The unintended consequences of raising the minimum wage

Matt K. Lewis Senior Contributor
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When the topic of raising the minimum wage comes up, I have often deployed this (admittedly simplistic) example to explain my opposition: If a small business owner can afford to spend a total of $15 an hour on staff, then he can either hire two people at $7.25 an hour — or just one person at the rate of $10.10 an hour. (What is more, at some point, raising the minimum wage could also incentivize replacing employees altogether with new technologies; robots don’t ask for more money every few years.)

Based on these assumptions, raising the minimum wage could actually contribute to higher unemployment and income inequality — two things liberals ostensibly oppose.

Of course, not everyone agrees. As AEI’s Michael Strain recently noted: “The University of Chicago Booth School of Business polled some top academic economists in February and asked them whether ‘raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skill workers to find employment.’ Thirty-four percent agreed, 32 percent disagreed, and 24 percent were uncertain. I am a credentialed economist, and based on my reading of the evidence I would have been in the one-third who agreed.”

While economists are divided, most media observers seem to assume the government can simply impose higher costs on employers — without any negative consequences. (In fact, some go so far as to argue that doing so would have only salutary benefits. For example, some believe it would have a sort of Keynesian stimulus effect, whereby putting extra cash in the hands of employees would, in turn, create more customers with cash to spend.)

They explain this by arguing that my aforementioned illustration (about hiring two people versus just one) is static, while the real world is dynamic. As such, they insist that when employers are forced to raise the minimum wage, instead of hiring fewer people, they will instead, 1). Pass on the cost to the consumer, 2). Attract better, more productive workers (thus increasing profits), 3). Increase the morale of the workers (thus increasing profits), 4). Reduce employee turnover (thus increasing profits and minimizing training/hiring costs).

These are not absurd assumptions. Even those who believe raising the minimum wage would increase unemployment also concede that some of these things could also happen. (But it should also be noted the the idea of passing the cost along to the consumer isn’t exactly a panacea, and is, in fact, a sort of catch-22.)

Regardless, logically, everyone must concede that, at some point, there are diminishing returns associated with forcing employers to pay more. After all, if raising the minimum wage costs us nothing — and magically spurs the economy! — then why not really spur it by raising the minimum wage to, say, $50 an hour?

In any event, Strain has an interesting argument for why the best way to help low-skilled workers isn’t to solely target the job creators, but to instead, explore other options such as expanding the Earned Income Tax Credit.

“Liberals, in supporting minimum-wage increases, implicitly argue that the employers of low-skill workers, together with consumers of the products and services the workers help provide, should bear the burden of ensuring that low-skill workers don’t live in poverty,” he writes. “Conservatives should reject this argument, insisting that all of society is responsible for helping the working poor — to escape poverty, to earn their own success, to flourish.”

Matt K. Lewis