This week, the city council will be voting on whether to increase the minimum wage in our city to $15. It is reported that some workers are making as little as $7/hour or $9/hour in our city. As a council member, before I make a decision on whether to vote for the minimum wage increase or not, it is important to me to examine the issue from an economic perspective and not only an emotional one.
The common arguments surrounding an increase in the minimum wage have to do with the social arguments of creating a “living wage” for employees and also the “greed” of employers who should be using more profits to support employees. While it sounds “nice” and caring to increase the minimum wage, these are emotional, subjective arguments and I prefer a more specific analysis.
First, I would like to examine minimum wage, and wages in general, in terms of supply and demand. Wages can be equated to price, workers (potential and employed) correspond to supply and jobs correspond to demand. When thought of in these terms, the free market should set an equilibrium price for wages – a wage that maximizes efficiency and is satisfactory to both workers and employers and that is fair. Ideally, this market-determined price would cause equilibrium in the jobs supplied and the jobs demanded, minimizing unemployment rates and maximizing the number of employed. Thinking in terms of a command economy, artificially high prices (which may be compared to an artificially set minimum wage) can create a surplus of goods. In the case of minimum wage, the surplus is not an excess of wheat or steel, but workers. When there is a surplus of workers, unemployment rates rise. If our city increased the minimum wage, would we unintentionally create a surplus of workers who are unable to find work?
In the case of our city, the proposal intends to increase the minimum wage anywhere from 66% to 114%. This is a significant increase. I question whether this increase is not only sustainable but also feasible, especially if the drastic change is to take effect immediately. I also question whether this significant change will cause a shock to the job market and have unintended consequences. Using simple economics, if the price (minimum wage) goes up this drastically, it will increase the supply (workers) but the demand (available jobs) will decrease. Is this change in the minimum wage the best choice for our city? While the idea to better support workers is a noble one, our efforts may be misplaced, and we could have the opposite effect that we intended.
Though the minimum wage may artificially increase due to legal intervention, employers and employees will still be able to determine what certain work is worth. If inexperienced, unskilled work is still only worth $9 an hour in the mind of an employer, I worry that employers will find other ways to get that work done. The law only says that employees must be paid a minimum wage. The law doesn’t state that employers must hire workers at all. I already walk into fast food restaurants in this city and place my order and pay at kiosks instead of ordering with a cashier. Will increased minimum wage see more of this type of automation? Is it possible that lower wages may actually allow more workers to enter the workforce? The laws of supply and demand indicate that lower prices (wages) increase demand (jobs), though admittedly also reduce supply (workers).
Some argue that an increase in minimum wage will create a living wage. It will allow minimum wage workers to support their families. They argue that an increased minimum wage will benefit minority, young, or unskilled workers. But statistics show that the majority of minimum wage earners are not supporting families. In fact, 42% of American minimum wage earners still live with parents or other relatives. Only 15% of American minimum wage earners are supporting themselves and a dependent (Sowell, 2015, p. 21). These young, unskilled workers may be priced out of a job if the minimum wage increases. Job requirements may increase, causing these young, unskilled workers to become “unemployable.” Not only will they miss out on job opportunities now, but they will also lose out on work experience, which makes them more valuable in the future. Their lack of work and gained experience now can affect their future job earnings (Sowell, 2015, p. 230). If the price of labor increases, will these individuals the law be hoping to help even be able to get jobs?
In summary, the increased minimum wage is seen as a positive for the community, and it appeals to those who believe in social benefits. However, I do not think that many who make the argument for an increased minimum wage fully understand the economic implications of an increased wage. If they did, they may look for other opportunities to increase benefits and opportunities for our city’s youngest and most unskilled workers.