My thoughts on the Minimum Wage Increase (Senate Bill No. 2018)

Updated: Feb 23

The popular conception of the minimum wage is that it is good for workers – obviously, the story goes, it raises their wages and gives them more spending ability, which is good for the economy. How could that not be a good thing? And businesses can afford it; they just make a little less profit. This conclusion is typical of bad or amateur economics – it counts the obvious benefits, but misses entirely all of the hidden, but very real, costs. It puts people into big groups (such as “workers” or “employers”), without recognizing that within those groups there are very big and significant differences. Imagine that you are a small business owner, employing people some of whom are paid at or near minimum wage, faced with a mandated increase in the minimum wage. You hire employees because they do tasks for you that are more valuable to you than what you pay them. This must be so, otherwise you would be making losses and your business would eventually fail, making all your employees unemployed. Some of your employees have few skills; they don’t produce value much above the current minimum wage, so when the minimum wage is raised, you are employing them at a loss. Your margins are already thin, so this is unsustainable. What do you do? You let them go, and either you get some of the more skilled employees to absorb their tasks, or you introduce more automation. To the extent you can, you may raise prices to try to keep loss-making workers, but this is a stopgap and in any case is difficult to do if you face competition. You certainly do not increase your hiring of low skilled workers. What is the result? An increase in the wages of some workers who can produce sufficiently to justify the higher wage, but unemployment for unskilled workers who cannot produce at that level. The business would be willing to employ them at a lower wage, but the new law makes it illegal to do so. Raising the minimum wage is a formula for causing unemployment among the least-skilled members of society. And throwing people into unemployment (or foreclosing even the possibility of employment) increases welfare costs, leading to higher deficits and all of the economic problems that come with that. Minimum wage laws create benefits for one group of workers but costs for another group. And the group that bears the costs are the least able to bear them. The costs are not just immediate but also long-term – the way people get skills is to learn them at work, an avenue of advancement denied to the unskilled unemployed thanks to the false generosity of minimum wage advocates. The origins of the idea of a minimum wage in the 1930s were overtly racial – to protect low-skilled whites from competition from unskilled blacks and foreign immigrants. It was successful. It was sold as “protecting workers from exploitation by business”, but see https://fee.org/articles/7-quotes-that-reveal-the-racist-origins-of-minimum-wage-laws. Advocates for raising the minimum wage will point to studies by some economists which fail to find a negative effect in employment from some particular case of a minimum wage rise. The study most often quoted was Card & Kruger, 1994, who looked at fast-food employment in NJ and PA. This study employed some very clever math and has led to a Nobel Prize for the method used, but while the method is certainly academically interesting, the conclusions drawn in this particular case have been heavily criticized and have not stood up to scrutiny. And there are quite a number of studies which have come to the opposite conclusion – that there is a measurable negative economic effect from raising the minimum wage. Minimum wage laws are an example of the fallacy that government can create prosperity at the stroke of a pen, just by passing a law. What a miracle this would be if it were true! Think of the prosperity we could create if we raised the minimum wage to $100 per hour! But all government can do is to create benefits for a favored group by imposing costs on an unfavored group. The minimum wage laws are particularly obnoxious and cruel in this regard as the unfavored group is exactly the segment of society least able to bear both the imposed economic cost and the psychological damage that accompanies unemployment.






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