The Case Against Increasing the Minimum Wage
By Jason Cox
Raise the wage! This is the answer to the question of how we alleviate the condition of the one in six Americans currently living in poverty, or at least so I’m told by hordes of activists, politicians, and the occasional Silicon Valley billionaire. This last week Republicans in the Senate blocked debate on a bill to raise the Federal minimum wage from its current $7.25 an hour to $10.10 an hour. This is a seemingly shocking outcome, as an increase in the minimum wage is supported by large majorities of Americans. But as the old saying goes, what is popular is not always right. And what is popular in this case is bad economics.
Beyond the racist origins of the minimum wage, or the questionable morality of not letting someone who wants to work for less than the minimum wage do so, the main problem with an increase in the prescribed legal minimum wage is the potentially devastating impact it can have on employment. Any introductory economics course will teach you that if you increase the price of a good, less of it will be demanded. I’m sorry to say that the Law of Demand still applies to the labor market.
Defenders of these laws will almost immediately cite cherry-picked case studies, such as the famous Card and Krueger study, which claim to disprove economic theory surrounding the minimum wage. This particular research was re-examined years later, and largely refuted. Research to this day continues to confirm the disemployment effects of minimum wage laws, with the Congressional Budget Office confirming that this new bill would cost at least half a million jobs, but in cases where there was no large scale loss in jobs; there is generally a very simple answer.
Opponents of minimum wage will often use an important argument almost ad nauseum; that is when they ask why we don’t support an increase in the minimum wage to $50 an hour, or even $100 an hour. While this may seem facetious, it makes a key point. No one in their right mind can honestly believe there wouldn’t be serious job losses with a minimum wage set that high. There must be a disemployment effect to minimum wage laws; the question is at what price this effect is observed. Moderate increases in the legally mandated wage, usually of 10% or less, have generally had little-to-no effect on employment, suggesting that the market was already paying workers the wage at which the law was set.
The main problem with new minimum wage laws being proposed across the country is that they are often much larger. The law being proposed at the Federal level is almost a 40% increase, and a local movement in Davis is attempting to raise the minimum wage almost 90% from $8 an hour to $15 an hour. Businesses are left with few options to cope with increasing labor costs; raise prices, fire employees, or if neither are an option, shut down. This leads to one of the worst problems associated with the disemployment effect of minimum wage laws; that the first to be fired from their jobs are those that need them most, primarily minorities and other disadvantaged groups that suffer from lower rates of employment as is.
Just as you cannot suddenly vote to ban the laws of physics so that we all might experience flight, you cannot ban the laws of economics. Poverty cannot be eliminated if all we do is make it harder for those most in need to be able to find a job. Increasing the minimum wage in the name of giving workers a “living wage” will only result in many more being forced into a maximum wage of zero.