Proposed minimum wage hikes have sprung up across the country, and Oklahoma is not immune. Here is why a minimum wage hike will hurt Oklahomans.
What happens when the price of something goes up? Take oil, for instance. As of this writing, the price of oil is just above $59 a barrel. Imagine the Oklahoma legislature set a minimum price for oil, and that number doubled. If gas went from $2.50 a gallon to $5 or more would it change your behavior? Would you drive less? I know I would. This is a basic illustration of the laws of supply and demand. As the price goes up, demand goes down. This is true for oil. People would still have to get to work, but they might rethink that summer road trip. Those who live near the border might drive farther to buy gas from a neighboring state. These same principles hold true for all commodities.
Why wouldn’t it apply just as much to labor? If you have to pay more for each employee-hour worked, wouldn’t you start to cut back on the number of hours you asked someone to work? Imagine you own a small business that makes widgets. You sell the widgets for $1 more than cost of materials. You have no overhead expenses. Your goal is to make enough money to feed your family. If the minimum wage is $7.50 per hour, you are not likely to hire a widget-maker who produces less than 8 widgets every hour. A widget-maker who produces only 7 widgets an hour is costing you money.
Now if the minimum wage suddenly jumps to $10.50 per hour, you will have to lay off not only your novice widget-makers who produce 8 widgets an hour, but also your journeyman widget-makers who produce 9 widgets an hour, and even your master widget-maker who produces 10 widgets an hour. Now all those widget makers who were making some money are making none. Instead of being helped by the minimum wage, they are hurt by it. In addition, your business may be unable to stay afloat, now that there is a shortage of qualified widget-makers cheap enough to produce widgets people will be willing to buy.
Perhaps you can raise prices enough to keep your master widget-maker, and your best journeyman. But now everyone who buys widgets from you has to make some adjustment to cover the increased expense. They may lay off their own less productive workers (if they haven’t already done so as a result of the initial minimum wage increase). More likely they will raise their prices. That will force their consumers to compensate somehow. Eventually everyone raises their prices, causing inflation.
If the minimum wage is left alone, eventually inflation rises to the point where it becomes profitable to employ those lower-skilled workers at $10.50 hour. The workers have gotten a nominal pay increase, but their actual buying power is exactly what it was before. The difference is the wages they lost while they were unemployed. They may have racked up credit card debt, which must now be paid back out of the same buying power they once had. They may have moved back in with their parents, sacrificing independence and self-esteem. They may have turned to crime, making society as a whole worse off. They may have lived on the streets, hurting their long term health. In any event, it is unlikely that the time out of the work force has improved their situation.
While this is obviously an oversimplified example, it illustrates the dollar value companies assign their employees. A company overpaying its workers (that is, paying them more than the value they produce for the company) is unlikely to survive long in a competitive marketplace. And while the value most employees bring to their company is more difficult to estimate than the number of widgets they make, there are ways of estimating any employee’s worth.
The government has not yet found a way to force companies to hire employees who cost the company money than their productivity is worth (though unemployment insurance premiums to force them to retain employees who are only slightly less productive than their cost). So if the government tells businesses they cannot pay their workers less than $10.50 an hour, than any employee who cannot provide at least $10.51 an hour’s worth of value to an employer will find themselves unemployed.
Redistributing Wealth: from Low Income Pockets to Union Coffers
One of the loudest voices for raising the minimum wage is often unions. This isn’t because they are on the side of the American working class, union or not. They are – properly – watching out for the interests of their members. So why does a union that represents workers who are paid $18 an hour care if the minimum wage goes up to $10.50? It isn’t altruism. It’s because it helps their members – at the expense of lower wage workers. Imagine the same widget business as before, except now the average non-union widget-maker can produce 10 widgets an hour, and the average union widget-maker can produce 20, but the union worker will not work for less than $18 per hour. If the minimum wage is $7.50, it makes sense for a business to hire two non-union workers, pay them a total of $15 an hour, and get 20 widgets. But if the minimum wage rockets up to $10.50, suddenly that $18 an hour union worker looks like a bargain, producing the same 20 widgets for $18 instead of $21. The minimum wage increase means more employment for higher skill union workers and unemployment for less skilled workers.
Unintended Consequences
Many teenagers work at or slightly above minimum wage. They don’t need a living wage, since they are still dependents. What they need is work experience, and enough incentive to come to work every day. Minimum wage laws make it harder for those with no experience to get that critical first job. We should not be surprised when some turn to illegal activities as the only way to better themselves.
Common Misconceptions
My father is a small business owner. In 2007, one of his employees mentioned offhandedly that the minimum wage was going up, and he was looking forward to the raise. The employee was a skilled tradesman and already made well above the new minimum wage. My father asked him why he expected a raise, and the employee said, essentially that when the minimum wage goes up, every hourly employee got a corresponding raise by function of law. My father informed him that there would be no such corresponding raise – that the minimum wage had nothing to do with a worker making $15 an hour – until rising inflation and unemployment crippled the economy. His employee’s enthusiasm for the increase diminished significantly. A rising tide may raise all ships, but a minimum wage increase – especially a 40% increase – is a tsunami that will wreck all but the largest and most seaworthy boats.
Mike Davis is Research Fellow at 1889 Institute. He can be reached at [email protected].
The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.