A Balanced Examination of Minimum Wage Increases

Last week, California Governor Newsom raised eyebrows when a recently passed $20 minimum wage for fast food workers had a surprising exception: The law didn’t apply to a large restaurant chain owned by one of Newsom’s large campaign donors. This led me to question why California needed a $20 minimum wage in the first place. California is certainly a more expensive place to live than other parts of the country, but why did Newsom decide to raise it to $20 in the first place?

Raising the minimum wage is often revered as a great economic policy that will help millions living paycheck to paycheck. Its goal is to offer support to those who need it the most and to help more people rise above the poverty line. I believe with any policy there needs to be a deep investigation on the benefits and drawbacks to come to an informed conclusion on whether or not the policy is worth implementing. In this post, I aim to look at both sides of this argument and offer my opinion as to why I do not believe the minimum wage will help those in the working class.

Possible Negative Outcomes

Firstly, evidence has shown that raising the minimum wage may backfire and decrease worker hours and wages. Take, for example, a recent study about minimum wage increases. Qiuping Yu, Shawn Mankad, and Masha Shunko found in their research, “When a Higher Minimum Wage Leads to Lower Compensation," that every $1 increase in the minimum wage between 2015 and 2018 led to employers decreasing the average hours each employee works by 20.8%. For a store in California, these changes meant employees worked an average of five fewer hours per week. In the end, California’s minimum wage hikes hurt employees’ total take home pay, where minimum wage workers total compensation decreased by 13.6%.

Possible Positive Impacts

On the other hand, proponents argue that a minimum wage increase will lead to reduced poverty levels and a better economy. According to WorkRise, a $15-an-hour minimum wage leads to a yearly earning increase of $5,000 and a total net gain of $3,700. Their study also cited that the poverty rate would decrease by about 2.1% and 6.9 Americans would leave poverty. George Akerlof from Georgetown University, a leading economist also says another positive aspect is that employee morale and work ethic increase, leading to more productivity. Some economists also linked it to better physical and mental health among workers. Lastly, a study by David Cooper and Doug Hall estimated that if there was a $2.55 increase in the minimum wage, it would lead to $40 billion in wages added to employees’ pockets, and drive significant GDP growth, boosting the entire economy.

Automation and Outsourcing

However, it is important to note the impact that automation could have if a minimum wage increase were to happen. Oxford University researchers Carl Benedikt Frey and Michael A. Osborne observed that higher labor costs accelerate the shift to machines instead of humans to cut costs and increase profits in the age of robots and AI.

A wage hike could also lead to an increase in outsourcing to other countries, like China, which costs 25-40% less for labor than in the U.S. A survey of 400 US Chief Financial Officers found that 70% of CFOs would “increase contracting, outsourcing, or moving actual production outside the United States” if the minimum wage were hiked to $10 per hour. This is because businesses are forced to pay wages they cannot afford and so owners will look for alternatives to reduce expenses. That could include outsourcing the work to states or countries with lower labor costs or investing in automation.

According to a First Research industry profile, 10% of grocery store’s expenses are wages. Forbes also says grocery stores have one of the smallest profit margins across different industries. A minimum wage hike would shrink the already small profit margins, forcing businesses to consider raising food prices and reducing labor costs. For example, stores could reduce staff by increasing the reliance on automated self-checkout and have fewer staff to keep shelves stocked and clean. As research and innovation increase access to robots and AI, businesses will be incentivized to automate more of their business operations. From factories to restaurants and many other industries, it is becoming easier than ever for businesses to opt out of dealing with forced wage increases by their increased reliance on automation.

There are other reasons for automation and outsourcing too, such as technological advancement and globalization. I think it is important to note that wage costs are not the sole reason for businesses looking for cheaper ways to produce products, although they can play a big role in decision-making regarding where companies choose to produce. A nuanced approach regards all of these aspects as a part of this multifaceted issue and considers them when coming up with solutions.

Poverty and Inflation

As stated earlier, many proponents of a minimum wage hike say it helps people rise above poverty by giving them economic freedom. On the contrary to this argument, many economists have expressed concerns that it could further restrict people’s ability to thrive. George Reisman, a Professor Emeritus of Economics at Pepperdine University, states, “The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the smaller the quantities of goods and services demanded and the number of workers employed in producing them.” Thus, raising the minimum wage would increase poverty among minimum wage workers.”

A minimum wage hike has also been found to contribute to inflation. In Brian Davis’s article "How Does the Minimum Wage Affect Rents?" from 2000 to 2009, three months after the wage increase, housing prices increased. NBC News backed this up, finding a correlation between wage increases and rising housing prices.

