Raising the Minimum Wage Would Hurt Workers

It’s been months since President Obama’s State of the Union pledge to raise the federal minimum wage to $9, but the debate has returned to the forefront following a series of strikes by fast food workers last month. Huffington Post added fuel to the fire with an article claiming that McDonald’s could double the salaries of all its workers by adding just 17 cents to all its Dollar Menu prices and 68 cents to the price of its Big Mac, citing a study by a University of Kansas undergraduate. Huffington Post has since removed the article, claiming that factual inaccuracies in the study “cast doubts on its claims.” Now fast food workers are planning a national strike on August 29 to demand a $15 per hour minimum wage, a nearly 70% increase over the median wage of $8.94 an hour.

One particularly alarming implication of the minimum wage debate is that many Americans seem to believe that a living wage can be mandated by a non-market entity without resulting in significant harm to poor and low-skill workers. Prices are not set arbitrarily in a market system, labor prices included. If it seems hard to believe that a minimum wage increase of just a few dollars could cost low-skill workers their jobs, consider what would happen if Apple decided to raise the price of its $500 iPad to $1000. Surely it would be unrealistic to expect that every consumer who would pay $500 for an iPad would still want to buy one at a cost of $1000, so Apple would lose sales. Firms can’t double their prices without adverse effects on consumer demand, so doesn’t it only make sense that McDonald’s won’t just decide to pay $15 an hour to all of its employees who currently receive $7.25 an hour to do the same work? Otherwise, why stop at $15 an hour? Why not $100?

It’s worth mentioning that not all economists agree that minimum wage increases have a negative effect on employment, which no doubt has caused endless confusion among non-economists. This entry from the Washington Post Wonkblog, for example, cites a February paper from John Schmitt of the Center for Economic and Policy Research proposing a variety of theories on how employers may respond to minimum-wage hikes without laying off workers. On the other side of the debate, a 2007 review of minimum-wage research conducted since 1991 states that among papers providing what the authors view as the “most credible evidence,” “almost all point to negative employment effects, both for the United States as well as for many other countries.”

However, one can miss the forest for the trees focusing on the relationship between the minimum wage and employment. The employment effect isn’t trivial, but after all it’s the workers that the protesters are concerned about, not the number of jobs. Consider a case where a minimum wage hike prompts McDonald’s to consider altering its labor force to increase productivity in order to cut profit losses. A large class of “medium-skill” workers unemployed in the current economy may decide to compete for the jobs taken by today’s minimum-wage earners, with the result that displaced low-skill workers end up earning $0 an hour instead of $7.25. The bottom line is that with a minimum wage higher than $7.25 an hour, some workers will no longer be employable who would have been otherwise, even if the number of people in jobs remains the same. They won’t be able to produce enough value for a company to be willing to hire them.

That’s not to say that the status quo is fair. As Sheldon Richman points out in an op-ed for the Future of Freedom Foundation, barriers to entrepreneurship and low wages are intimately related. Fast-food workers would have vastly more job options without restrictive zoning codes and licensing requirements keeping them from going into business in their own homes, not to mention a whole host of other regulations that shield large corporations from competition with small businesses. Becoming entrepreneurs would not only allow these workers to increase their wages by taking advantage of skills they can’t currently market, it would also alleviate the constant glut of supply in the fast food labor market, putting low-skill workers at less of a disadvantage and giving them a better chance to negotiate higher wages.

At best, the minimum wage is a policy for helping one group of poor people by taking away opportunities from another group of poor people. A better policy would be to empower workers with the kind of choice and opportunity that is currently suppressed by the U.S.’s corporate state economy.