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Does the Minimum Wage Hurt Workers?

Some politicians argue that raising the minimum wage helps the poor and disadvantaged. While this may appear to be the case on the surface, economics professor Antony Davies explains that the common view of the minimum wage overlooks one important detail: The minimum wage does not force employers to pay a particular wage to every worker; it forces employers to pay a particular wage to every worker they choose to keep.

Using an example, Professor Davies shows that minimum wage increases may make the least productive workers too expensive for employers. Minimum wage increases do not help the worker at the expense of the employer; instead they help the most productive workers at the cost of the least productive workers. What’s worse is that over time the more productive worker likely would have been rewarded for productivity anyway.

The evidence is not just anecdotal. The data show that minimum wage increases have little effect on unemployment among college graduates. Minimum wage increases lead to higher unemployment among high school graduates, though, and significantly increase unemployment for the least skilled, least educated workers. The minimum wage may be a well-intentioned public policy, but it often hurts the workers most in need of help.

Minimum Wage [PDF]: See Prof. Davies' power point presentation on the minimum wage.


Does the Minimum Wage Hurt Workers?

Some politicians argue that raising the minimum wage helps the poor and disadvantaged. It might seem that way at first. Certainly workers who are earning $8 an hour today would be better off if they were earning $12 an hour instead. The problem is that this view of the minimum wage overlooks one important detail: A $12 minimum wage doesn’t force employers to pay $12 to every worker; it forces them to pay $12 to the workers the employer chooses to keep. The employer pays $0 to the workers that get laid off or who are never hired in the first place.

Let’s look at an example. Suppose this guy owns a burger joint. The reason the owner hirers a worker is because the worker generates value for the owner. Suppose that, not counting what he pays his worker, the owner makes 10 cents on every burger he sells.

Here’s Al. Al can flip 100 burgers an hour. If the owner makes 10 cents on every burger, not counting what he pays Al, then Al generates $10 worth of burgers for the owner every hour. If the owner pays Al $8 an hour, then the owner makes $2 an hour profit: $10 an hour on the burgers, minus $8 an hour that he pays Al.

Now suppose that the employer hires three workers of varying abilities: Al, Bob, and Carl. Bob is a faster worker and can cook 120 burgers an hour. Carl is a slower worker and can only cook 90 burgers an hour. Since each burger is worth 10 cents to the owner, each hour Al produces $10 worth of burgers, Bob produces $12, and Carl produces $9.

Suppose the owner pays Al, Bob, and Carl $8 an hour each.  After paying the workers, the owner earns $2 an hour profit from employing Al, $4 an hour profit from employing Bob, and $1 an hour profit from employing Carl. In total, the owner makes $7 profit per hour from employing the three workers.

Now suppose the government imposes a minimum wage of $9.50 an hour. What does this do to the profit of our three workers? Al produces $10 worth of burgers per hour. At a cost of $9.50 an hour, Al now generates a profit of only 50 cents an hour for the owner. Bob produces $12 worth of burgers an hour, at a cost of $9.50 an hour, Bob now generates a profit of $2.50 an hour. But look at what happens to Carl. Carl produces $9.00 worth of burgers per hour, but he now costs the owner $9.50 per hour in wages. Carl is no longer generating profit for the owner.  Carl now generates a loss. In fact, the owner would be 50 cents an hour better off if he fires Carl.

The minimum wage was good for Al and Bob: they’re each a $1.50 an hour better off than they were before. But it was devastating for Carl. Carl lost his job and so is $8.00 an hour worse off than he was before.  Here is the first lesson of the minimum wage. It doesn’t help the worker at the expense of the owner; it helps the more productive workers at the expense of the less productive workers.

What’s even worse is that the more productive workers usually don’t need the help. What do you think would have happened over time to Bob, the most productive worker? Either the owner would have rewarded Bob’s higher productivity with a raise, or if the owner didn’t reward Bob, one of the owner’s competitors would have offered Bob more money to go work for the competitor. Either way, eventually Bob would have ended up earning more anyway.

This is the second lesson of the minimum wage. Many of the workers that it does help would have ended up better off anyway, even if the minimum wage hadn’t existed. It works this way in the real world; increases in the minimum wage have little effect on unemployment among college graduates. Increases in the minimum wage increase unemployment among high school graduates. And among the least skilled, least educated workers, increases in the minimum wage significantly increase unemployment. The minimum wage may be a well-intentioned policy, but it often hurts the very workers who are in most need of our help.

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