The Imminent Dangers of an Increased Minimum Wage

Imagine that you are a child. Your parents give you and your 3 siblings $7.25 each week for an allowance. Your sisters, who are both older than you, complain that $7.25 is not even enough for a movie ticket. While your parents advise them to save their money, your sisters refuse and instead ask for more than double their current allowance. Your parents talk it over and decide that since you and your younger brother have less things to spend money, they should instead give your younger brother and yours allowance to both of your sisters. This is effectively what a minimum wage increase would do. Paying some employees more than double what you used to pay them will cause you to have to lay workers off and hire less workers. James Sherk explains that “Raising starting wages to $15 would price millions of Americans out of work…totaling roughly 7 million additional jobs nationwide.” Raising our national minimum wage from $7.25 to $15 is not only unsustainable, but unimaginably hurtful to the United States economic system.

One major problem with a huge minimum wage hike like Democrats propose, is that companies will not want to hire employees that will not bring in as much money as they are being paid. Most unskilled minimum wage employees are not capable of producing that much value. James Sherk claims that companies will have a hard time “hiring a full-time employee at $15 an hour…or $38,700 annually for a full-year job…when many …workers are not…this productive”. For the most part, he is right. With the Affordable Care Act making it more difficult for companies to employ people already, this just adds another layer of governmental policies that companies have to abide by. With all the extra expenses that companies are having to deal with now a days, more than doubling the minimum wage would cause mass job loss and hiring freezes in many companies around the United States. The ratio at which wages and unemployment rise is 7:11. So if wages were to increase 11 percent, unemployment would jump up about 7 percent. That would make Bernie Sanders plan to increase the minimum wage yearly a complete and utterly unsustainable plan.

How big an effect does this have on the job market? Economists debate this. But no one argues that increasing the minimum wage increases the number of unemployed workers who find jobs. In the end, the trade-off is clear. People who keep their jobs get more money; those who lose their jobs, or fail to get new ones, suffer. In announcing his proposal to increase the minimum wage, Bernie Sanders argued that doing so would alleviate poverty. He is certainly correct to turn his attention to the poor, many of whom have been suffering for years in a tough economy. And it is clearly desirable for households that engage in full-time work not to live in poverty. But increasing the minimum wage would not accomplish this goal. Studies show that the people in the lowest 20% of our nation’s wealth triangle, aren’t in it after a year. Over 65% are in the other 80% after one year. This shows that people don’t need a minimum wage increase as much as most democrats think that they do.

There are many reasons why an increased minimum wage would help no one. First, many people who live in poverty do not work, and would thus be unaffected by an increase in the minimum wage. In addition, workers who earn the minimum wage are generally not the primary breadwinners in their households. They are secondary earners – an elderly parent earning some retirement income or a spouse with a part-time job. Or they are young people living with their parents. Data from the Bureau of Labor Statistics show that while workers under age 25 make up only about 20% of those who earn hourly wages, they constitute about half of all workers earning the minimum wage or less. Raising the minimum wage is therefore an ineffective anti-poverty proposal. The case for a higher minimum wage grows even weaker when you stop to consider that there are vastly superior alternatives for steering money to low-income households. For example, the nonpartisan Congressional Budget Office has found that expanding the earned income tax credit is a much more efficient way to fight poverty than increasing the minimum wage.

Why have we so often embraced a less effective tool? A tax credit is less politically palatable because it takes money directly out of federal coffers, while the minimum wage can be raised without it showing up directly on the government’s books. The cost of a higher wage is borne by employers and consumers – and by the unfortunate people who end up not working because of it. It is also important to consider Bernie Sanders proposal to increase the minimum wage in the context of today’s labor market. The unemployment rate for African American teenagers stands at a staggeringly high 43.1%. For white teenagers, the unemployment rate is 22.1%; a little more than 11% of workers older than 25 and without a high school diploma are unemployed.

To put these numbers in perspective, overall unemployment at the height of the Depression was about 25%. Especially for low-skill workers and for young workers, the two groups of workers who will be disproportionately hit by a minimum-wage increase, ours is a labor market in crisis. Increasing the cost of job creation now is unwise.

In a truly free market economy, employees should get paid for the value they add to the final output. Wages are not a gift. They are not at one level, but could have been substantially higher or lower. They are what they are because of the employees’ skills and the market value of what they produce. Now suppose that were not the case. Suppose there was a firm that paid employees more than their marginal product. That would mean the firm is collecting less from customers at the margin than it is paying out in wages. The firm can try to raise prices to cover the deficit, but then it would lose sales to rivals whose costs are lower and it would eventually go out of business. Or it could cover the deficit with lower profits. But then the investors would fire the manager and hire someone who gets the wages right and provides a market rate of return. Suppose that there was a firm that paid employees less than their marginal product. In that case, rival firms would hire the employees away—since they are worth more than what they are being paid. A firm that pays workers more than they are worth cannot survive because it cannot match the prices and the rate of return to investors of its rivals. In summary, a firm that pays workers less than what they are worth, cannot survive because it will not be able to retain its employees. Competition in the marketplace tends to determine wages; there is a definite logic to what people are paid; and it has nothing to do with miserliness or generosity.

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