Minimum wage is predicated on a very stupid notion.
The notion is that employers are essentially Scrooge McDuck: they’ve got a giant money bin, and that money bin is filled with all of their profits, and if only we could pry that money bin open and hand all that cash over to the workers, they would all be better off.
There’s only one problem: the minimum wage does not accomplish what it seeks to accomplish.
Here’s the deal. Here’s how wages are set. It is reliant effectively on two factors.
Factor number one is the price people are willing to pay for a product. You can’t charge a bunch of money for labor if the product is going to be sold for a much lower price. So let’s say that you’re buying a hamburger for a buck. You can’t then pay somebody $5 an hour to make that hamburger or you will lose money. So, what people are willing to pay for a product is one of the factors in determining the price of labor.
The other factor in determining the price of labor is the market for labor. So, for example, if there are five people on planet earth who can cook a hamburger, you’re not going to be able to pay them $5 an hour. It’s going to be very, very expensive. Because again, high demand, low supply. Supply and demand are the name of the game when it comes to setting wages and setting prices, and essentially all wages are a price for labor.
Basketball players get paid an enormous amount of money, not because of the social value they create but because there is enormous demand for excellent basketball players, and there are not very many of them.
By contrast, janitors — who provide an enormous social value — are not paid very much money. The reason being, the number of people who are capable of doing a janitor’s job is very high — so high supply — and the amount of demand is sort of in the middle.
Minimum wage jobs are typically the kinds of jobs that are middling demand but extremely high supply. Lots of people are qualified to do those jobs, and that means that employers are not going to pay an enormous amount of money for those particular jobs. Now, in reality, the number of people who are working in pure minimum wage jobs — $7.25 an hour jobs — is actually exorbitantly low.
According to the Bureau of Labor Statistics, in 2017, there were about 80 million people who are working hourly wage jobs. Only about 542,000 were working at the federal minimum wage of $7.25 an hour. Another 1.3 million were actually working for below that amount of money, which means that grand total — in terms of people who are being paid an hourly wage — only about 2.3% of all people being paid an hourly wage were either making minimum wage or below.
That’s because, again, the market for labor is typically above the minimum wage. Most people who are going to be working an hourly wage are going to be working for more than minimum wage.
So who exactly are these minimum wage workers? Well, they’re typically not a single mom, aged 35 with three kids. A quarter of minimum wage workers are under the age of 25. In fact, 8% of all teenagers are working for minimum wage.
What does this mean? It means that minimum wage jobs very often are the first jobs that people take. Many, many people start at minimum wage jobs and then work their way up the food chain. This means that minimum wage jobs are particularly attractive for both employers and employees for people who don’t have tremendous levels of skill. Actually, about two-thirds of people in minimum wage jobs are going to be earning more than minimum wage within one year of beginning that minimum wage job.
What happens when you raise the minimum wage?
What happens when you artificially boost the price of labor?
Well, a couple of things happen. The first thing is you push a bunch of people out of the market.
Thomas Sowell is fond of saying the minimum wage is never what the government says the minimum wage is; the minimum wage is zero.
Say, for example, that there is a job that is currently being paid $8 an hour. Now the federal government says it’s going to be paid $15 an hour.
The people who were competing for a $15 an hour job were typically people who are going to be college-educated. They’re people who have more work experience, because a $15 an hour job was not the lowest level of job that you could obtain. But now, a $15 an hour job is the lowest level that you can obtain, and that means that if you are an employer, you’re going to be looking for a college graduate to flip burgers as opposed to a high school graduate.
All the people who have those high school degrees? Those people are kicked out of the labor markets in favor of people with a college degree that employers are now looking for to fill a $15 an hour job. Because again, the value of the job has not actually changed, it’s just that now you’ve opened up that job to a new pool of labor.
So, what does the minimum wage actually do? It creates artificial disparities in the labor market. In fact, according to Sowell, in 1948, the black unemployment rate for teenagers was 10%. Since the advent of higher and higher minimum wages, the black unemployment rate has never been lower than 20% and has often been higher than 50%. Because again, the people being pushed out of the labor markets are the people who most need the jobs.
