Valerie Rhea on the minimum wage

Q: How do you feel when million dollar companies say raising the U.S minimum wage is bad for business and would result in higher prices of goods for the consumer? 

A: Most of the other responses to this question correctly point out that prices climb when businesses pay more for “raw materials”. Since labor is no different than any other raw material, this would tend to be true for minimum wage hikes. It’s economics 101 and supply and demand. 

Still, this isn’t the entire story. If you dig a little deeper, you’ll find that there are in fact a few other outcomes we don’t often talk about. When labor gets more expensive, businesses can typically do three things: 

• Raise prices, as has been suggested. 
• Use less labor. 
• Fold. 

The problem with raising prices is that doing so presumes the market is able to absorb a price increase - and quite often, that’s not true. In any market, there’s an optimum price point that yields maximum revenue…raise prices above this level, and you actually take in less revenue because consumers resist paying and seek other alternatives. 

Thus, the first challenge is that raising prices suggests there’s “room” in the market for higher prices, and that raising prices will actually result in higher revenues for the business. The limits of this “price elasticity” depend on many factors: nature of your product, competition, availability of alternatives, etc. But as a general rule, all businesses seek the optimum price for their products, and a spike in the minimum wage doesn’t necessarily change the optimum price point businesses can charge. 

Now, stop and think about that for a moment… 

If consumers would willingly pay higher prices, then what we’re suggesting is that the business owner is an idiot. If market permission exists, then he could charge those higher prices today and improve the profitability of his current business. In other words, if we’re to believe a business owner could simply raise prices to cover the increased cost of labor, we have to conclude that the business owner currently prices his products below their optimum value. Clearly, that would be a pretty stupid business owner. 

Thus, quite often we see businesses react to a spike in labor expense by raising prices, and the result is that they sell fewer products at the higher price. Overall revenues very likely won’t grow to the extent that the business owner expects, and very often, this becomes a race to the bottom: raise prices, revenues doesn’t keep up, so prices are raised again. This is a death spiral for many businesses. 

Moving on, option #2 from my list above is actually where many businesses end up. 

If you’re maybe a fast-food franchise and labor costs suddenly spike, the most obvious thing you can do is to use less labor. That might mean restructuring jobs, hiring fewer but more qualified workers, cutting back on operating hours - and the big one, turning to automation. These are attempts to raise worker productivity so that you need less labor overall. If you can replace half your staff with computerized kiosks and a mobile app, then the spike in labor cost doesn’t hurt your business nearly as much. 

In other industries, instead of automation, you might move jobs offshore, or consolidate with your competitors into one larger entity instead of lots of small ones. All of these strategies reduce the need for labor - and none of them involve price increases to consumers. In fact, replacing an American worker costing $30–40/hour (that’s wages, benefits, taxes, etc) with an offshore worker costing $15/hour might actually result in price reductions for the consumer, not increases. 

Finally, there’s option #3 - the business dies. Many labor-intensive businesses that are viable when labor costs $8/hour simply aren’t viable when labor costs $15/hour. These will be businesses where there aren’t offshoring or automation options, and where perhaps 60–80% of revenues represent a labor expense. The simple truth is that these firms will very likely fail in response to a labor price increase. 

The punchline is that business figures all this stuff out. 

Depending on the nature of the business, you’ll very likely see one (or combinations) of the scenarios I describe above, so it’s not a foregone conclusion that minimum wage hikes are always bad for the consumer. In fact, by incenting businesses to seek out more productive approaches, businesses actually can be more efficient over time - consumers and investors win this way. That is, so long as the business survives… 

In fact, the ones that are almost always guaranteed to be hurt by minimum wage increases are the low-skilled workers we claim to want to help. Yes, a small number of them may see wage increases - but there are plenty that will find themselves unemployed…this is one of the key reasons for the change we’ve seen over the past few decades: in 1970, almost 15% of all hourly-paid workers were paid at the minimum wage…today, it’s about 2%. 

