Economics: Is Raising Minimum Wage A Bad Idea?

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There’s a movement in cities across the country to raise the minimum wage to $15 per hour. One of the most prominent advocates is former labor secretary Robert Reich who thinks that $15 per hour should be the minimum wage for the entire country, this is a bad idea. Here are three reasons why, first of all, it would kill jobs.

One of the basic lessons of economics is that when the price of something goes up, people buy less of it, so, if the price of pumpkin lattes rises you can expect consumers to buy fewer of them. This law of demand also affects the market for low-skilled workers, raising the minimum wage means a higher cost of employing each worker which makes workers less affordable than before.

Our coffee shop won’t keep a worker at a mandated $15 per hour if that worker’s efforts only result in $7.25 per hour in added revenue. Over the course of the year, a shop that keeps such a worker full-time would lose $15,500, so instead, it would eliminate that job and evidence shows that employers in fact do respond in this way to minimum wage hikes.

Recent research by economists Jeffrey Clemens and Michael Wither finds that 1.4 million jobs were destroyed in the late 2000s when the minimum wage rose across all 50 states by an average of nearly 30%, and worse, those job losses were probably suffered by the people who need jobs the most.

This fact brings us to reason number 2, the minimum wage actually hurts the people we most want to help. When the minimum wage rises, the workers fired first and the ones hired last are those who employers judge to be the least productive, the inner city teen from the lousy school district or the immigrant with poor English will be fired before the suburban American teen from the excellent school district.

So those who are most disadvantaged, tend to suffer the most job losses, this reality is compounded by the fact that raising the minimum wage causes more competition for jobs. A supermarket job that once paid $8 per hour draws more applicants when it pays $15 per hour, applicants who include retirees, and people with higher education who reenter the workforce only because of the higher wage.

Because these people often have more skills, they squeeze out immigrants and those from disadvantaged backgrounds who are likely more desperate for the jobs, and certainly more desperate to gain job experience. The third reason is that minimum wage hikes aren’t necessary to give deserving workers raises. 96% of American workers today earn wages higher than the current minimum wage, which proves that employers don’t just pay the minimum that they’re obliged to pay by law.

Employers respond to the value that each employee adds, so they can retain the best talent. It’s expensive to train new employees and businesses don’t wanna lose good workers to their competitors, so they raise worker pay voluntarily as employees gain more skills and experience. But when government imposes such raises by hiking the minimum wage, some of the least experienced workers will not only lose their current jobs, they’ll find it incredibly hard to find other jobs.

In essence, the minimum wage cuts off the first rung on 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.