Why Raising the Minimum Wage Will Cost Jobs


On its surface, raising the minimum wage seems like a great thing to do to help the working poor.  After all, who wouldn’t want to try to help a mother with two kids who is just making it at a fast food restaurant?  There are also several relatively new arguments for a minimum wage increase.  Among them:

The need dictates the reward argument:  Living in (insert your favorite big city here) costs a lot and there is no way for someone making less than $15 per hour to pay for necessities to raise a family.

The taxpayer against evil business owner argument:  We are giving out a lot of money in food stamps, cell phones, rent subsidies, and other government welfare programs.  We should shift the cost to the employer so we could save that money as taxpayers.

The overpaid CEO argument:  The CEO makes 100 times what the lowest paid employee makes, versus 10 times back in 1935.  We should raise wages to put things more in balance.

The noble poor argument:  People have worked for the company for 20 years, giving thousands of hours per year, so they deserve to get paid more.

The Keynesian economic stimulus argument:  Paying people more will put more money in their pockets, which will stimulate the economy.

Each of the arguments appears to have some merit on its face.  After all, why wouldn’t someone want to help a hardworking mother-of-three who works 60 hours per week at two jobs to make ends meet?  Who wouldn’t want to ensure everyone had enough to pay for basic necessities, especially if some evil business owner paid for it?  Why should a corporation make billions of dollars a year, or a CEO make 100 times what someone sweeping the floors makes?

Unfortunately raising the minimum wage won’t help the people you wish to help because the economics just don’t work.  In fact it will hurt them and make their lives more desparate.  The cleaning business will cut their workers by half, keeping only the most capable employees who work the fastest.  The working mother-of-three at the fast food restaurant will be replaced by someone with a college education from a culinary school when the restaurant upgrades from cheap burgers to gourmet sliders.  The hotel will replace all of its American workers with illegal immigrants who accept lower wages because they live ten to a room and get paid under-the-table.

Even those who stay, and the rest of us working at above minimum wage, will be hurt.  Because there will be fewer people working and more collecting government benefits as their sole source of income, you’ll be paying more in taxes or there will be more inflation robbing you of your savings as the government prints money and borrows from your future.  There will also be fewer goods and services to go around, meaning that you’ll be working harder to keep the same standard of living or your standard of living will decline.  Where before the lowest skilled workers were at least producing enough to provide for half of their own needs, now they will not be working to provide for any of their own needs at all.  People will also find it difficult to find a first job and gain the skills they need to become more productive and move up the income ladder because the first rung will be too high.

Why will all of this happen instead of things working out?  Because doing so violates one of the three basic principles of an economy (let’s call these the SmallIvy Economic Theories):

Theory 1:  You can’t be paid more than you produce.  If you produce $8 worth of goods per hour, you can’t be paid more than $8 per hour without the person employing you going broke.  In fact, you’ll need to be paid less than $8 per hour or the person hiring you will not make any income and starve.

Theory 2:  Giving money or things to someone who doesn’t produce enough to earn it just results in transferring wealth.  You can tax a car dealer, give the money to someone who isn’t working, and then have them turn around and buy a car, but the amount of wealth in the world remains the same – the car just went from one person to another.  This does not cause the economy to grow.

Theory 3:  Taking money that people earned from them reduces their desire to produce.  If you were the car dealer in the previous example, would you be eager to do all of the work needed to rent the building, hire the employees, buy the cars, and do all of the paperwork if you weren’t making any money after taxes?

So how do you raise your wage?  You gain the ability to produce more per hour.  You increase your skills.  You work more productively.  You look for things you can do to make the company you work for more money.

As an example, let’s say I ran a ditch digging business and you are my employee.  If using a shovel, it takes you 1,000 hours to dig a ditch which I can sell for $1,000, the most I could pay you is $1.00 per hour (probably $0.75 after my costs and a small profit for my trouble in running the business were taken out).  Want to earn more?  Learn to use a backhoe so you can finish a ditch in an  hour instead of taking 1000 hours.  Then I could pay you maybe $600 per hour after paying for the upkeep on the backhoe and taking a small profit.

The point is, the way you make more money is by becoming more productive.  This translates into providing more value and helping more people meet their needs.

Comments, please?  Any holes in my theories?

