companies will go with the automation every time to remain competitive.

Minimum wage hikes raise prices for everyone

This naturally tends to hurt the people in the economic strata that the increase is most aimed at helping. WalMart’s everyday low prices will be higher if they have to pay every $10-per-hour employee $15 per hour. But it goes further. There were employees either doing better work or with more experience who were making maybe $14 or $17 per hour. They will demand, and deserve, higher wages. So this pushes wages higher up the ladder. Some will emotionally think this is win-win! But it’s closer to lose-lose. Every item from bread and milk and toilet paper to shirts, basketballs and trikes will cost more. McDonald’s value meals will be less of a value and gas prices will be higher than they otherwise would be. This will be true even when automation replaces some of those employees because remember, the increased employee costs are what made automation more affordable — but still more expensive than the previous cost for the employee.

This is not just theoretical

Seattle recently raised its minimum wage from $11 per hour to $15 per hour. In the first month after it was implemented, economists reported that 1,000 restaurant workers — just restaurant workers — lost their jobs. That was the largest one month job decline since the Great Recession while the overall economy was strong. But around the state of Washington, restaurant jobs increased 3.2%. Market forces are never trumped by government decree. And in some cases, a community can be so economically hot that it can absorb it — for awhile. But the out-of-balance market pricing will catch up eventually. This is market inevitability. So in a sense, dramatic minimum wage hikes create mini recessions among the low-wage workers even while increasing the costs of living for those same folks and everyone else.

Finally, the emotional tug is a bit of a false set up

Only a tiny percentage of people earning the minimum wage are trying to put food on the table. According to the Bureau of Labor Statistics, about 2.5% of all workers are on minimum wage. Of that, one-third are teens and more than half are under 25. So it is probably affecting only about 1% of the country’s workers over 25, and only a percentage of those actually have families. About two-thirds of all workers on minimum wage are second and third incomes in a family. So when the media does its inevitable story on some pitiable mother working two minimum wage jobs to try to make ends meet for her children, they are finding the needle in the haystack to stoke the emotional appeal that will actually hurt more of those same types of people.

The minimum wage’s positive impact on individuals is really quite minimal. As an aside, but so often the case, there is a political benefit to politicians who push the issue, playing to emotions over economic reality. But the reality of its negative impact on the broader economy, on all low-income workers and on companies competing globally is much larger — and fewer people are working and getting the opportunity to climb the ladder.

Does Raising the Minimum Wage Help the Low-Wage Earner?
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One thought on “Does Raising the Minimum Wage Help the Low-Wage Earner?

  • October 17, 2016 at 12:57 pm
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    I’ve always been fascinated and a little stupefied by the logic that leads people to believe that raising the minimum wage is a good idea for anyone. Aside from decades of demonstrable proof that government tampering in markets (in this case, the labor & employment markets) invariably backfires, I’ve never quite understood where people think the money to pay the workers will come from?

    If from merit, then one would assume that the business has increased revenues or profits. But simply mandating higher pay doesn’t create either one. If anything, it will necessarily squeeze profits even as it drives prices for goods and services higher (as you pointed out).

    This of course has the exact same effect as increased taxation on the business owner(s), which ironically often actually seems to accompany the mandated wage hike. The effective “double tax” often puts business owners in a predicament: where to find more profits to pay for the taxes?

    It certainly won’t be found in hiring more workers. And it often means that employees who do merit pay increases because of their performance cannot be granted them.

    What a disaster!

    Reply

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