Minimum Wage Increases Mandated by Government Are a Lose-Lose-Lose for Workers
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Most economists believe the demand for labor is elastic, with a relatively horizontal labor demand curve, as in Figure 1.
This means a 1% increase in wages causes a more than 1% number of workers not demanded by employers
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Lose #1:
The minimum wage increase from wage A to wage B, results in a decrease in number of minimum wage workers employed, moving from D to C.
At higher minimum wage B they are largely replaced with:
· higher value workers including college students, retirees, and housewives who before thought the free-market minimum wage was too low to want to get a job
· increased automation, previously more expensive than the minimum wage
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Lose #2
Likely there is a decrease in total wages for those who remain employed at new higher minimum wage.
With natural free-market equilibrium wage A, total wages earned by all minimum wage workers is the rectangular area AED0.
After the newly government-mandated higher minimum wage B, employment falls to C, total wages earned falls to BFC0.
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Lose #3:
Prices go up to cover the new higher minimum wage cost.
Wage costs are about 75% of a typical company’s total costs.
If all companies in the economy raise minimum wage, either because of law or public pressure, they can keep the same amount of workers and simply raise prices, with the expectation competitors will do the same.
This creates individual market and economy-wide price inflation.
Inflation reduces or wipes out wages gain.
Higher prices hurt low-income people the most.
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Why do companies need to increase prices, aren’t they already making plenty of profits?
Because they almost always operate with a small margin of profit forced by competition, with profits slightly above the return business owners could receive by putting their money instead into the stock market.
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All these results are why politicians avoid mandating big minimum wage increases.
With any minimum wage increase there is some loss of jobs.
But with a not-excessive minimum wage increase, it seems it is a gain for workers, because:
· those who get the new higher minimum wage get the most attention
· many of the unemployed are hidden because they never get a job in the first place
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There is a likely additional Lose #4:
A minimum wage can act as a ceiling on wages, keeping wages lower than they would be if there was no minimum wage law.
An employer knows a new worker is actually worth $20 per hour, more than current minimum wage $15.
But the new worker expects and accepts the $15 minimum wage.
Workers become comfortable with the workplace and do not look around for a job that pays the $20 they are worth.
Employers know they can hire $20 value workers at $15 and expect them to stay with the business for a longer time than if there was no minimum wage.
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Perhaps the only benefit of a mandated higher minimum wage is
many people, those don’t understand or accept the above fundamental economics, get a satisfying feeling government cares and is trying to do something to help them.
As California governor Jerry Brown once said, “increasing the minimum wage to $15 is the moral thing to do, but economically it might not make sense.”
Politicians’ enacting a new higher minimum wage can help maintain current political stability and gain votes for themselves.
Many people become satisfied with the “we care” government, at costs of:
· increased unemployment and number of poor people
· lower total wages for low wage workers
· higher inflation
· increased government-dependency because of higher unemployment
· increased future political instability, with many people then again pressing for government to “do more to help,” including raising the minimum wage even higher
· increased economic inefficiency resulting in slowed overall economy growth
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Helpful video: Is Raising the Minimum Wage a Bad Idea?
https://www.youtube.com/watch?v=9aCpaON5NyE
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