I recently went into my local poke restaurant for lunch, and I noticed a framed letter on the wall as I waited in line. The letter was to the faithful customers, and it stated that all of the prices were increased by $1 due to the impact of the recent minimum wage law legislation. I knew the manager of the restaurant, so I asked a little more about how the new wage hike was affecting business. He stated that not only are prices increased for customers, but since the restaurant is a small business, they had to cut back on benefits given to employees in order to keep the business and cover costs. Lastly, I noticed how his employees were all young ambitious Generation Z’ers. He stated that with the increased wages, applicants who are truly poor or have no education don’t apply because of the surplus of 17 to 19-year-olds willing to work in order to pay for high tuition college fees. Most of the people working for him were not poverty-stricken or single mothers, rather most could write code or help you develop a website. This was interesting: a law that is proposed from an ideology proclaiming to care for the poor and oppressed, is actually having an inverse effect.

Currently in America, there are many who fervently advocate for legislation to “help” the poor and oppressed. Many of these policies, however, only virtue signal without doing anything at all for the oppressed. Moreover, many policies that sound compassionate actually do more harm to the people it’s meant to help. This particular essay gives arguments against minimum wage hikes. Despite the compassionate appeal to raise the minimum wage in order to help minorities and low-skilled workers in America, the economics and data tells us a different story.

#1: Minimum wage hikes hurt small businesses

Minimum wage laws increase costs for businesses, making it more difficult for small businesses to pay their employees accordingly. When Seattle recently increased its minimum wage, several restaurants that couldn’t afford the higher labor costs had to shut down immediately. Kelly Ulmer, owner of Almost Perfect Books in Roseville, California, had a business model that was employee-friendly, offering shares of all profits to the employees each week. “As the minimum wage increased, the profits decreased,” she says. “All of my employees actually made more money at $8 an hour than they do at $10 an hour because I had actual money to give them.”[1] Anytime minimum wage laws are enacted, the biggest initial outcry comes from small businesses who don’t have the cash flow to take the economic impact of the wage hike.

Many people found it eerie that Walmart CEO Doug McMillon called on Congress to raise the minimum wage in 2019. Here you have a CEO of a multi-billion-dollar company looking like a generous saint. Before we anoint Mr. McMillon, keep in mind that Walmart benefits greatly from minimum wage hike because it increases their revenue after the collateral damage done to small businesses around the country. You see, big businesses have more cash flow to pay the extra costs from the minimum wage hike. Thus, small businesses take the biggest financial hit.

#2 Minimum wage hikes increase unemployment

Low-skilled workers who would be employable at a low wage become unemployable at an artificially higher wage. And that explains the perverse cruelty of minimum wage laws: it inflicts the greatest harm on the very workers it is allegedly designed to help.

Similar to my first point, a minimum wage hike reduces the quantity by labor because employers can’t afford to pay everyone the increased wages. Therefore, companies have to lay-off people in order stay afloat. Also, if we begin to think about the future with the increase of artificial intelligence, minimum wage laws incentivize companies to use AI rather than people to save on costs.

As an aside, for those who love to point to the Scandinavian countries as the paragon of “the ideal society,” keep in mind that Switzerland is one of the few modern nations without a minimum wage law. As of December 2019, Switzerland’s unemployment sits at a meager 2.1%. The last time Americans saw unemployment rates that low was in the Coolidge administration when unemployment was 1.8%. By the way, there was no federal minimum law implemented during the Coolidge era.

#3 Minimum wage hikes harm low-skilled workers

If the government raises the minimum wage, the higher wages can lure more skilled workers to compete for jobs they may have once avoided. A college student who wouldn’t have taken a McDonald’s job for $9 an hour may find it worthwhile at $15 an hour, leaving fewer opportunities for, say, an uneducated immigrant from South America. Going back to the aforementioned impact of the Seattle minimum wage ordinance, researchers at the University of Washington reported:

“Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. The work of least-paid workers might be performed more efficiently by more skilled and experienced workers commanding a substantially higher wage.”[1]

And this highlights the essence of the economic logic that explains why the most vulnerable workers (low-skilled, uneducated, teenagers, etc.) are the group that is most harmed by minimum wage laws — those laws artificially raise the wages of low-skilled workers without increasing their productivity, and therefore significantly reduce their employability relative to higher-skilled workers.

#4 Minimum wage hikes hurt the oppressed

Many people don’t realize that in 1930, the unemployment rate for blacks was lower than the white unemployment. It’s unbelievable because people assume that racism was so persistent in 1930, it ought to have left most if not all blacks without any opportunity for employment. Despite rampant racism, however, there were more black workers than white workers.

Back in 1948, the unemployment rate for 17-year-old black males was just under 10%, and no higher than the unemployment rate among white male 17-year-olds. How could that be, when we have for decades gotten used to seeing unemployment rates for teenage males that have been some multiple of what it was then — and with black teenage unemployment often twice as high, or higher, than white teenage unemployment?[3]

The disparity in unemployment between black and white workers occurred when the minimum wage regulation went into effect during the 1950’s, and the racial gap in unemployment expanded.[4] With the artificial increase in wage, blacks were priced out of jobs.

Many people automatically assume that racism explains the large difference in unemployment rates between black and white teenagers today. Was there no racism in 1930’s and 1940’s? No sane person who was alive in 1948 could believe that. Racism was worse — and of course there was no Civil Rights Act of 1964 then.

It’s important to note, however, that the economics of supply and demand often carries more weight than racist policies. To use another historical example, during Apartheid in South Africa where it was illegal to hire blacks in most occupations, blacks nevertheless outnumbered white workers. During this time, there was no minimum wage law in South Africa, so many blacks were able to do the work that whites refused to do. Thus, economics carried weight even in South Africa apartheid.

Final Thought

Why is this important? Because ideas have consequences. And if we perpetuate ideas without looking at facts, history, and the collateral impact on society, then you get the kind of country that devalues liberties and freedoms needed to thrive. Perhaps it’s better to think about ideas, like minimum wage hikes, using facts and reason without depending on emotional “compassionate” arguments that end up causing more harm than good.  Just a thought.

 

 

 

 

 

 

[1] Esha Chhabra, Forbes (May, 2017)

[2] “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle” by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor and Hilary Wething.

 

[3] Thomas Sowell, “Intellectuals and Race,” 2013.

[4] Actually, the federal government established a minimum wage in a 1938 law called the Fair Labor Standards Act. However, this law was never in effect because a decade of high inflation had raised money wages, for even low-level jobs, above that minimum wage.