For minimum wage advocates, their position is clear: more money in the hands of the worker is better for the worker — a tangible result. Though their hearts may be in the right place, they lack the basic understanding of the invisible effects of minimum wage policies, especially when it pertains to the business side of the equation. What does the business grapple with? Here are three typical responses to a minimum wage hike.
1) By raising minimum wage, many people, especially the poorest among us, 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 $2.50/pound. Fewer people will buy the apples, or buy less of them overall. So it is also with a higher minimum wage; with more money going to basic business costs, fewer businesses will hire, or they will hire fewer people overall. An added effect is that the economy will likely contract because of the loss of jobs resulting from a wage hike.
2) Businesses earn less money. Employees are the number one cost for businesses. If even more of the earnings must go to the capital cost, 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 for future business endeavors. Whether it is reinvested directly back into the business with equipment upgrades or growing the business through expansion, whatever the case may be, 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 can also 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, people are wont to adjust their purchasing habits and will end up buy less of the product. When consumption decreases, the health of the economy worsens.
Every one of these responses — cutting jobs, loss of business capital, and raising prices — are either bad for the employees or 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.