An Increase in Minimum Wage: Have We Learned Nothing?


 No matter how many times certain ideas are completely debunked, many, nevertheless, have a way of always returning. The present push by Democrats to increase the federal minimum wage rate is one such debunked idea returning for its tired and predictable reprise. Currently the federal minimum wage is $7.25-per-hour. The president and congressional Democrats would like to see this rate increased to $10.10-per-hour by 2015, a 39% increase. The city of SeaTac, WA, has recently increased its minimum wage for certain workers to $15-per-hour, from $9.32, a 60% increase.

money_small An Increase in Minimum Wage: Have We Learned Nothing?

 The president and his allies frame this debate in terms of fairness. Why should some work at wage rates barely above the poverty line? Unfortunately, since most people have little or no training in economics, have never learned how to focus on the long-term economic effects of various governmental programs, have never learned that wages are simply a name given to employers’ labor costs and have no special economic properties beyond that, harmful populist measures, such as laws increasing the mandated minimum wage, often pass with little thought to their long-term consequences. In the case of mandated minimum wage increases, the primary long-term negative effect is a guaranteed general increase in unemployment and a specific increase in unemployment among those already at the bottom–the black teenager, the unskilled, the uneducated.

Why is this? Many workers’ skills are simply not worth the new, higher required minimum rate. And those who are not, lose their jobs. Although an employer may entirely need a worker at the lower rate, at the higher rate he may not. And when he does not, the employer must find an alternative to his new higher labor costs. Generally this means letting go at least some workers. Even though a worker may be quite willing to work at the old lower rate, and the employer receives real benefit by employing the worker at the lower rate, the government deems this voluntarily agreement illegal. The employer by law must pay the higher rate if he wishes to continue employing the worker. The government, in effect, is stating that it would prefer the worker be unemployed than to work at the lower rate. Thus the obvious result: an increase in unemployment.

A less obvious result is that since a lower-skilled worker cannot legally offer his services at the lower rate, and thereby gain new skills while on the job so he can eventually be worth the higher rate, he is effectively locked out of the legal employment market. The traditional avenue of working one’s way up the ladder, gaining new on-the-job skills, has been, by law, removed from him as an option. (The worker can, however, offer his services on the black market, out of view of the government, and no doubt many are forced to do just that. In addition to the irony of governmental action, the purpose of which had been to help the worker, being the cause of the worker’s immediate distress, the government itself ultimately loses tax revenues as black market wage payments are usually made in cash.)

In response to higher labor costs some may argue that employers can simply raise their prices to offset these increased costs. To some extent, this is true. But in most cases, raising the price of an item means consumers will choose to buy less of it, or to substitute some other less expensive item. For instance, if the cost of coffee rises, perhaps drinking tea becomes more attractive to the consumer. Also one must consider that some employers who had been barely surviving while paying the lower wage rate will have no choice but to raise their prices–for them any increase in business costs, labor or otherwise, is fatal. But once these barely surviving employers do raise their prices, many will soon go out of business entirely as customers, reacting to the increased prices, reduce their purchasing, thereby creating another route to more unemployment.

Some on the left will argue from a moral perspective that industries who pay their employees below-sustenance wages should go out of business. But let’s follow that argument to its logical conclusion. First and most obviously, everyone working in such an industry that “should go out of business” immediately loses his or her job (thus, more unemployment). Second, consumers lose whatever product such an industry had provided, tending to increase consumer prices in reaction to reduced quantity. Third, and most important and often overlooked, even though the worker’s pay rate had been low, it was (and probably still is) the best alternative he had at the time. Otherwise he would have taken a more attractive alternative to begin with. Thus in spite of the worker’s own desires, he is forced into alternative areas he had previously deemed less desirable. And even worse for such workers, the additional competition for the available jobs in these less desirable areas will tend to lower wage rates (because of an increase in job seekers for a limited number of jobs).

The lesson is that government cannot create wealth. It can attempt to redistribute it, but in doing so almost always creates unintended negative effects. With a minimum wage increase, the negative effects, as outlined here, are obvious and should be easily understood by everyone. Nevertheless, for political reasons, the fairness argument, of which you will be hearing much between now and the 2014 midterm elections, is constantly rehashed. It is a nostrum, an emotional argument devoid of economic understanding.

The only real way to increase workers’ standards of living is by increasing their productivity and thus their worth to employers. These remedies include new time-saving machines and inventions, greater management efficiencies within industries, and better worker education. Quite simply, the more a worker can produce for his employer, whether a worker provides skilled or unskilled labor, the more he is worth to his employer. When such an increase occurs, employers in competition with each other naturally bid up the price of labor. This competition increases workers’ money wages (the amount they get in dollars).

And most important, such an increase in productivity increases workers’ purchasing power, along with the purchasing power of everybody else. When workers are more productive, all society benefits from the resultant increase in quantity of available products newly available to consumers at lower prices. Indeed, this is the only definition of an increase in standard of living that is actually meaningful–one that results in an increase in purchasing power. In contrast, a government-mandated increase in the minimum wage, does not increase society’s standard of living–just its unemployment rate.

About The Author:

Robert Boxer is a political pundit and software engineer, living in beautiful Santa Barbara, California. Not a day goes by when he doesn’t realize how lucky he is to live in such a desirable city. He attended the University of California, at Berkeley and Santa Barbara, majoring in both Political Science and Computer Science. Since his university days, he has extensively continued his study of economics, embracing free-market, laissez-faire economic policies (often referred to as Austrian economics).