Very few people are paid only the minimum wage, with almost all of those being teenagers just starting in the workforce. Yet more minimum wage increase referendums are showing up on ballots, joining the ever-present promise of politicians to increase the minimum wage in exchange for votes. In this article, we examine the effects of mandated minimum wages and how they most often hurt those they are intended to help.
Table of Contents
Wages are Set by Supply & Demand
Pay rates, like any other price, are set by supply and demand. Often times there are complaints that entertainers and professional athletes make many multiples more than nurses and school teachers. But there are economic reasons this pay difference exists. Not only are there tens of thousands more jobs available to teachers than to professional athletes, reducing what employers must bid for an instructor’s services, but also the pool of candidates for teachers is massive when compared to that of professional athletes.
Those who can be starting point guards at the NBA level are just a fraction of a fraction of the world’s population. It requires years of training on top of God-given natural aptitude. On the other hand, almost anyone who wishes to be a teacher or nurse has the possibility to make that desire a reality. That doesn’t mean it won’t be very difficult for some to finance and attend school, and certainly not all teachers and nurses are good at what they do. However unlikely becoming a professional teacher or nurse might be for some, it is possible for almost anyone to do it.
When it comes to being a starting point guard in the NBA, almost the entire population is eliminated based on God-given physical attributes alone. One has to have speed, dexterity, and size–but not too much size. Only members of that already incredibly small group can then train and hone their skills to the point where becoming an NBA starting guard is possible.
The time taken to develop natural gifts and turn them into marketable skills cannot be discounted. The example economists often use is that of a street artist who spends 20 minutes drawing a caricature of a person before charging $50. When asked how she can charge so much when it only took her 20 minutes do complete the drawing, she points out that it took her “20 years and 20 minutes.” All of the sacrifice that went into becoming a superb and marketable artist is being justly compensated, it is just two decades after the training began.
While wages are determined by supply and demand, other important factors impact whether paying the market rate for a given occupation is feasible to employers. Among these are productivity, which is a measurement of output per cost. Productivity is not dependent solely on the worker. The tools, management, coworkers, supplies & suppliers, etc. all impact how productive an employee is, and often more than the individual himself.
American factories, with their assembly lines and power tools, can afford to pay workers more than enterprises manufacturing the same product in economies without such advanced tools. Likewise, the ability to acquire supplies reliably, quickly, and at cheaper costs boosts the American worker’s productivity.
Key Effects of Higher Minimum Wage
Minimum Wage Laws Cause Unemployment
Since a level of productivity must be met for employment to be possible, the mandating of a wage above that productivity eliminates all jobs below it. If a person with a given job, often through no fault of their own because of tools and constraints, can only produce $8 an hour but the government says he must be paid $10, either that person is going to be unemployed, or everyone at the company will be unemployed because it will eventually go bankrupt. Either way, unemployment must be a result.
Even though an overwhelming majority of economists and virtually all studies show that minimum wage hikes lead to higher unemployment, a few studies to the contrary exist. These studies must be examined carefully as they almost always utilize poor methods. For example, since only businesses that survive can have its employees counted, those who lose jobs because of bankruptcy are treated as if they never existed.
To give a simple example, let’s say that two widget companies in Seattle each have 1,000 employees. When Seattle raises the minimum wage to $15 an hour, company A fails to survive. Since there is still a market for widgets and the competition is gone, company B can then raise their prices enough to remain in business. They hire 200 employees who were out of a job when company A went under.
Aside from the fact that this caused the prices of widgets to rise, hurting society as a whole, when studies are done examining the effect of the minimum wage increase, only company B can be surveyed since company A no longer exists. These studies will then proclaim that 200 jobs were gained after the minimum wage increase, when in reality a net of 800 were lost.
In this case, the average pay per employed worker will increase, but the average wage per person will not move higher, and may even go lower. After all, there are now a lot of people earning $0 an hour who aren’t being factored into so-called “average wage” numbers.
That higher mandated employment costs bring higher unemployment is not simply theory, but has been proven time and again in the real world. Nations with low or no minimum wage, such as Norway, Iceland, and Switzerland, have low unemployment numbers. In a famous striking example, Hong Kong had an unemployment rate of 1.3% in 1990. When China began to impose wage and benefit mandates on Hong Kong, the unemployment rate jumped to over 7%.
Minimum Wage Laws Harm the Poor
When jobs are being cut, those harmed the most are the less skilled and experienced. This group is made up largely of the young and poor, most often minorities who minimum wage laws purport to help.
Higher wages require higher qualifications in the form of education, skill, and experience. Inevitably this leads to a widening of the so-called “income gap,” the exact opposite of what advocates for higher minimum wages say they wish to accomplish.
The young and poor are further hurt by being deprived of opportunities to develop skills and gain experience, both of which are needed for a person to earn more. Because of the reality of compounding, this will cost a massive amount of income over a lifetime.
Minimum Wage Laws Permanently Eliminates Jobs
When workers must be paid more than they can produce, companies are forced to innovate. One thing bound to happen is for money to be directed away from labor and to capital. This is often manifested in increased automation.
There is a reason most stores have self-checkout lanes and even fast food restaurants are moving toward self-ordering kiosks, pre-made food, and machines that automatically flip hamburgers. As labor costs are forced higher by governments, unions, or societal pressure, it makes more and more sense for employees to be replaced by machines.
The move towards automation is more appealing for businesses when one considers all of the benefits. For example, there are no healthcare costs for machines, and robots never call in sick. There is not “robot turnover” where a machine decides to work elsewhere and must be replaced with a new robot that requires training. There are no personality conflicts between self-checkout lanes that brings dissension into the store, lowing morale and customer service.
Big businesses like to boast about how they are “raising the wage” of their employees, but it comes at a cost. Notice how the Walmarts and Targets of the world are running with fewer and fewer people, and turning more and more towards automation.
Minimum Wage Laws Allow Discrimination
Higher wages bring more applicants. To the business manager who wishes to discriminate on the basis of gender, skin color, birth nation, or religion, this gives what amounts to a free pass to implement their bias. The business is not hurt by passing over qualified candidates since there will be plenty more to choose from; therefore, a well qualified black person can be passed over because a similarly-qualified white person will certainly apply in short order.
Many of the biggest advocates of minimum wage laws around the world, including in America, were among the biggest racists. In the United States, the desire was to price blacks out of the work force, and minimum wage laws have caused trends in that direction. Before the minimum wage was enacted in 1938, blacks had the same labor participation rate as whites. As the minimum wage has steadily gone up, the participation gap between whites and blacks has steadily grown.
Once again, minimum wage laws are seen hurting the groups that are supposed to benefit from mandatory pay increases.
Closing Thought
It is a given in economics that consumers will buy more at a lower price than at a higher price. The same is true for employers and labor. Employers will “buy” more employees when the cost is cheaper and fewer workers when the price is higher. While the quest to raise the minimum wage might be inspired by good intentions, the reality is higher mandated wages hurt the exact portion of the population it is designed to help.
Related reading: