Economics often gets a bad rap. It has been derisively branded "the dismal science." Economists are accused, like the local weatherman, of always being wrong. Yet, the study of economics is simply the study of human nature and humans' reactions within the context of a market economy. And if more policy makers and voters truly understood the fundamentals of economics, they might find themselves on the other side of the now-popular argument to raise the minimum wage.
Liberals employ a raft of studies and some specious arguments to back up their minimum-wage-raising stance, touting them as proof that hiking the minimum wage helps both workers and the broader economy. The problem is, many of these studies mix up causation with correlation. And many contradict each other. This Huffington Post article cites a study projecting that the economy would grow by $22 billion and create 85,000 new jobs, all from the initial phasing in of a minimum wage hike from $7.25 to $10.10. Yet the CBO (the independent government analyst for the economy) predicts that 500,000 jobs would be lost.
As for the prediction that the economy would benefit from extra cash in the pockets of some low-income workers, it defies common sense to think this is a critical factor. After all, total minimum wage payments are just about one-third of 1 percent of total GDP. Even if the liberal argument that extra income will be spent, therefore helping the economy, is 100 percent true, we're only talking about a few billion dollars in America's $15 trillion economy.
But in the end, many Democratic politicians and idealistic progressives don't make a macroeconomic case for raising the minimum wage. Theirs is a moral argument. It's just not fair to pay such a low wage, they say. People can't live on $7.25 an hour. In essence, they view a higher minimum wage as an anti-poverty program.
Ironically, free-market economists have the same goal — to help the poor. However, they know there are much more efficient ways of achieving the same end.
President Obama wants to raise the federal minimum wage from $7.25 to $10.10 — a 39 percent increase. But cash that goes into one pocket must come out of another. Business owners with lots of minimum-wage employees would undeniably see their costs skyrocket. Maybe they'll compensate by raising the prices at the fast-food restaurant they own, which would hurt many poor and middle-class families who would ultimately pay higher prices at these restaurants. There is no free lunch — the money to pay for a big wage hike has to come from somewhere.
But more critically, the bedrock economic principle of the interconnected relationship between supply and demand comes into play. Simply stated, if the price of a good increases, the demand for that good decreases. If the price goes down, demand goes up. Labor is a good, too. When the price of low-priced labor increases, employer demand for that labor decreases, while employee demand for those jobs increases. That means more workers will be chasing even fewer openings. Those jobs will pay more — but fewer employees will benefit.
Let's look at the example of workers in the food-service industry. Of the 3.3 million (4.3 percent) in America who earned the federal minimum wage of $7.25 or less in 2013, about 1.5 million were in the food preparation and serving related occupations. What happens to them if the U.S. increases the federal minimum wage to $10.10 per hour?
Both economic theory and common sense tells us that demand for those workers will decrease.
Now, liberals and conservatives alike point to plenty of studies that "prove" their side of the argument. On the left, this article from Think Progress sums it up well. Or, as the above CBO study concluded, a government-mandated wage increase would cause the loss of many existing jobs, but ultimately create a net economic gain. On the right, a recent and very thorough study by the American Action Forum showed that in the states that raised the minimum wage in January of this year, by May, 129,200 jobs had been lost in the food service industry. Yet, at all other wage levels, the number of jobs increased.
It's easy to drown in the noise of the arguments on both sides. Besides, belief (on both sides) usually trumps good science. So here, again, is the key point: The law of supply and demand tells us that when the price of low-priced labor increases, employer demand for that labor decreases. A big minimum wage hike will cost many minimum-wage earners their jobs.
And the long-term trend of businesses shedding low-paying jobs is clear. Making the lowest-paid jobs even more expensive for businesses will hardly incentivize them to retain or multiply these positions. And thanks to technology, it's easier than ever to cut bait on these jobs.
Gas stations, airline ticketing check-in counters, grocery stores, tollbooths — they have eliminated thousands upon thousands of jobs through automation. With driverless cars promised in five years, it takes little imagination to assume that lower-priced restaurants will have us placing orders via tablet soon — and not need the workers who used to serve this function. Inventors in California have created an automatic hamburger-cooking machine that cooks 340 hamburgers in an hour without human intervention. Technology marches on. A minimum wage hike only hastens its effect on low-paid workers. Since all pricing is relative, even the threat of hikes, let alone the reality, would decrease the price of these innovations, thereby increasing their value.
Partisans on all sides can surely agree that $7.25 an hour is not a living wage. But that doesn't mean the solution is raising the minimum wage. Minimum-wage jobs should and often do serve as training, a first step on the path to middle-income wages and, sometimes, beyond. Remember, only 3.3 million American workers get the minimum wage — a very small percentage of the total workforce. The main reason so many overqualified workers remain in minimum-wage jobs today is because of the anemic recovery from the 2008 crisis. Hiking the minimum wage by 40 percent won't fix that problem.
The minimum wage increase that many Democratic politicians promote actually hurts many of the very people it's designed to help. How ironic it is that low-income voters will be swayed by a policy that reduces their opportunity to enter and progress within the labor market. The much-maligned economic profession has a term for that, too: "unintended consequences."