In October, St. Paul Mayor Melvin Carter made the formal proposal to the City Council to increase minimum wage to $15, following Minneapolis’ steps after becoming the first city in the Midwest to adopt that minimum wage.
Higher minimum wage, that means more money for our pockets and more consumer buying power correct? No. Economics is the study of scarcity, the study of how people use their limited resources to meet their unlimited desires through the study of decision-making. Supply and demand, the main model of price determination used in economic theory, dictates the allocation of resources in the most efficient way. As the minimum wage hike continues to spread across the country like wildfire, so do the prices of the good and services in order for businesses to maintain their profit margins. It’s easy to see the minimum wage increase as “more money for the employee”, but the unforeseen behind-the-scene effects end up costing customers higher prices and inflate unemployment.
Seattle, one of the most recent metropolitan cities in America to implement a $15 minimum wage back in 2015, is a remarkable example of the negative effects minimum wage laws have on low-skilled employees in the workforce. The higher the minimum wage laws increase, the higher it is for low-skilled employees to enter the workforce because employers will resort to seeking out to high-skilled employees and automation, technological machines that replace human labor. According to a 2016 report released by the University of Washington,
“The team concluded that the second jump had a far greater impact, boosting pay in low-wage jobs by about 3 percent since 2014 but also resulting in a 9 percent reduction in hours worked in such jobs. That resulted in a 6 percent drop in what employers collectively pay — and what workers earn — for those low-wage jobs. In addition, the report also estimated that there are about 5,000 fewer low-wage jobs in the city than there would have been without the law.”
Higher minimum wages have a cost, a significant cost that would be foolish to ignore. The sound of a $15 minimum wage sounds enticing, and the higher the minimum wage goes up, the more enticing it sounds; but what about the high school student that was prevented from attaining this job due to the extravagant cost for the employer? Or the five employees that lost their job after the employer had to shut down their small business due to the rising wage costs?
French economist Frédéric Bastiat introduced a parable known as “the broken window fallacy” back in 1850. In Bastiat’s tale, a man’s son breaks a window, meaning the man will have to pay for the replacement. Members of the community reacted by saying that the son actually did a service because he’s producing employment (those who have to fix the windows); however, what the members fail to realize is that the dad’s money can’t be used towards other industries and services now since he has to pay for the replacement. While the broken window fallacy usually applies to the argument that destruction and war stimulate the economy, it can still apply to minimum wage laws because it emphasizes the unforeseen effects of such laws and policies.
Artificial and arbitrary economic laws aren’t the solution to enhance an individual’s financial conditions. Just because a law says $15 is the new minimum wage does not mean the individual is now worth $15 an hour. While policies like these are intentioned to help low-income, low-skilled individuals, it backlashes and ends up affecting these groups. Policies have to be viewed by their feedback effects and causes, not the symptoms. Stimulate the demand for labor rather than stimulating arbitrary wages, the former will do much more to protect our vulnerable from exploitation than anything we can legislate.