The Problem(s) with Minimum Wage

In 1987, the New York Times published an opinion article entitled, “The Right Minimum Wage, $0.00.” Here the author concluded that economists were all in agreement, “the idea of using minimum wage to overcome poverty was old, honorable, and fundamentally flawed.” However, today, we can see that many cities within the United States including New York, Washington D.C., Seattle, San Francisco, and even my home-town of Flagstaff, Arizona have all implemented a higher and ever-increasing minimum wage. It bears asking, if economists agreed the minimum wage was terrible for society in 1987, why are U.S. cities raising the minimum wage today?

The answer – voters, including you, are being played.

Politicians have long framed the issue as a battle of corporation’s vs employees whereby the corporations take advantage of the employees by paying them a non-livable wage. In fact, both Bernie Sanders and Hilary Clinton used rhetoric to emphasis this exact point. In 2016, Bernie stated, “I said that we’ve got to end the starvation minimum wage of $7.25” and Clinton repeatedly used the word “living wage” rather than “minimum wage” to further exaggerate her non-livable wage argument. Both of these statements are tailored rhetoric which are intended to target your emotions. After all, we’re all against starvation and want everyone to have a living wage – right?

The problem with minimum wage is it makes several assumptions about how all businesses operate. 

It assumes:

  1. Every business is making vast profits and has large sums of cash it is hoarding;
  2. The owner, president, or CEO is making significant sums of money compared to its lower tier workers
  3. Differences between employee salaries is unfair as it is inequality, and inequality is unjust;
  4. Assumes one outcome and doesn’t consider cost and rewards;

In doing this, the minimum wage argument fails to make distinctions between small business and large business. It fails to take into consideration industries which operate on razor thin margins. It fails to acknowledge hierarchy within employment structures which are based upon merit and responsibility and it fails to acknowledge outcomes of policy implementation.

The only thing an increase in minimum wage guarantees is that employees within those cities will be paid that specific minimum wage. It does not guarantee those employees will still have the same amount of hours or even a job. Even further, it does not guarantee that the companies for which those employees who receive a minimum wage will exist as a result of the increase in labor costs.

When the Government mandates a business pay its employees a specific cost that cost has to come from somewhere. Any industry which operates with low margins will be negatively affected. The most notable are restaurants, fast food chains and retail stores. The result is these industries either have to increase prices, shut down stores if consumers do not continue purchase goods, reduce employee hours, or fire workers.

Additionally, minimum wage prices young people and those individuals without skills out of the job market. Those individuals who typically work for minimum wage, teenagers, are now competing with those adults who would typically make $15. The idea here is everything slides right as you arbitrarily increase the wage rate.

But don’t take my word for it. 

In March of 2018, Dara Luca and Michael Luca published, “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit” within the Harvard Business School NOM Working Paper and found that a $1 increase on the minimum wage leads to a 14% increase in the likelihood of an exist for a 3.5-star restaurant. Further increases would still allow those 5-star restaurants to survive, but they would now be required to raise prices.

Paul Samuelson, who won the Nobel prize in economics famously stated, “what good does it do a black youth to know an employer must pay him a minimum wage if the fact he must be paid that wage keeps him from getting that job.”

Milton Friedman, another Nobel prize winner in economics  famously stated, “A minimum-wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.”

So who does minimum wage help? Progressive politicians.

Minimum wage effectively keeps those who are poor, poor – by not allowing those individuals to learn the skills necessary to get better jobs at higher wages. Those same poor people and those individuals who are impacted by emotional rhetoric then vote for the minimum wage policy. The result is a never-ending cycle of poverty. Oh, and those politicians who advocate for minimum wage get to stay in office for a lengthy amount of time.

Sounds good, right?

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