The Economic Advisor

Why the Minimum Wage Hurts Everyone and Causes Unemployment

Supporters of a higher minimum wage incorrectly believe that it will help teenagers and minorities. This post is a somewhat brief overview of why and how the minimum wage and the raising thereof actually hurts low-skilled workers in terms of unemployment.

On the surface level, raising the minimum wage increases the cost of labor across the board and makes it more expensive for firms to hire workers. At first glance (the only glance Washington ever takes), raising the minimum wage is very attractive to the average person and to politicians. It’ll put more money in the pockets of a low-skilled laborer, they say. Upon analysis using some basic principles of economics, however, the proposition seems the opposite of beneficial.

The laws of supply and demand dictate behavior in society whether we want them to or not, folks. As one of my economics professors once said, the basic principles of economics are always at work. This concept is just as much armchair economics as it is technical jargon. When the minimum wage is raised, employers look for employees with more skills that are more productive to offset the increased cost of that labor. Thus, they hire less low-skilled workers. You see, in essence, a minimum wage law is effectively an example of a price floor. In terms of economics, it creates an immediate shortage of jobs and a surplus of potential laborers. What is even less obvious is the fact that the more the minimum wage is raised, the more attractive a minimum-wage-rate job becomes to a previously unemployed high-skilled worker, decreasing the total number of available jobs even further.

Yet another effect that goes unnoticed is a potential slight increase in prices for consumers. Most companies will most likely choose to not go this route, but some might. People tend to forget that the money to cover the increased wages must come from somewhere; it does not just magically appear from nothing. Washington often forgets this simple fact as well. As stated, some companies may choose to raise their prices which offsets the costs to the consumer, thus the total utility (benefit) to society is decreased. Employers, if the minimum wage is raised high enough, may even go so far as to outsource their labor to foreign countries, hire illegal immigrants, or pay their employees under the table. As such, the only groups I can think of that would actually benefit from a raising of the minimum wage are illegal immigrants and workers in foreign countries.

Another group that would probably benefit is politicians, but they benefit from virtually every policy they put into effect. They and their respective voters and supporters seem to believe they are on some moral high ground, constantly stating that they want to help teens and minorities. This is ignorance at its best. Not only do they say one thing and do another, but they almost always don’t even understand the ramifications of what they do.

People respond to incentives. Raising the minimum wage gives more people the incentive to disregard pursuing a valuable education. In doing so, young people set themselves up to ‘live poorly’ in the long run. And no, minimum wage hikes do not decrease poverty. Sure, previously poor families that experience a pay raise may escape poverty, but previously non-poor families will eventually fall below the poverty line in accordance with the aforementioned incentive effect, thus a minimum wage hike hurts everyone in society in the long run.

I would even go so far as to argue that in theory there should be no minimum wage, and that wages in most fields (obviously there would be exceptions) should be allocated based on the productivity of the employee. This occurs in the field of sales with a thing called commission. This system would allow the most productive workers, essentially the hardest workers, to earn the most money. If I were an employer, I would absolutely implement this system in every way possible. I believe this system would make employers more profitable as well, which is again a good thing for society. After all, we do live in a world surrounded by meritocracy and credentialism, for the most part. It’s fair, as high pay rates are reserved for those who want and need it the most. How’s that for morality and economics!

But Tyler, how will people live? Let the government subsidize education, internships, housing, or food (they already do much of this), and encourage low-skilled workers to become educated so that they can achieve higher paying jobs. This would also effectively decrease the number of low-skilled workers and increase the number of available minimum wage jobs, thus helping teens and minorities even more.

If you are a relatively productive worker, present this idea to your employer; your rate of pay may increase if he agrees. If not, however, do everything you can to keep the concept under wraps, as you will probably see a reduction in pay or get fired when he or she recognizes the extremely fallible system.

Tyler Williamson runs a site about basic principles of economics that are applicable to everyday life and realistic situations. His site is called Armchair Economics.