Raising the minimum wage to relieve poverty and do a little income redistribution seems like a good idea to many. There are even calls for $15 hour minimum wage. This a dangerous idea as it would create inflation, mass unemployment and lead to a recession or worse. Here’s why.
Minimum wage has four major areas of economic defect on the labor market:
First, on the supply side. It draws supply.
Higher wages will draw idle labor into the labor market. Retirees, stay at home mothers and better off college students may stay out of a $7.25 per hour labor market. As the minimum wage goes up to $10, $12 and even $15, more and more will be attracted to compete for the jobs. They will bump out many of the lower income workers who were supposed to be helped. Retirees have an advantage in that they can work for less hours and have Medicare. Health insurance will not be an issue to an employer.
The "off the books" market will swell. $15 hour will draw more illegals into the country who will work for a lot less. Desperate businesses trying to survive will have to hire them. So will businesses competing with those businesses. Illegal immigration will get a lot worse. Illegal employment pays no taxes. At high minimum wage rates rates, few will be able to switch jobs competing with the glut of new job seekers. This will lead to fewer job openings.
Second, on the demand side. It causes job losses.
The more something costs; the less will be bought. This is an old law of economics. It doesn’t have to happen, but usually does.
Less workers will be hired or some will be laid off.
If labor goes up in price then machines may replace workers.
If a business is competing with lower cost foreign labor, the higher costs could put them out of business or move the business overseas. If a business is struggling to survive, a steep increase in the minimum wage could simply put them out of business.
For every $1 increase in the minimum wage, an employer has to pay $1.07 due to Social Security taxes.
Third, there is an inflation effect that is mostly regressive
There is an income ladder or an income pyramid. When the bottom rung is raised then the higher rungs will move up too. Skilled workers like bookkeepers, auto mechanics etc. will demand higher wages. Everything will cost more.
Much of this will be on necessities and thus regressive inflation, that is, it will hit lower incomes the hardest like: Food will cost more at the grocery store and elsewhere. After a mere 14% rise in minimum wage in San Francisco, Chippotle raised its prices 14%. What would happen with a 100%+ increase from $7.25 hr to $15 hr nationwide?
Apartment rents will be bid up or landlords would just raise them if they can get it.
Higher incomes could push lower income workers up over the cutoff points for Medicaid, Obamacare subsidies and food stamps.
All workers on the income ladder could be pushed up into higher federal and state income tax brackets.
The higher costs will be tough on people on fixed incomes. This will add to Social Security cost of living adjustments and accelerate inflation. It will also drain the Social Security trust fund faster.
There will be no increase in "aggregate demand" to stimulate the economy as some theorize. Someone has to pay for the inflation with less buying power. It is a transfer of income and buying power from the middle class and lower middle class to the lowest levels plus a lot of inflation.
Fourth, the “one size fits all” minimum wage doesn't fit.
There are big regional variations in cost of living. California and New York are quite different than Florida and Texas.
A trainee may produce little or nothing in the beginning or may not finish the training. This can slow down hiring or stop expansion.
There are shift differentials for night work.
There are easy jobs like watching over something while the employee can read books, watch TV or use a tablet or cell phone. These fringe benefits can’t fit into a minimum wage number.
We’ve got to create better ways to boost the economy like a financial transaction tax on stocks and bonds to pay for infrastructure employment to create more jobs well above minimum wage and pull up wages.
A recent article adds to this sad fact of economic life with studies to back it up. Click here.