Raising the Floor: Short-Term Profits Versus Long-Term Losses

<a href=”http://www.worldatlas.com/articles/minimum-wage-by-state-in-the-united-states.html”>A patchwork of federal, state, and local laws sets the minimum wages in the United States. The federal minimum wage acts as the bottom price floor for nearly all labor wages throughout the country, except a few occupations within the restaurant and hotel industry. The national minimum wage, established in 1933, was created when President Franklin Delano Roosevelt said, “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country.” Fast-forward to today, and the minimum wage debate remains highly contested.

There are plenty of reasons to increase the minimum wage. For example, worker productivity has risen dramatically. If the minimum wage grew at the same rate as worker productivity since 1968, it would have reached $21.72 per hour today. There is also significant support from economists for raising the minimum wage. Seven Nobel Laureates in Economics and over 600 economists endorsed raising the minimum wage to $10.10. An increase of this size in the minimum wage does not necessarily translate into a loss of jobs and would likely even stimulate the economy, since workers would theoretically have more money to spend. At this wage increase, full-time minimum-wage workers would see their annual salaries increase from around $15,000 to approximately $21,000.

Many critics of raising the minimum wage argue that a hike in the minimum wage would be crippling to small businesses and restaurants. Initial research has shown conflicting evidence on whether an increase in the federal minimum wage translates to job loss. Most of the focus of the $15 minimum wage debate concentrates on large corporations, like Wal-Mart and McDonalds; however, there are many important implications to consider that would drastically affect small businesses, too. To prove causation in regards to minimum wage increases leading to job growth, more studies must be done – a difficult task considering that it is tough to hold all real-world factors constant when trying to measure how the minimum wage affects only the job market.

In the realm of public policy, a living wage is the minimum income necessary for a worker to meet their basic needs. One does not need to look hard to determine that a federal minimum wage baseline of $15 would affect each state differently. For example, states with high costs of living like Massachusetts or New York would not be affected, if at all, to the same degree as a less costly state like Tennessee or Mississippi. A uniform federal minimum wage disregards this fact.

Neoclassical economists generally argue that raising the price of some good results in a lower quantity demanded of that good, which in this case refers to fewer workers. Furthermore, raising the minimum wage in turn raises the cost of labor (with all other things being equal). To offset this naturally occurring phenomenon, employers have three basic choices: raise prices, accept lower profits, or compromise by doing both of these things.

Proponents of a higher minimum wage point to the obvious and visible benefits to some workers – those who may find a job at a higher wage or keep their current job with a higher salary. However, we have seen this backfire; McDonald’s implementation of self-service kiosks is a prime example. Business owners and larger for-profit corporations are in the business of generating profit. Forcing a $15 minimum wage is likely to force employees to perform cost-benefit analyses on their operations. Technological advancements will likely lead to employers feeling pressured into innovating in their service delivery. With this in mind, we have to ask a simple question: What is the point? By raising the minimum wage, are we just postponing the inevitable technological shift that will occur once we realize machines can do some of our jobs better then we can?

There are several unintended or less obvious issues present with raising the minimum wage: A uniform federal minimum wage may be sub-optimal for many states, and uniform state minimum wages may be sub-optimal for many cities. A one-size-fits-all approach to the minimum wage is really a “one-size-fits-none”. Interestingly enough, states with high costs of living tend to vote Democrat, while states with low costs of living, which are most susceptible to the negative effects of a $15 minimum wage, tend to vote Republican. Also, the exact level of proposed minimum wages are almost always arbitrary and never based on sound economic analysis. There is so much differentiation throughout various studies typically stemming from political affiliations and perspectives that it is hard to have a “correct” position when it comes to this debate.

Minimum wage laws discriminate against unskilled workers for skilled labor, and minority groups face the greatest amount of this discrimination. In theory, there are some positive outcomes associated with raising the minimum wage like alleviating income inequality, especially for those currently working in minimum wage jobs. However, realistically, the individuals already on the margins are the first people to be cut from their employment when minimum wage rises incentivize higher skilled workers to pursue jobs previously occupied by minimum wage workers. Dee’s Route 202 Diner, which had to cut staff following the increase in minimum wage, experienced this first-hand. For workers who get laid off solely because there is a limit to how much gap many small-businesses have, they face an increasingly difficult time figuring that increasing the wage will limit the number of opportunities for that same job. The law of demand states, “When the price of labor or good rises, demand for that good will decrease – more so in the long run than the near term.” Workers who retain their jobs are made better off with an increase in the minimum wage, but mostly at the expense of unskilled or younger workers who cannot find a job or lose their jobs at the higher legal minimum.

With a $15 increase, each minimum wage job would cost employers $17,500 per employee more than usual.

Recent studies have argued that raising the minimum wage for low-skilled workers will reduce both property and violent crime, as well as crime among younger populations. However, this is assuming that the low-skilled workers are the ones who benefit from the increase in wage and also retain their jobs. Low-skilled workers are the ones affected most by job losses since they are “more likely to lose their jobs, become idle, and commit crimes.” In one study, which focused on the city of Philadelphia and its troublingly high youth unemployment rate, raising the minimum wage was shown to correlate with an increase in property crimes, especially in poorer neighborhoods.

In a recent study, evidence suggests that there are adverse long-term effects on job growth that arise thanks to increases in the minimum wage; new organizations can choose labor-saving technology keeping them more cost effective compared to already existent companies whose capital was essentially “locked in their employees.”

Finally, one must take into account both the viability and practicality of a $15 minimum wage hike in today’s political madness. President Obama fought to raise the minimum wage but these efforts were thwarted by the Republican Congress. President Trump, who is fresh off of a damaging health care reform defeat, is likely to stick to his campaign promises of letting the states decide the minimum wage. Although there are some Republicans who want an increase in the minimum wage, there are very few, if any, who support an increase to $15.

That being said, the President will certainly be focused on demonstrating his power to solidify more support throughout the Republican Party. There is the extremely unlikely possibility that the loss of the health care bill will make President Trump consider collaborating with Democrats to gain support for future legislation. If this scenario occurs, the Democrats will surely want some of their proposals to be pushed through, and the minimum wage increase is precisely the type of proposal that Trump could enact to mollify his opposition.

There has been an overwhelming amount of both public and expert support for an increase in the minimum wage. However, many experts quickly withdraw their support as the call for the federal minimum wage increase gets larger and larger. It is true that we do not see job loss effects from modest raises in the minimum wage; however, doubling the federal minimum is not a modest increase. It will cost employers much more money – one Forbes article calculates that with a $15 increase, each minimum wage job would cost employers $17,500 per employee more than usual – which would most certainly lead to rising unemployment, the ceasing of some business operations, more outsourcing, and possibly more workplace automation.

As most of the evidence suggests, an increase in minimum wage is a good thing. However, we have to be careful with how far to push this. Jumping to $15, even with a delayed rollout, will drastically affect individuals and have unforeseen components. The abundance of state-level experimentation on the subject is encouraging, but at a federal level, policies must move more slowly. There is more to lose if something goes wrong. Doubling the entire wage floor uniformly across the country has the potential to cause extreme situations. We should allow the states to experiment single-handedly because they are the most informed about what’s going on at the local level. At the federal level, increases should occur at a much slower pace. Periodically increasing the wage in smaller increments allows us to see a natural progression of innovation and policy change, while also highlighting the bad things that can occur if we continue to push the minimum wage further.