It seems as if every time the economy starts thriving people on the left begin repeating the same tired old tagline. They claim the economy is only working for the elite and that low-skilled workers are being denied a “living wage.” They complain of inequalities and demand government intervention in the form of minimum wage laws. Sure enough, now that the economy is thriving under the deregulatory agenda of President Trump, people on the left are once again calling for yet another minimum wage hike.
One such proposal currently being debated is the Raise the Wage Act, H.R. 582. Introduced by Rep. Bobby Scott (D-Va.), the Raise the Wage Act seeks to raise the federal minimum wage to $15 per hour over the next five years. Although Rep. Scott’s motives for raising the minimum wage are surely wholesome, basic economics tells us that this very proposal would likely end up doing more harm than good for the people it seeks to aid.
Raising the federal minimum wage to $15 per hour is simply an ineffective and economically damaging method for raising citizens from poverty. Take the example of Seattle which passed a $15 minimum wage ordinance in 2016. Since the ordinance took effect, Seattle has seen low-wage earners actually begin to earn less. A study by economists out of the University of Washington found that increasing the minimum wage “reduced hours worked in low-wage jobs by 6-7 percent, while hourly wages in such jobs increased by 3 percent. Consequently, total payroll for such jobs decreased, implying that the Ordinance lowered the amount paid to workers in low-wage jobs by an average of $74 per month per job in 2016.”
The conservative economists who were lambasted for warning Seattle of the damage their ordinance would do turned out to be correct. We cannot fault Seattle for their intent of raising people from poverty with a “living wage.” Yet, anyone who understands basic economics should have seen the writing on the wall. As Forbes contributor Panos Mourdoukoutas put it, “a ‘living wage’ isn’t an entitlement, it must be earned by delivering value to the consumer.”
In such circumstances, it is useful to remember that labor is a commodity. Workers are, and should be, compensated for their labor based on the value that said labor adds to the product of the organization. Demanding a high minimum wage, then, is the same as fixing high prices to other commodities. As happens with any other commodity, when the minimum wage is increased, companies are suddenly forced to pay more for the same amount of work. Subsequently, companies can thus afford less work leading to reduced hours and layoffs.
The unfortunate reality of the minimum wage is that it ends up hurting the very people it seeks to aid; the uneducated and unskilled sections of the workforce. Increasing costs, especially in the labor market, will always result in either higher prices or cutbacks. Since corporations are ultimately governed by profits, the costs of increasing the minimum wage would never be shouldered by the company itself. The costs of the minimum wage are always passed onto either the consumer in the form of higher prices and/or onto the worker in the form fewer hours or job opportunities.
McDonald’s is a fantastic example of just such phenomena. If you’ve been to a McDonald’s in an American city within the past few years there is a high probability that your order wasn’t taken by a cashier. Rather, McDonald’s has invested millions in automating the fast food industry, eliminating hundreds of low-skilled jobs across the country. According to the former President and CEO of McDonald’s, Ed Rensi, the move towards automation is directly linked to calls for raising the minimum wage. Put simply, when challenged with artificially inflated labor costs, businesses with relatively small profit margins like McDonald’s franchisees are forced to seek alternatives such as automation.
Both during and following his tenure at McDonald’s, Rensi warned of the pitfalls of the minimum wage. He prophesied both the rapid automation of the service industry as well as the fact that raising the minimum wage would “force many small businesses to lay off staff, seek less-costly locations, or close altogether.”
As he himself stated: “labor groups accused business owners of crying wolf. It turns out the wolf was real.”
A recent report by the Congressional Budget Office (CBO) paints a stark picture of what would happen if we scaled up Seattle’s disastrous $15 minimum wage to a federal level. According to the median estimate of their analysis, “1.3 million workers who would otherwise be employed would be jobless” by 2025 if we were to implement a $15 minimum wage nationwide, roughly equal to “a 0.8 percent reduction in the number of employed workers.”
It is clear from both hindsight and foresight that proposals like the RWA would be detrimental to the very people such proposals seek to aid. Rather than jamming a regulatory wrench into the economic gears by raising the minimum wage, we should look to real long-term, free-market solutions that are proven to build up all Americans. To quote President John F. Kennedy, a rising tide lifts all boats. So, in seeking to build a robust, well rounded, and free economy, we will find that many of the ills the RWA targets can be cured by the power of the market.