As Sowell notes:
If you go back to say 1950 — 1948, ‘49, ‘50 — you find that at that time, the unemployment rate among black teenagers was a fraction of what it is today. And there certainly wasn’t any less racism than there is today. What was different was that at that time the minimum wage law was a decade old. It was a decade of inflation, and the law hadn’t been changed. So for all practical purposes, it didn’t exist.
This is not actually a partisan point of view. The Congressional Budget Office recently evaluated Joe Biden’s plan for a $15 federal minimum wage, and what they found is that over the course of the next few years, it would improve the salaries for some 900,000 people, but it would put 1.4 million people out of work.
The reason being that when you artificially boost the price of labor, people don’t just magically come up with the money. Instead, they fire a bunch of people, or they automate a bunch of those jobs. The people who retain their jobs make the higher minimum wage. Everybody else, again, they make Thomas Sowell’s minimum wage of $0.
In 2015, Seattle raised its minimum wage from about $9.50 an hour to about $10.50 an hour, and then a year later they raised it again to about 13 bucks an hour. That second boost in pay actually boosted the wages by about 3%, but what it also did is it reduced the number of hours worked by about 9% for a net loss of income.
Then there is the problem of a federal minimum wage. You may have noticed that New York does not look a lot like Mississippi. Neither does California. This is one of the problems: the price of labor in these places is very, very different. So for example, a $15 minimum wage in Los Angeles is not going to pay for a studio apartment. However, a $15 minimum wage in Mississippi is actually higher than the median wage right now. The median wage — like, the guy in the middle — in Mississippi right now is $14.22 an hour. That means the guy working in Mississippi for 15 bucks an hour can probably afford a small house.
Creating a federal minimum wage that applies equally across all the states is completely idiotic. It actually puts out of work more people in the states where the pay is already the lowest.
Who is hurt when minimum wage is forced higher?
The businesses hurt the worst by an increase in minimum wage are not big businesses. They are in fact small businesses.
Small businesses already have a tough time competing with big business. They’re unable to aggregate their costs, they have fewer sales. Their margins of profit are generally smaller. That means that small businesses pay the price when minimum wage gets increased. In fact, big businesses tend to pay more than minimum wage.
There’s a reason that a poll in February 2020 — an economic boom time — found that 8% of small businesses said they would have to lay off workers if there was a massive increase in the minimum wage. Fourteen percent said they would have to cut worker hours, and 22% said there would be a loss of profit margin, which in the end would lead to hourly cuts or to employees getting laid off.
Raising minimum wages in a time of high unemployment is among the dumbest ideas ever. It is one thing to raise minimum wages when you are talking about a shortage of labor for desirable jobs, but when you’re talking about a surplus of labor, then raising the minimum wage only means that you are creating a greater disparity between what businesses ought to be paying in a free market and what businesses are now being forced to pay. That means more people being put out of work at a time when you actually need more people employed.
And then there’s one big cost we haven’t even talked about; and that is the cost of automation.
If you’re a trucker, you do have to worry about the possibility that your boss is going to decide your labor is too expensive and then put some sort of machinery in the truck that drives the truck instead of you.
The same thing has already happened to grocery stores all around the nation. When you artificially boost the price of labor, at a certain point the business figures: “You know what? I don’t want to deal with this union. I don’t want to deal with this labor. Why don’t I just hire a machine? I don’t have to pay the machine anything. The machine doesn’t need a living wage. In fact, the machine doesn’t earn a wage.” They have decided that the burdens of labor are simply not worth the cost of labor.
Now, right now, because low wage jobs are still cheaper than implementing that technology, people still have jobs. But at a certain point, when you artificially raise the price of labor, the machinery becomes cheaper than the jobs.
And at that point, you’re going to see workers replaced entirely across wide swaths of the American economy.
The bottom line is this. When you have officials setting an artificial standard for the price of labor across industry, across states, without regard to how businesses are actually run, you end up with more people out of work, fewer hours worked, and in the end, more people earning the minimum wage of zero.
The views expressed in this opinion piece are the author’s own and do not necessarily represent those of The Daily Wire.