Government plays to largely economically illiterate voters, businesses figure out other alternatives, and the low-skilled we’re allegedly trying to “help” get crushed. If we think a minimum wage hike is going to improve, say, unemployment among younger Americans or in the inner city, we’ll be forced to learn these lessons all over again.

~ Valerie Rhea, Quora, August 7, 2021

Royal Meeker on minimum wage laws

It is much better to enact a minimum-wage law even if it deprives these unfortunates of work.  Better that the state should support the inefficient wholly and prevent the multiplication of the breed than subsidize incompetence and unthrift, enabling them to bring forth more of their kind. 

~ Royal Meeker, Princeton scholar and labor commissioner to Woodrow Wilson, as quoted in Political Science Quarterly, Vol. 25, 1910

Donald Boudreaux on the minimum wage

If the case of raising the minimum wage even might destroy jobs for some of the workers that it's meant to help, what right have we to embark upon this policy?  I think none.   Remember, the people whose livelihoods are here being experimented with are low skilled workers.  They aren't doctors, lawyers, machinests, welders or college professors.  They're motel maids, fast food workers, teens just entering the workforce.   If minimum wage proponents are correct that no jobs are destroyed, then these workers are indeed benefitted without cost to them.  Although here there's a question of who pays the costs of these workers' gains and what is the moral reason for imposing that cost on those persons.  For example, if we all agree that all low skilled workers should be given raises, what's the moral justification for requiring only current employers of low skilled workers to pay these costs?  Why not pay these raises out of general revenues collected in taxes from the taxpaying population?  It's a question that I think should be asked, but it is seldom asked. 

But what if basic economics and the bulk of empirical studies are correct and minimum wage proponents are incorrect?  We then have a policy that not only prices some willing workers out of jobs - and again, also out of opportunities to get job experience, which helps these people to get even higher wages in the future - but a policy that also distributes its benefits to those who need those benefits the least, while it inflicts the bulk of its costs on those who can least afford such burdens.

~ Donald Boudreaux, "Against a $15 Minimum Wage," 10:05 mark, USD Center for Ethics, Economics and Public Policy, September 16, 2016

Kevin Duffy on minimum wage laws

Wages, like any price, are determined by supply and demand. Not happy with what you're making? Develop skills where they're needed and difficult to develop (or even unpleasant). E.g., most younger people want cushy desk jobs so there is a shortage of trade skills. Really want to make a ton of money without getting a 4-year degree? Try underwater welding. Here's another skill that pays A LOT: simultaneous translation (very few people can do this).

Of course, you have to start somewhere and typically that begins with a low wage job. Heck, I remember working in an art gallery hanging paintings and sweeping the parking lot in high school. My brother flipped burgers at the local Burger King. Then we built a deck for our parents, developed some carpentry and design skills, and realized there was plenty of demand. Just like that, we were our own bosses, making decent money, and having all the work we could handle during the summers.

What happens when you impose a minimum wage? Does it give everyone below that wage a raise? Unless you can repeal the law of supply and demand, "no." You will instead make that employment agreement illegal, hurting the very people you purport to help, the relatively unskilled starting at the bottom and trying to gain skills so they can move up the economic ladder.

~ Kevin Duffy, Facebook response, February 18, 2020

Tom Woods on entry level jobs and mindset behind minimum wage laws

When you have an entry-level job anyone can be trained to do in an hour, you're not in a strong bargaining position.

The point of an entry-level job isn't to make a career out of it, much less try to support a household on it. It's to give you experience and an opportunity to hit the first rung of the employment ladder.

Or it's to give you an income while you learn a skill in your spare time -- an option the Internet has made simpler than ever.

When only one company, and no one else in the world, thinks you're worth even minimum wage, be thankful for that. If you must be angry, be angry at everyone who refused to hire you at all. Why be angry at the one place that did?

~ Tom Woods