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

4 thoughts on “Why Raising the Minimum Wage Will Cost Jobs

  1. Ah the old minimum wage argument and you even included my favorite, the sob-story about someone with 3 kids not being able to make ends-meet. I love those stories because its classic “court lawyer” trick: You can’t prove that raising the min wage will actually help people and make them more responsible SO you take the focus off the wages and make it about the woman with 3 kids who is struggling, make them feel bad for the woman so they will agree to anything to avoid feeling like a bad person who doesn’t care about her. Well guess what, the single mom with 3 kids will NEVER be wealthy. There I said it. Even if you pay her a 100k salary (keep in mind that takes her off all food stamps, housing assistance, childcare assistance, medicaid, welfare, etc), she will be WORSE off than where she was paying nothing for her subsidized housing and free healthcare. And if you raise minimum wage I can promise you the mother of 3 will be one of the first to get canned. Her kid gets sick a few times and she has to call out at the last minute leaving the other workers in a bind and you can bet the boss will hire someone much more qualified who will show up to work every day.

    The main problem I see with raising minimum wage however, is the lack of incentive for education. Why would I go through a 4 year degree program that averages $40k salary (and 40k in debt) when I can make over 30k right out of highschool at the EASIEST job I can find? Even a smart investor-savvy teenager would do the same knowing that they could get some investments started while living with their parents and then compounding interest can take them from there.

    • I think you need to be careful when making generalizations. I’m sure there are some mothers-of-three who end up in the working world without the skills needed to work above minimum wage, at least at first. There are women who marry right out of high school and have children, are abused, and need to flee with the kids to save their own lives. There are also women who marry young and then lose their husbands to a car accident or other event without life insurance. Certainly there are people who can’t get above minimum wage because they don’t show up on time and are always quitting or getting fired, and there are many people who cannot manage money, but you really need to look at each situation independently. No matter the reason, however, raising the minimum wage will result in a loss of jobs for low skilled people and make it difficult for people trying to get into the workforce to get the first job needed to climb the ladder.

      I agree with your comment about destroying motivation for education, or improving oneself in general. As I said, it would be sad for someone to be no more capable when they retire at 65 than they were when they started at 16.

      You are also right that the current system where people make less working than they do not working needs to be changed. My proposal is to make charitable donations to groups that provide food, shelter, clothing, and job training a tax credit and then to cut back on welfare benefits by a like amount to the drop in tax revenues since that need would be directly funded rather than funded through the government. I think people at the local level would do a better job of getting necessities to those who need them and encouraging those who don’t to be productive.

  2. great reflection, the minimum wage issue is such a large topic with so many different arguments and angles, I’m surprised you haven’t had to fight your way passed any irrational bloggers who just spew insults and miss your point–this is purely an economic standpoint. Unfortunately, economics is not for a faint of heart.

    I really liked your point about the fall in the standard of living:
    “There will also be fewer goods and services to go around, meaning that you’ll be working harder to keep the same standard of living or your standard of living will decline. Where before the lowest skilled workers were at least producing enough to provide for half of their own needs, now they will not be working to provide for any of their own needs at all. People will also find it difficult to find a first job and gain the skills they need to become more productive and move up the income ladder because the first rung will be too high.”

    I think another problem regarding the minimum wage issue is outsourcing, and not just across seas (that’s not always the best choice with tariffs, the culture, trade regulations, etc), but across state borders. Outsourcing can also hurt the standard of living as production and exchange isn’t circulating within the same area. The standard of living hinges on the need for mobility, which is greatly impacted when the political arena interferes and heavily regulates the employer… This interference cuts back on innovation, production, and a free enterprise system. Then what happens? Mobility is slowed… and the standard of living.

    A minimum wage cuts back production not just on the employer front either. If your income is the same regardless of how hard you work, or how dedicated you are to the company and your job, or how hard you try to climb the ladder… Why should you work hard? Why should you increase production? Ultimately your human capital is negatively impacted… Not just bad for companies, but bad for yourself.

    • Great comments. I’m not sure why I haven’t gotten much pushback on the post, but then again I don’t tend to get many comments. As you said, most of the opposing argument is driven by emotion instead of facts, leading to irrationality and personal attacks (Sal Alinski advocated such behavior as well).

      I’m hoping if people start to look at the facts, we’ll come up with better solutions. We do have an issue that a lot of the entry level jobs are being automated out of existance and there are a lot of people without the education and skills to do the jobs that will come – fixing the robots and computers that replace the entry level workers. I think at some level it may be best to just keep workers in some of these jobs even if a machine could do it faster or cheaper. Raising the minimum wage, however, to unrealistic levels or creating work rules that cannot be met while remaining profitable makes this economically impossible.

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