On a recent post over at Cafe Hayek, my friend Don Boudreaux discusses the merits of minimum wage policy. A gentleman, Mr. Hutcheson, wrote in to chide the writers, saying that Boudreaux and others “who argue that the minimum wage destroys some jobs miss the point.” Mr. Hutchinson insisted that the real point is “the amount of harm to low income workers compared to the benefits of going to other low-income workers.”
Boudreaux correctly responded that minimum wage legislation is unethical because the government strips “some people of economic opportunity in order to artificially enhance the opportunities available to other people.”
Although Don’s response is certainly correct, I do not believe arguments of fairness, morals, or constitutionality carry much weight with the standard liberal position espoused by Mr. Hutcheson. I believe that he needs to understand that raising the minimum wage hurts everyone, as other individuals and the economy as a whole are outright harmed by such policy by much more than than those who are helped. This can be seen by realizing that the money that is now going to a higher minimum wage WILL NECESSARILY cause one or a combination of the following:
1) In an attempt to offset the higher minimum wage, the business will fire or refuse to hire other employees. Especially from the poorest among us, many individuals. will either lose their job or not be able to get jobs at all moving forward. The cost of raising the minimum wage is just like the cost of raising a commodity. For instance, consider the scenario where the price of apples — a basic pantry item for most everybody — goes from $1.50/pound to $2.00/pound. Fewer people will buy the apples, or people will buy fewer apples overall. So it is also with a higher minimum wage; if a unit of labor costs more,fewer units of labor will be purchased overall. As a result, the economy will likely contract because of the loss of jobs resulting from a wage hike.
2) The business can simply earn less profit. If more of the earnings must go to the cost of labor, the business earns less profit overall. For some minimum wage advocates, perhaps that is the actual goal — to keep businesses from earning too much at the top. But in reality, the loss of business capital (from both large corporations to small mom and pops) means there is less money to grow the existing business, or for future business endeavors. Whether it is reinvested directly back into the business with equipment upgrades or growing the business through new employees or expansion, earning less money for the company creates a ripple effect. The less a company can earn, the less it can help grow the economy. Impeding its ability to do so, through the imposition of mandated wage increases, is harmful.
3) In order to offset the increased wage cost, a business, if possible, can choose to raise its prices. This will attempt to ensure that the company earns the same amount as before. But the effect of the price increase is negative. As prices increase, supply and demand dictates that some customers will simply not buy (reducing GDP) and the rest will have their standard of living go down (because they are paying more just to have the same product as before).
Every one of these responses — cutting jobs, loss of business capital, and raising prices — are bad for the employees and the economy as a whole. Though the minimum wage hikes sound good in theory, in reality, economies don’t exist in a vacuum. These types of policies hurt more than help. The three aforementioned points overwhelm anything positive going to minimum wage recipients; in reality, it is a bigger net cost to the system.
Would ⅔ of the population still support the minimum wage it if they understood how devastating it would be both to the most economically disadvantaged people and to the economy as a whole? People have continuously been pitched the false idea that the economy improves because minimum wage recipients will spend their extra money. Minimum wage policy is an impediment. Economics 101 reminds us that in fact, it is more stimulative for the economy that the employer keep the money and reinvest it than for the worker to merely spend it. That is how you grow the economy.