In his campaign for President, Vermont Senator Bernie Sanders has called for raising the minimum wage significantly, to make it a “living wage,” and in many places local governments have raised the minimum wage. The argument for such raises is that if we just increased the minimum wage, people working at those minimum wage jobs would earn more money, could provide better for their families, and might actually spend more of their pay and help the economy. In short, the country as a whole would be better off.
These arguments seem to defy basic rules of economics and normal human experience. We know from our own lives that the cost of something matters. How many people shop without looking at the price tag? We also know from our own experience that if something becomes too expensive, we will try to do without that costly item. So the notion that you can raise the cost of anything without any negative reaction or consequences seems both naive and outlandish. The across-the-board minimum wage hike arguments presuppose that those who employ minimum wage workers — who are, by definition, the most unskilled, untrained, fungible people in the national workforce — have an endless supply of money and will simply accept a minimum wage hike without taking any steps to account for their increased costs. If you know anyone who has worked as a manager of a fast-food restaurant, you know that assumption is fantasyland.
Some municipalities have increased the minimum wage anyway. So, how is it working? While the data is preliminary, it seems to show what any rational person would suspect — that minimum wage increases affect hiring. A recent economic research study by the Federal Reserve Bank of San Francisco concluded that “the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.” The study adds that “allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession.” And more recent data from the U.S. Department of Labor suggests that hiring slowed in those locations where the minimum wage was increased.
I’m sure the minimum wage hike advocates will dispute the data, or argue in the alternative that the better earnings by the employed more than compensate for any job loss that might have occurred. Such arguments seem to me to be both misguided — wouldn’t we rather have more people working, and taking that first step up the job progress ladder? — and short-sighted. If employers of minimum wage workers are cost-sensitive, as the data is indicating, they’ll look for other ways to avoid paying wages that are too high as a result of governmental fiat. As the Washington Post has reported, one option that is being explored is increased reliance on machinery and robotics in places like fast-food restaurants, which already have seen declines in worker employment.
Let’s not kid ourselves. Hiking the minimum wage is no panacea, and we don’t live in a fairyland where employers have endless supplies of money. Don’t be surprised if, in a few months or years, you don’t see that teenager behind the counter at your favorite fast food restaurant and are served your burger by Robbie the Robot instead.