You’ve most likely heard the line “Living Wage” or “We need to fight for $15/hr” from politicians like Bernie Sanders and Elizabeth Warren. However “morally satisfying” these talking points may sound, in reality they have severe negative effects on the economy, such as: increased unemployment and an increase in the poverty rate. This claim is not only supported by common logic, but supported by almost every economist and economic study. The minimum wage is not only ineffective, it is plainly immoral.
There are several conclusions one can draw from an analysis of the minimum wage, and all are negative. For example, if an employer, particularly a small business, pays their two employees $15/hr combined, that’s $7.50 each, and the minimum wage is raised to $15/hr, the employer is forced to do one of two things. They could take a loss and proceed to pay $30/hr in total for labor costs. If the employer is unable to pay the increased labor costs, they would fire one employee, as that would keep labor costs at $15/hr. Both of these have negative effects on economic growth as the employer has less money to invest in their business or a decrease in productivity as the employer has less employees doing work. For larger corporations, particularly fast-food chains like McDonalds, the increase in labor costs would only lead to an incentive to automate. Automation, like ordering machines and conveyor belts, would allow for the corporation to keep labor costs low. This is because there are less laborers to pay as the machines “took” their jobs. The logical case against the minimum wage is well known and easy to grasp. If the government forces employers to pay employees more than their work is worth to employers, then employers will either refrain from hiring the potential employees or fire those who don’t provide value in excess of the legally mandated minimum wage. Thus, one consequence of minimum wage laws is that many people—particularly the young and inexperienced—end up out of work completely and, of course, are therefore unable to gain work experience and earn higher wages in the future. But the economic harms that minimum wages impose do not stop advocates of such laws or even give them pause. People who advocate minimum wage laws do so not because of their economic beliefs but because of their moral beliefs.
These logical claims are also supported by data and economic analysis and studies. Labor economist Joseph Sabia of San Diego State University summarized the academic evidence on minimum wages in this 2014 bulletin for the Cato institute. He writes,
“Many firms respond to minimum wage increases by substituting away from low-skilled labor and toward other inputs. For example, grocery stores may substitute away from cashiers and toward self-checkout systems or toward higher-skilled labor. If some near-poor, low-skilled workers lose their jobs or have their hours cut as a result of minimum wage increases, then their incomes may fall, resulting in a rise in poverty among these households. The vast majority of credible empirical evidence produced by labor economists … suggests that minimum wage increases reduce low-skilled employment. Estimates of the employment elasticity with respect to the minimum wage for low-skilled individuals generally range from -0.1 to as large as -0.3, suggesting that a 10 percent increase in the minimum wage reduces low-skilled employment by 1 to 3 percent.”
In a new study, Burkhauser examines Census data, and find that workers earning between $7.25 and $10.10 per hour—workers who would be directly affected by a proposed federal minimum wage increase—overwhelmingly live in non-poor households. They write,
“We find that only 13 percent of workers who would be affected live in poor households, while nearly two-thirds live in households with incomes over twice the poverty line, and over 40 percent live in households with incomes over three times the poverty line. Other research suggests that poor single-female headed households make up less than 5 percent of all affected workers.”
While alleviating poverty is a widely shared goal, raising the minimum wage is unlikely to achieve that end. In reality, it is more likely to result in making many low-skilled workers worse off. The minimum wage fails to reduce net poverty because of its adverse effects on employment and poor ability to target workers living in households below the poverty threshold.
It is, in my opinion, not only illogical and anti-science to support the minimum wage, but immoral. I would never force and employee to work for an employer at a given wage, as the violates the 13th amendment and constitutes slavery or indentured servitude. I would also never force and employer to pay and employee a certain wage, as that also constitutes slavery. As Milton Friedman observed, there ain’t no such thing as a free lunch. Arbitrarily raising the cost of labor—there is no principled basis for choosing any particular government minimum—will increase prices, reduce investor returns, and cut employment levels. Wages are determined by the laws on economics, like supply and demand, not by the whim of “moral” politicians. Minimum wage increases the cost of doing business, so therefore, has negative effects on the economy. Why is it moral to knowingly support a policy that makes us all worse off? Any economic growth is good economic growth, cutting the cost of doing business in any way possible is great for the economy. What is great for the economy is great for all of us, we will all live better when the economy is stronger. We will have a higher standard of living as a whole. Economist Milton Friedman said that “one of the great mistakes is to judge policies and programs by their intentions rather than their results.” Alas, that is the mistake that continues to drive the minimum wage debate in the United States.
Cato. “Negative Effects of Minimum Wages.” Cato Institute. Cato, 08 Apr. 2016. Web. 11 Feb. 2017.
Guler, A. (2011). http://www.jcam.com.tr/files/KATD-157.pdf. Journal of Clinical and Analytical Medicine, 2(2). doi:10.4328/jcam.220