Photo by Kenny Eliason on Unsplash

Prices and Net Income

Similar to housing, NBC News also found that a cup of coffee went up 10%-20% in Oakland, California, after they hiked the wage by 36%. Chicago prices rose 6.7% after they changed it to $10. James Sherk, a Senior Policy Analyst at the Heritage Foundation found that a single mother working full time with the federal minimum of $7.25 would be $260 a month worse off if they hiked the wage to $10.10. “While her market income rises by $494, she loses $71 in EITC [earned income tax credit] refunds, pays $37 more in payroll taxes and $45 more in state income taxes. She also loses $88 in food stamp benefits and $528 in child-care subsidies.”

Entry Level Jobs & The Employment Ladder

Raising the minimum wage will have a substantial impact on people in the early stages of their work experience. Teenagers, young adults, and those just starting their careers may struggle to find employment because employers may be hesitant to hire entry-level workers at higher wages if their skills don't yet justify the cost. This could lead to a decrease in job opportunities for these groups, impacting their career development and skill acquisition. Those with less education will have difficulty with this as they haven’t learned the skills to be successful yet.

Essentially, this entirely removes a whole group of people who want to join the workforce. Don Boudreaux, Adjunct Scholar at the Cato Institute, explains, “The minimum wage cuts off the first rung of the employment ladder, and it’s that first lowest paying rung that provides the skills and experience workers need to reach the next rung and to continue climbing their way to a better life.” Increasing the minimum wage decreases the number of entry-level jobs that are on the way to the top of the job ladder.

How Businesses Adapt: Business Viability

Under increased labor costs, businesses may find it hard to remain open. When free to negotiate wages, the employee and employer are free to find a common ground of what their work is worth. For example, a lazy employee should be paid less than someone who gives their all every time they come to work. However, with a minimum wage, both employees have to be paid the same because it would be illegal for the lazy worker to be paid less than what they are worth to that company. With that in mind, the business may be incentivized to let go of that first employee because they no longer see them as necessary for their company.

This change is also hard on businesses. With higher wage costs and thin profit margins, some companies have to absorb the additional costs by increasing prices, decreasing the number of workers they employ, and decreasing worker hours. Some businesses still can’t afford to keep their doors open, and many will close as a result of the wage hike.

For example, in cities like Seattle and NYC, The American Enterprise Institute’s Mark Perry announced that Seattle “already… has seen a number of restaurant closings and job losses related to the government-mandated wage hike.” Harvard Business School found that for every $1 increase in the minimum wage, the company was 14% more likely to close.

A Broader Economic Perspective

While all of these arguments are important, it is essential to acknowledge them within a much bigger context. The relationship between wages, prices, and poverty is complex and influenced by various factors, including market dynamics, fiscal policies, and global economic trends. Additionally, the impact on inflation should be considered alongside other inflationary pressures and monetary policies. The minimum wage has been critically acclaimed as a way to help poverty and inflation. This dynamic is complex and has many aspects, and an informed debate involves knowledge of these aspects to learn.

What’s the solution, then?

So, that brings us back to the question, if the right answer isn’t to raise the minimum wage, what is? In my opinion, we don’t need a minimum wage at all, and here’s why:

In a capitalist, market-driven approach, employers would be free to set wages based on the perceived value of the employee. If Company A offers the worker $5 an hour but Company B offers the worker $6 an hour, the worker would choose Company B because they perceive their work to be worth that amount of money. Today, that worker would have trouble finding a job because both wages are below the nationally mandated $7.25.

To argue that if we abolish a minimum wage, employers will immediately lower their prices is to completely ignore that 97-99% of the country already makes above minimum wage. The $7.25 is just a hinderment and block to the free market and capitalism. Wages should always be based on the value they provide for their company, and if a worker is forced to be paid more than they are worth, it leads to unemployment.

The Living Wage Counterargument

When many people argue that the minimum wage is an impediment to the free market and that there should instead be no wage requirement, many people bring up that people deserve to make a living wage and that the mandate is only making sure people aren’t being scammed and paid a low amount that is not enough for them to live comfortably. There are multiple things that I think are flawed with this argument, although I believe everyone should be paid an amount they can live off of. For starters, to say that is to ignore that 97-99% of businesses already pay above the minimum wage. Additionally, in the U.S., we have the right to quit our job at any time and find other work that is better for us based on wages and lifestyle choices. If the business you work for is not paying you enough, you can easily find work. There are about 9 million job openings in the U.S. as of December 2023. All of this suggests that there truly is not a reason for a minimum wage and that is just an obstacle to the free market.

Conclusion

Based on the comprehensive analysis I have presented, I think it should be clear that while the policy of a minimum wage is well-intentioned to help those who need it, it often does not achieve those objectives. The evidence I have presented shows that it can lead to job losses, inflation, automation, and more issues. Outside of eliminating the minimum wage, there may be other solutions that should be considered and investigated, just like I’m researching this solution. We should always strive to help others, but in a way that benefits everyone and doesn’t come with many major drawbacks.