“Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen and also those which it necessary to foresee.”
~ C. Frederic Bastiat, 1801-1850
The Center for American Progress (CAP) held an event on June 7th called “Raising the Minimum Wage, Rebuilding the Economy”. At this event, experts such as Professor Michael Reich of UC-Berkeley and Dr. Heidi Shierholz of the Economic Policy Institute predicted that raising the minimum wage by even $0.50 an hour would stimulate the economy, possibly “to the tune of 50,000 new jobs.”
On the surface their argument, like many for stimulus spending, seems compelling; after all, as they point out, those who work minimum-wage jobs generally have to spend much of what they earn. This quick spending immediately releases capital into the economy, which would certainly benefit those businesses where the money is spent. The positive aspect of this ‘stimulus’ is immediate and readily apparent – it is what is seen.
As always with such an economic change, however, there are unintended consequences which result – these are the things which are not immediately seen, and must be foreseen. First, the money which is given to the workers in the form of a higher hourly wage is not simply granted from thin air – the businesses must divert resources from elsewhere in order to meet their new, higher payroll. These resources may be passed directly to the consumer in the form of higher prices, or they may be absorbed by the employer in various ways, such as cutting back in another area of its budget or simply hiring fewer workers in order to keep a similar payroll. In the former case, the consumer will now have less money with which to buy other products; in the latter, the higher wages benefit some workers at the cost of others being unable to find a job.
Another of CAP’s arguments was that a study has proved that raising the minimum wage decreases employee turnover, and thus lowers costs for employers. Though the costs of employee turnover are real, the point they are missing is that minimum-wage jobs are not the sort that are meant to be permanent. According to the Bureau of Labor Statistics, only 1.3 percent of all workers earn the minimum wage or less, and fully half of those are under the age of 25. Such jobs are the training ground of our workforce, providing teens and college students with the easily-available jobs they need to gain experience and spending cash on the road to attaining their independence – that their turnover rate should be very high is something to be expected.
While CAP’s experts repeatedly invoked the benefit of minimum wages for poor families, a recent study shows that only a very small percentage of low-wage workers are sole earners, or even the majority earners for their households. Even for these relative few, the effects of raising the minimum wage are negative. Studies have shown that these low-wage jobs can serve as a springboard for these unskilled workers, allowing them to attain skills and references to put towards better-paid occupations while still earning a wage. However, because employers tend to hire both less frequently and for fewer hours after a minimum wage hike, fewer of the people who benefit most from these jobs are able to find them.
Whenever the government passes such a regulation as a wage increase there are always a series of consequences which tend to travel through the economy. Like waves rippling outwards from government’s center of power, these effects seem innocuous as they travel towards the consumer, yet they conceal true power underneath. The capital which is diverted to artificially increase wages takes away from that which could have been more efficiently used elsewhere, and in effect eliminates something else which might have been produced with it. This loss of capital is felt by everyone in the economy, but in this case it is felt most by the unskilled, the young, and the poor.