Among the many policy proposals supposedly intended to help those harmed by the COVID-19 pandemic and associated lockdowns is a fresh push to increase the minimum wage to $15 an hour. However, the minimum wage, though often a popular policy, hurts more than it helps. Although the federal minimum wage is set at $7.25, policymakers would be wise to remember the real minimum wage is $0. Perhaps the one silver lining of suddenly mandating $15 per hour would be the sudden and massive job losses so that no one could ever argue again that minimum wages don’t put people at that $0 no-job minimum.
The most fundamental laws of economics are the laws of supply and demand. When the price of a product is increased, in this case, labor, the demand for said product falls. The result of a minimum wage increase would be increased unemployment. The first minimum wage instituted in 1938 resulted in the loss of at least 40,000 jobs. A 2006 review of over 100 minimum wage studies found that about two-thirds found negative employment effects. The most recent study from the Congressional Budget Office projects that an increase in the minimum wage to $15 an hour would result in 1.4 million fewer jobs.
With uncertainty over future wage mandates, businesses will likely pursue cost-saving measures, such as investing in automation over hiring new employees. For example, many stores have already begun testing a cashier-less model to save on employment costs. While, to a degree, automation is unavoidable, a high minimum wage increases the speed of that trend. If advocates for raising the minimum wage succeed, consumers will likely begin to see dramatic changes in the services they receive, like eating at restaurants staffed by robots.
Beyond laying off workers, businesses also have the option of raising prices. As a general rule of thumb, when wages go up 10%, prices increase by an average of 0.7%. However, this rule does not hold constant across industries, with some industries having more dramatic responses to an increase in wages. For example, the price of coffee in Oakland, California, went up by up to 20% when the city raised its minimum wage to $12.25. The increases in the prices of labor-produced products results in lower demand, which further hurts a business’s profits and ability to hire and retain staff.
A third option available to businesses looking to offset the consequences of a minimum wage hike is closing locations or halting expansions. In response to a Long Beach, California ordinance mandating that companies with more than 300 employees nationwide pay employees an extra $4 an hour, Kroger closed stores in the area. Similarly, in Oakland, the minimum wage increase caused Wal-Mart to close their store there.
Increasing the minimum wage does not even help lift workers out of poverty, as advocates claim. A study in 2010 found that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates. If anything, the likely effect of a minimum wage increase is quite the opposite—an increase in poverty levels. It logically follows that if there is an increase in the price floor on labor, then workers get laid off, as discussed above. Those no longer working are likely to slip into poverty with a $0 wage. While those who keep their jobs do gain, the overall effects on poverty are, at best, neutral. Income inequality, though, increases.
Small businesses have been hit particularly hard by COVID-19 restrictions, while large corporations have been able to swallow those losses with greater ease. This effect is also present in minimum wage increases. The reason many CEOs in recent years have jumped on board with raising the federal minimum wage is it helps to price out small-businesses competition. While small businesses are forced to either pay higher wages or close, larger corporations have the resources to invest in automation and other cost-saving measures.
The groups most impacted by a minimum wage increase are teenagers and young adults. This demographic is often paid lower wages commensurate with less experience and fewer hard or soft skills. If higher mandated wages result in greater unemployment among young adults, the consequences can be lifelong. According to one study, “those experiencing unemployment at an early age have years of lower earnings and an increased likelihood of unemployment ahead of them.”
Regulations imposed by lawmakers often have unintended consequences. While the goals of raising the minimum wage may be noble, they are better met through other policies such as eliminating artificial barriers to employment like occupational licensing. This would allow workers to transition to higher-skilled occupations more easily. Another alternative, though unthinkable to many policymakers, is to eliminate the minimum wage entirely. Allowing the market to set wages would lead to near full employment and increase the true average wage, which should include the $0 wages so many are forced into with unemployment by the minimum wage.
The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.