Raising the minimum wage is one of those popular feel-good issues. Who could be against workers earning a “living wage?” In other words, higher than the current federal minimum wage of $7.25 an hour. It’s about “fairness and equality,” lifting the earnings of low-wage workers.
Fourteen states and several cities planning their own minimum wage increases in 2016. How will these wage hikes work out? Let’s take a look at a few cities that recently increased their minimum wage, as well as the laws of economics governing labor costs.
Economics teaches a demand curve, which dictate that as the price of something goes up, the demand for it goes down. And vice versa. Look at homes, cars or any other commodity. Wages are no different as they are simply the price of labor. Raise the price and demand goes down. This played out predictably in several cities.
San Francisco raised its minimum wage last year, to $11 an hour. Borderland Books, a science fiction boutique bookstore, closed in response. The store claimed, “Continuing to pay the higher wage without any corresponding increase in income will expend the store’s cash assets.”
Seattle also increased its minimum wage last year to $11 an hour. An owner of a popular pizzeria is “being forced to close her doors, because she can’t afford the higher labor costs.” Ivar’s Salmon House took a different approach, raising menu prices 21 percent to cover their higher labor costs.
Is any of this surprising?
The demand curve predicts this clearly. Higher labor costs lead to less demand for labor, meaning fewer workers, shorter hours, or both. This harms smaller business most, the mom-and-pop shops employing local residents. The Fortune 500 behemoths aren’t affected as most of their employees earn more than the minimum wage.
Who actually earns the minimum wage? According to the Pew Research Center, half are age 16 to 24 and a quarter are teenagers age 16 to 19. Two thirds are part-time workers. Meaning most minimum wage earners are part timers, working their first job, either in or out of school. This is the entry-level job for which the minimum wage is designed and entirely appropriate.
Most of these jobs are in the leisure and hospitality industry where tips supplement take-home pay beyond the minimum wage. Of the older than age 25 workers, three-fourths live above the poverty line, most work part time and very few are married. In other words, the stereotype of minimum wage breadwinners living on the edge of destitution is false. Instead the minimum wage earner is typically a suburban teenager earning a few extra dollars, not a breadwinner supporting a household.
It’s ironic that the beltway politicians pushing a minimum wage don’t practice what they preach. The White House pays its 300 interns nothing. Same as Congressional interns. Why don’t they deserve a “living wage?”
While it feels good to push for a higher minimum wage, employers will respond to their increased labor cost as they would any other cost. Reduce it by eliminating entry level jobs or cutting hours for those lucky enough to keep their jobs, throwing the most vulnerable out of work. This means fewer opportunities to enter the labor force, gain experience and climb the ladder to higher wages. The politicians and progressives will pat each other on the back for their compassion and sensitivity, while ignoring the economic destruction they leave behind.
Brian C Joondeph, MD, MPS, a Denver based retina surgeon, radio personality and writer.
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