In his most recent State of the Union address, President Obama proposed raising the minimum wage, starting with federal workers, to $10.10 an hour. As expected, such an order triggered much controversy and discussion. But, as has been the norm these days, such discussion quickly transformed: one minute, a dispute about poverty and unemployment, and the next, a squabble about the merits of Republican and Democratic ideologies.
In my opinion, this issue is one that transcends political deadlock. And, as someone who considers himself more liberal-leaning, increasing the minimum wage is one agenda I cannot get behind. My reasoning is simple—increasing the minimum wage harms everyone on the socioeconomic spectrum, multinational corporations, and day-to-day laborers alike.
Since every reputable economist agrees that an increase in the minimum wage will increase unemployment, I won’t address that here. However, economists do disagree about whether the tradeoff in qualitative employment is able to offset the increase in quantitative unemployment. I believe that it cannot, for several reasons.
First, and most logically, increasing the minimum wage increases layoffs, and when workers are laid off, they make nothing. At the very core, some means of subsistence is better than no means. Qualitative increases rely on the assumption that firms will retain workers despite the higher cost. But most will not.
This argument may seem implausible at first. After all, transnational organizations such as McDonald’s should easily be able to afford paying their workers a few extra dollars per hour. However, while the three-dollar increase seems marginal at first, expenses accumulate and create a financial monstrosity.
A few years back, McDonald’s ordered seven thousand machines to take customers’ orders, replacing ordinary cashiers1. Doing the math, it’s not hard to see why. If each one of those workers got a three-dollar increase in their wages, and each worked around eight hours a day (the standard 9AM to 5PM), each worker would see an increase of twenty-four dollars a day in salary. Multiplied together, McDonald’s would have to shell out $168 thousand more per day in salaries. In a year, that amounts to just over $61 million!
Maybe in the short term, some workers do have a higher standard of living. But, in the long run, firms will innovate and find ways to replace workers rather than pay them artificially high salaries.
Second, in the event that these businesses are smaller and/or cannot innovate significantly enough to cover the increase in expenses, they will just pass the costs onto consumers. Recently, a study by UC Berkeley’s Center for Labor Research showed that an increase in the minimum wage (they used twelve dollars per hour) would increase the cost of a Big Mac by ten cents and other expenses, such as a trip to WalMart, by forty-six cents. Again, at first, the cost seems trivial. But, over time, it adds up. If every product you bought had around a fifteen-cent markup (and it is easy to buy a ton of items—a simple meal of a burger, fries, and drink, or any sort of daily groceries), it isn’t unreasonable to estimate that consumers might be charged an extra two dollars each day. Over the course of a year, that would equate to $730, which doesn’t seem so trivial anymore.
Lastly, raising the minimum wage harms the most disadvantaged groups. One of the leading causes of poverty is unemployment. And, while poor-quality employment does contribute to poverty, its contribution does not rival sheer unemployment in magnitude.
Recognizing this, it’s easy to see why a minimum wage increase would harm the worst-off. Not only would they not receive any benefits from the wage increase since they are currently unemployed, but the increase in unemployment that follows an increase in the minimum wage would also create a looser labor market (since more laborers would be unemployed and searching for work). And, because these specific laborers possess the same skill sets, competition would increase, making it even harder for the jobless to find jobs. Finally, if increased costs incentivize firms to replace workers via technology, the reduction of job vacancies makes finding work even harder.
Raising the minimum wage would be a grave mistake. Instead, the government should pursue other alternatives to poverty relief such as an increase in spending on policies such as welfare. Such alternatives would shift the burden away from businesses and potentially even help them by spurring consumer demand within the U.S.
1Amanda Kooser, “McDonald’s hires 7,000 touch-screen cashiers,” May 17, 2011
2 UC Berkeley Center for Labor Research and Education, “Living Wage Policies and Big-Bpx Retail: How a Higher Wage Standard Would Impact Walmart Workers and Shoppers,” April 2011