More On Minimum Wage Logic Fallacies

The minimum wage/living wage debate continues, with many of the proponents for more than doubling the minimum wage choosing to ignore the consequences of doing so. They believe they can ignore the law of supply and demand by way of legislation, something that has been proven many times in the past to be immune from such legislation or executive order. And so it is with the present day demands for a living wage.

If all other factors remain equal, the higher the price of a good, the fewer people will demand it. That's the law of demand, a fundamental idea in economics. And yet there is no shortage of politicians, pundits, policy wonks, and members of the public who insist that raising the price of labor will not have the effect of reducing the demand for workers. In his 2014 State of the Union address, for example, President Barack Obama called on Congress to raise the national minimum wage from $7.25 to $10.10 an hour. He argued that increasing the minimum wage would "grow the economy for everyone" by giving "businesses customers with more spending money."

Many of the theories put forth about how raising the minimum wage will benefit everyone tend to ignore a number of factors that will blow them out of the water. One of the first is that business owners aren't likely to adhere to the theories. They will cut costs in order to maintain their bottom lines, meaning if their labor costs double, they will likely cut staff not raise prices. That right there illustrates the first point brought up in the quote above: the higher the price of a good, the fewer people will demand it. Labor is a good. It is worth what employers are willing to pay for it. Artificially raise the price of labor and the demand for it will fall. With some businesses already having razor thin margins, doubling the price of one of their more costly aspects of business will cause one of two outcomes: they'll cut the number of employees or they'll raise prices...and go out of business.

While much of the focus of the minimum wage/living wage proponents has been big corporations like McDonald's and Walmart, it is the small businesses that will suffer the brunt of this movement should the proponents succeed. That's a huge blind spot they choose to ignore. But then again, they aren't really concerned about the small business owners because there's no press opportunities to exploit like there is when they take on the “big greedy corporations.” So the small business owners are on their own.

Another downside, something I've mentioned many times, is that such a rise in the minimum wage will lock most teens out of the labor market. Minimum wage jobs are supposed to be entry-level jobs. Raise the minimum wage to $15 and hour and almost no one will hire teens with no job experience and no work history. For those kind of wages businesses will want experienced (read that to mean more mature) employees, ones with a good work record. Unless there is a two-tiered minimum wage structure – one for teens and another for 'regular' workers - teens will be out of luck in the job market. If history is any indicator, the minimum wage/living wage proponents will have none of that as they won't see it as being 'fair', giving businesses a preference for hiring teens rather than more expensive adults for what are unskilled entry-level jobs.

The argument has been made that raising the minimum wage hasn't caused disruption in the labor market in the past, but it has, though not as broadly as will happen if it is doubled. About the only time I can recall a rise in the minimum wage having little, if any affect on jobs was when it was increased at a time when there was full employment (meaning the U3 rate was around 4% and the U6 rate around 6%) and almost no one was paying minimum wage because there was a shortage of workers. Businesses were paying above minimum wage to keep what employees they had and to 'steal' workers from other businesses. It's a perfect example of the law of supply and demand. But raise the wage at a time when there is a large supply of workers and that supply will merely grow bigger as businesses shed employees. You don't increase the demand for something by increasing its cost, particularly when the supply is already too big. An example:

The Hanson/Hawley study takes into account how wages relate to the varying cost-of-living levels among the states. First they report the number of workers in a state who earn less than $10.10 per hour. Next they apply the widely agreed upon formula that for every 10 percent increase in wages there is a corresponding 1 to 2 percent decrease in demand for labor. They then straightforwardly estimate that boosting the federal minimum wage from $7.25 per hour to $10.10 per hour would result in the loss of between 550,000 and 1.5 million jobs.

Should the minimum wage be doubled to $15 does that mean we might see a 5 to 10 percent decrease in demand for labor? Probably. So how does that help anyone except those who are working towards creating total dependence upon government? It doesn't.

Another thing the minimum wage/living wage proponents ignore, particularly on the 'living wage' side of their argument, is the cost of living is different from state to state or region to region. An across the board increase to $15/hour will have disproportionate effects. Fifteen dollars an hour in North Carolina or Louisiana is worth more than fifteen dollars an hour in California or New York. This implies (to me) the negative effects of the living wage will fall more heavily on the lower cost-of-living states with more people losing their jobs in those states rather than the high cost states. Then again, isn't that what the proponents want – to increase the misery in low unemployment states so it's equal with high unemployment states? After all, fair is fair, right?

One more ignored consequence that can have a profound effect is labor union contracts with wage rates tied to the federal minimum wage. What happens if the living wage folks get their way and $15 an hour becomes the new minimum wage? The effects will ripple through the economy and everything will become more expensive, particularly housing, construction, and transportation costs. Those increased costs will affect other costs, like food, energy, clothing, medical care, and so on.

What about those who are presently making $15 an hour for their skilled or semi-skilled labor and they see less skilled and experienced workers now making the same as they do? Will they in turn demand much higher wages to compensate? Of course they will. That in turn will drive others above them to demand the same thing.

After it all works its way up the chain, will those at the bottom of the wage scale be any better off? No. They'll be right back where they started from and their wages won't be worth any more than they are now. They might even be worth less. Will the living wage proponents then demand yet another rise in the minimum wage and start the whole thing again? Probably. They won't have learned the lesson from the first round and will make the same mistake again, which will help nobody but will likely generate one heck of an inflation rate.

All in the name of 'fairness', of course.