Why a $15 Minimum Wage would be an economic disaster

And should the minimum wage be abolished completely…

Photo Courtesy of The All-Nite Images

By: Hayden Cunningham

Upon entering office, Joe Biden signed an executive order raising the minimum wage to $15 for federal contract workers. This was done quickly and eagerly to appeal to the “Fight for $15” movement. The push for a nationwide $15 minimum wage has been growing among the Democratic party and it is almost guaranteed in the future.

A $15 minimum wage is a terrible idea. Contrary to belief, it won’t help the poor. It will hurt the poor more than it hurts the rich. Here’s why:

Let’s start with a metaphor. Say you have people of varying income levels going to the store to buy apples. Now, double the price of apples. Some people can still afford the apples, but they have less money in their pocket. Some people have to buy less apples because they can’t afford as many as they used to. Some people can no longer afford apples at all. This is obvious, right? A sharp increase in price leads to less purchases of the product.

Labor is a product. Just like the apples, labor is a product bought by consumers. If you drastically increase the price of labor ($7.25 to $15), then the same outcomes will occur. Some companies will be able to pay a $15 wage, some companies will have to hire less workers, and some companies will completely go out of business. This causes more job loss and higher unemployment. What’s worse: a minimum wage of $7.25 that’s not meeting all your desired expenses, or a $0 wage because you lost your job?

It is for this reason that big companies like Amazon, Facebook, and Google advocate for a $15 federal minimum wage. Most major companies already pay their lowest-level employees $15 an hour. These companies are so profitable that they can afford it. If their competitors are forced to pay a higher minimum wage, many of them will go out of business. A minimum wage increase can bankrupt small businesses (who already have a smaller profit margin) and provide more profit and wealth to the richest companies in each industry (great policy-making from the party that says it wants to fight big corporations and the top 1%).

A minimum wage hike doesn’t just hurt small businesses, but employees themselves. When the government sets the minimum wage, the market doesn’t control the price of labor. This artificial change in price occurs but the value of the job itself has not. The price of labor is determined by the factors of demand and supply: what price consumers are willing to pay for a product, and the market for labor (how many people can do that job).

Here’s an example to show what the consequences of a minimum wage increase would be:

Let’s say you have two job candidates applying for the same job position. This job position is the lowest-paying job at a company. The first candidate has a high school degree, no college degree, and no work experience. The second candidate has a high school degree, is currently in college, and has two years of experience in a related field. Let’s say the first candidate’s labor is valued by the market at $7.25/hour, and the second candidate’s labor is valued at $15.00/hour.

Since it’s the lowest-paying job, the company will pick the first candidate because they will pay less for his labor. low-paying jobs (Minimum wage jobs) typically have a high supply of labor, that’s why businesses do not want to pay them as much. Now add a federal minimum wage of $15.00 (remember that the actual value of that job has not changed). The company is now forced to pay $15.00 to whoever gets the job. So who will they pick? The company is going to pick the second candidate because they may as well go with the candidate who has more value.

The lowest-paying jobs are hurt the most by a minimum wage increase. Companies will have to hire less people. They also will hire more qualified candidates over less-qualified candidates to do the most basic jobs. This means those with the least credentials are pushed out of the labor market. While once being able to get the minimum wage at a low-level position, they now find themselves unable to get any job at all. A minimum wage increase by the government creates artificial disparities in the labor market.

It is for these reasons that the minimum wage is best determined by the market itself. There’s also the fact that a minimum wage is restrictive to a person’s employment process. If you were applying for a job, would you want a government representative in the room to negotiate your salary for you? That representative does not know your value, your needs, or your willingness to work. It’s more free to the individual if we let them negotiate their own salary instead of deciding the government knows best.

Raising the minimum wage, like many economic policies by the federal government, is like a row of dominoes falling down. There are many other aspects of the economy that are hurt by an increase in the minimum wage. Another, for example, is automation. Many fear that automation will cause large percentages of job loss in the near feature. A minimum wage increase just incentivizes businesses to automate quicker. A businesses’ greatest priority is to maximize profit. Decisions have to be made with this simple fact in mind.

The worst time for President Biden to enact this policy would be during a time of high unemployment. Raising the minimum wage when there is a surplus of labor increases the disparity between what the market set the value of labor to be and what a business now has to pay. A minimum wage increase during high unemployment puts more people out of work, thus raising the unemployment rate and making the problem worse.

The current federal minimum wage is $7.25, but most states have passed their own laws for what the minimum wage is required to be:

States have their own minimum wage standards for the same reason a federal minimum wage is irrational: each state has their own standard of living. A worker making a $15 minimum wage in New York is not making enough money to afford the state’s extremely high standard of living. But in Mississippi, the state with the lowest full-time median monthly earnings, that $15/hour would be higher than the median wage of the entire state.

A federal minimum wage for every state would put people out of work in the states where income is the lowest. Plus, one-third of small businesses owners say that a $15 minimum wage will result in layoffs.

And to mention the most important factor for leftists: let’s talk about race. Economist Thomas Sowell makes the point that the black unemployment among teenagers has increased for decades as the minimum wage has gone up (black teenage unemployment has more than doubled). He also notes the arguably racist history of the minimum wage, as it was a way to price racial minorities who were less skilled out of the labor market.

Currently, only about 2.3% of people make the federal minimum wage or less; most jobs are already paying above the $7.25/hour level. Minimum wage jobs are appealing to both the employer and the employee because there is high supply for the job and those who are applying lack skills but need experience. High supply for minimum wage jobs is what employees don’t take into account when they demand a pay increase. When you ask for a raise, it’s not about how much you think you deserve. Rather, it’s about how hard you are to replace.

All of this is just basic economics.

Whether it’s the minimum wage increase or any other dreamy proposal from politicians, remember this: when the government tells you they’re going to pass a policy to help the little guy, it very rarely works out.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s