The House of Representatives recently passed a bill that would raise the federal minimum wage to $15 per hour. Let’s take a look at the potential impact to workers and the economy.
The minimum wage is a politically charged issue, so I’m going to start this article by saying this up front: I am not a Republican. I am not a Democrat. There’s a pretty good chance I won’t even vote in 2020. So don’t come at me with some partisan nonsense.
If I do vote, it will not be for anyone with a “D” or an “R” next to their name. I’ve always had an interest in political philosophy, especially in how it relates to American history. But I have very little interest in participating in what passes for modern politics.
Lastly, this is an opinion. You can find Nobel prize winning economists on either side of this debate.
OK, now that my disclaimer is out of the way, let’s talk about a $15/hour federal minimum wage. Raising the minimum wage sounds like a great idea on the surface, but with some deeper thinking, we see that enacting this policy will have a negative effect on the economy—albeit a small one—with mixed results for workers. However, the workers most in need of help will bear the brunt of the negative effects.
We can break this down into three categories in order to understand its potential impact: economic, logical, and moral.
Economics of Minimum Wage Laws
Whenever you’re talking economics, the first thing you need to understand is opportunity costs. Only politicians will try to convince you that a given course of action is good for everyone. In real life, every action comes with certain trade-offs, be it in economics or any other decision-making process.
Should I stay in and study for college finals, or go out and party? I can get better grades, which can lead to potentially better employment and future earnings. But the trade-off is that maybe I miss the opportunity to make friends, meet my future wife, or finally take down four Busch Lights in a single beer bong.
Henry Hazlitt’s Economics in One Lesson drives this point home well (the trade-offs, not the beer bongs).
Anyway, back in 2008, between beer bongs and gridiron head injuries, I managed to get a degree in economics. One of the first things they taught me was how to draw supply and demand curves to understand how markets function.
To help understand it, think about a minimum price for a gallon of milk, set at $10. What would happen if the government imposed this price?
If you answered, “Less milk would be purchased,” you get a cookie. Go to the front of the class.
At this price, there would be a heck of a lot more farmers willing to sell their milk than people willing to buy it. The result would be a bunch of milk sitting around with no buyers. What would happen to dairy workers in that scenario? Udder destruction! (Sorry.)
Let’s apply this principal to the labor market.
This part may get a little wonky. Please bear with me. Below I’ve sketched out what they teach you in Econ 101. The vertical axis (P) represents prices, which when discussing labor markets means wages. The horizontal axis (Q) represents quantity—in our example, quantity of people (or labor hours) employed.
The supply and demand curves that cross on the chart represent the amount of labor demanded or supplied at a given wage. Note that the demand curve slopes downward and the supply curve slopes upward. This tells us that the lower the wage, the more labor employers will want and the less labor workers will supply. A higher wage will result in a high supply of labor, but employers will demand less of it.
Where these lines cross is the equilibrium. The market equilibrium is where supply meets demand and the market wage is set. In other words, this is the wage level where all the workers willing to accept a particular job and all the employers willing to provide a particular job meet and agree to employ and be employed.
This is obviously an over-simplified example, but it works well to illustrate the basic premise. Please excuse my third grade penmanship.
Now let’s look at what happens when we impose a minimum wage above the prevailing market rate. We see in the graph below that where the minimum wage crosses the demand curve will produce a quantity of labor demanded. But the quantity of labor supplied is far greater. Simply put, there are more people willing to work for the higher wage but less employers willing to hire at that wage.
Like any price floor, this results in a surplus. With labor, that means unemployment. More people want jobs at that wage than there are jobs available.
You still with me? What happened? I think I just blacked out.
The trade-off here is higher wages for some but unemployment for many others.
So, from a very basic economic perspective, we see what we all know intuitively. If you force the price of something higher (in this case the price of labor in the form of higher wages), people (employers) will buy less of that thing.
In the real world, labor economics is far more complicated. Real world results have so many variables to be controlled for: general economic strength or weakness, what industries are highly represented in a given area, other trends in the market, percentage of people affected by a given wage law, what other laws or policies are in place or changing, and countless other factors that might impact unemployment and wages outside of simply changing the minimum wage.
You can find economic studies that would suggest that minimum wage laws cause damage. In fact, an Employment Policies Institute 2015 survey showed that nearly three-quarters of economists oppose a federal minimum wage of $15/hour. 
Studies on the Seattle minimum wage hike have been mixed but seem to show that earnings may be up slightly while hours worked are down. Some industries are being hit harder than others.  
When the Congressional Budget Office (CBO) studied the issue, they predicted that 17 million workers would see earnings increases, but as many as 3.7 million people would lose their jobs.  However, several other studies contradict this sentiment, seeming to find the benefits would outweigh the costs. 
Sweden, Switzerland, Denmark, Norway, Iceland, and Singapore all have no minimum wage law and remarkably low unemployment. Wages are allowed to fluctuate to the “market clearing rate,” where most people seeking a job can find one.
The studies seem to show that, generally, minimum wage hikes are neutral or negative. The people able to keep their jobs do benefit, but there will also be a lot of people left out in the cold. Studies that institute more complicated models that try to control for more variables have come out recently and are more favorable. My sense is that economists can tweak enough variables and modify enough inputs to massage the data to say what they want, in line with their political leanings.
With all the noise in the numbers, I think it makes sense to do some critical thinking here and apply some logic to the situation, coming to our own conclusion.
Logic Behind Minimum Wage Laws
If we stop after the first link in the logic chain, we may conclude that a minimum wage hike would be beneficial. People making less money get more money, they can buy more stuff, everyone wins. Right? Not exactly.
