Like most political posits, the concept of “Raising minimum wage to reduce destitution and increase income” sounds like a great idea, but after analyzing all of the unintended consequences resulting from the idea’s implementation, I have come to think differently. Of the plethora of negative impacts resulting from the increase of the federal minimum wage (FMW), a few of the most damaging include: cost increases throughout the market, underdevelopment of job skills, loss of employees’ net earnings, and exclusion of specific demographics from the workforce. Also, considering that only 2% of workers even receive the FMW
(Decker), do you really think it is even worth propagating?
The FMW is a reductive solution to a complicated problem, and it ignores the economic reality that, in an elastic labor market, mandating a price that is greater than the equilibrium between supply and demand will always reduce demand. As the epigram goes, “The road to hell is paved with good intentions,” and the epitome of that concept is the Federal Minimum Wage.
Exclusion of Specific Demographics from the Workforce: people act self-interestedly; survival requires it. The primary reason people work is to provide for themselves and their families. Individually, people want to get “the most bang for their buck”, but when you increase the FMW, you decrease employers’ profits and increase their liability. If you are a business owner, and I tell you that you have to start paying every employee fifteen dollars per hour instead of ten, you are likely to either do one of two things: First, you will raise your standards for the job, meaning you will choose skilled people who would not work for less than the higher wage over less skilled people who would gladly work for the lower wage. (In other words, if I charge you the same price for hamburger and steak, you will choose the steak over the hamburger.) This doesn’t sound like an awful adjustment, until you realise that fast food franchises and other minimum wage jobs are where demographics like teens and felons gain the experience that is dire for them to establish their reputations, build up their resumes, and climb the employment ladder. FMW encourages credential inflation and blocks at-risk populations from ever entering the labor market. It incentivises employers to hire fifty-year olds with twenty years of experience over rehabilitated felons and inexperienced fifteen-year olds -- or to just buy a $2,000 kiosk to avoid the long term cost of hiring employees. In fact, Wendy’s bought kiosks in 2016 in reaction to the minimum wage laws (Staff). Overall, FMW incentivises employers to inadvertently hinder the development and growth of skills for demographics like teens, or to just favor the work of technology over humans, causing individuals to lose jobs. The second reaction on the employer’s behalf to minimum wage is decreased hours.
Loss of Net Earnings: by raising minimum wage, you would think you are providing employees with the opportunity to earn more; however, the unintentional side-effect of reduced hours actually lowers total net pay. If employers have to pay employees more per hour, then they will just allow employees to work fewer hours. Some may argue that the increase of income compensates for the decrease of time spent working, but studies have shown this is not true. A study published by The National Bureau of Economic Statistics found that in the city of Seattle, minimum wage workers were losing 125 dollars a month thanks to reduced hours (Jardim 2). Thus, by increasing employer expenses and being a catalyst for reduced hours, minimum wage actually can cause people to lose money, despite higher earnings per hour.
Costs Increase Throughout the Market: the last major effect of minimum wage is cost increase across the market, affecting a much larger and inclusive congregation. To compensate for the loss of profit due to increase of expenses, entrepreneurs and producers begin raising the costs of their products and services. Thus, consumers must pay greater prices to support the increasing costs. This direct relationship between price and cost means a greater cost drives a greater price. Greater aggregate costs cause people to demand higher pay despite previously implemented minimum wage laws. If the call for higher pay is answered, that act of raising income initiates a macroeconomic theory deemed a wage-price spiral, which drives inflation, wrecking the actual value of the employees’ nominal earnings and penalizing people who hold long-term debt-free investments and responsible, low-risk savings.
Because the demand for low-skilled labor is highly elastic and because minimum wage is a price floor (Staff), minimum wage can cause increased unemployment amongst the low skilled by reducing employers’ profit margins and encouraging credential inflation for low skilled jobs. Increased unemployment and credential inflation acts as catalysts for specific demographics not acquiring the skills they need to thrive and improve in the workforce. Additionally, improved technology relative to increased minimum wage incentivises employers to utilize technology over human labor, increasing the marginal rate of technical substitution. Furthermore, minimum wage can indirectly cause employees to have a lower net gross income, thanks to reduced hours. Meanwhile, minimum wage can drive a wage-price spiral, instigating a reflexive cycle of inflation and rising costs and prices. For all of these reasons, I believe FMW often does more harm than good, and I implore you to be conscientious of the simplified “solution” that FMW appears to offer to the problem of poverty and squalor; for FMW has far more insidious consequences and costs than it has benefits.
Works Cited
Decker, Fred. “Problems With Minimum Wage.” Small Business - Chron.com, Chron.com, 30 June 2018, smallbusiness.chron.com/problems-minimum-wage-2692.html.
Jardim, Ekaterina. “Minimum Wage Increases, Wages, and Low Wage Employment: Evidence from Seattle.” The Washington Post. The National Bureau of Economic Statistics, Massachusetts, July 2017, http://www.nber.org/papers/w23532. Accessed 10 Sept. 2018.
Staff, Investopedia. “Minimum Wage.” Investopedia, Investopedia, 17 Apr. 2018, www.investopedia.com/terms/m/minimum_wage.asp.
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