The way the labor market works is that an employee earns a wage relative to his or her productivity. If an employee can cook $12 worth of hamburgers an hour for an employer, their wage will approach $12/hour (the marginal product of his or her labor, if you like nerd-speak). If the government forcefully imposes a $15/hour wage, would it make sense for the employer to keep them on the staff, losing $3/hour to keep them employed? Buying a burger-flipping robot will start to look better by comparison.
Depending on the product/service and the industry, the problem may manifest itself elsewhere. Perhaps the employer swallows the cost. In this case, the employer has that much less money to spend in the economy or to save and reinvest in the business, opening more stores and employing more people. In highly competitive, low margin businesses, this particular business may be forced to close altogether.
If the employer can’t swallow the cost and can’t fire the employee, the only option left is to pass along the cost to the consumer. If the consumer doesn’t want to pay that price, the business closes. If the consumer does pay the increased price, now society at large is footing the bill. All of us are a bit poorer and can afford less goods and services in aggregate.
None of these options are great for workers or the economy.
To be sure, not all minimum wage employees will be fired, and no changes will occur over night. The long-run tendency, however, will be increased automation, reduced employment of minimum-wage workers, and higher prices, in some combination.
Who Are the Minimum Wage Workers?
Minimum wage workers tend to be young and inexperienced part-timers. Minimum wage workers are also a very small percentage of the workforce, about 2.3 percent of hourly workers. Of these workers, about 50 percent of them are below 25 years old, despite being only 20 percent of the hourly workforce.
Only about 1.4 percent of all hourly workers over 25 make minimum wage or below. Slightly over 1 percent of full-time workers make the minimum wage.  This tells us that minimum wage jobs are typically not breadwinner jobs on which a family relies. These tend to be the first rung on the ladder for young, inexperienced people who earn minimum wage for a short time, then move up in income after building skills and experience.
Who Benefits from Minimum Wage Hikes?
We’ve seen how sound logic would indicate that employers will tend to employ fewer minimum wage workers at a higher mandated minimum wage. But what about the people they do keep on staff?
At $15/hour, certain jobs will start to look a lot more attractive to a different type of worker. Older, more qualified workers will view minimum wage jobs as an attractive alternative. Retirees with much more experience and skill may decide that a minimum wage of $7/hour didn’t look so great compared to watching Matlock and eating butterscotch candy but at $15/hour it might be worth going after.
Who would you hire? The 18-year-old know-nothing, who might sleep in, or the dedicated, sweet semi-retired person?
This would have the effect of crowding out the inexperienced teenagers and young adults in favor of older, more skilled workers. These younger workers have lost their most important advantage: their willingness to accept a lower wage in order to gain critical experience and contacts in the labor force that will allow them to increase their value as an employee over time.
Removing this critical first rung on the economic ladder could have significant downstream effects and trap people in even worse poverty.
Put yourself in a business owner’s shoes. An 18 year old comes into your business with no working experience and asks to clean the floors for $7 an hour. After six months of showing up on time, working hard, and proving herself, she decides to ask you if she can learn to drive a forklift, and you agree. Now she’s got additional skills, and forklift operators across town are making $12 per hour. She’s more valuable now to you as she can do more for you, so you pay her $10 to keep her around. She continues to build skills and add value to the business—a true win-win.
Now a $15 minimum wage is implemented. The 18 year old comes to you to clean your floors for $7 an hour, and you’d love to hire her. She wants to work, but it’s illegal. Instead, you clean the floors yourself, or you pay someone higher-skilled, who can drive a forklift, do inventory management, and sign shipping orders at $15 an hour, adding floor cleaning to his job responsibilities.
The 18-year-old goes jobless. Then, she takes out an exorbitant student loan because it’s the only way to get a job five years from now. Under this scenario, increasing the minimum wage hurts exactly the people we want to help most.
Now let’s think about the people earning at or slightly above the new $15 minimum.
These people are making more than current minimum wage, because they have skills and experience that can produce more for their employer. These people and the companies employing them would LOVE a higher minimum wage, because it reduces their competition. Any competitors that may have a slightly worse product or service but can beat them on price have now lost their advantage. Be skeptical when you hear these firms and workers cheering for a higher minimum wage.
For our last logic thought experiment, let’s assume the politicians say, “Hey, if $15 per hour is good for everyone, why not $100 per hour? Think of all the additional spending that would occur!”
I think we can quickly realize where the logic breaks down here, and the damage it would do at that scale. This principle holds at $15.
Morality of Minimum Wage Laws
Most people who support the idea do so with a sense that it is the moral thing to do. It is hard to argue with that on its face. We all want people in a tight spot to do a little better—myself included. But if we think deeper about what is really going on, some additional insights emerge.
First, any voluntary transaction is, by definition, good for both parties. The minimum wage worker is willing to accept the job because it is the best choice among realistic alternatives. If two consenting people agree to do a certain job for a certain wage, is it morally acceptable to step in, deem that transaction illegal, and stop it from happening?
In our earlier example, is it the right thing to do to deprive the 18 year old of a job in favor of a machine or an older, more skilled worker?
The politicians would like us to think the choice is between $7.25 per hour and $15 per hour. In reality, for the minimum wage worker, the choice is $7.25 per hour, or $0, because the job goes away or is given to a higher-skilled person.
The government can’t give anything to anyone without first taking it from someone else. They are the only entity in society that can forcefully impose its will on others under threat of punishment, including putting you in a cage. Do we want to exercise that power to prohibit an otherwise voluntary transaction from occurring? Is it moral to force costs onto someone?
Who owns a business? The government?
Who owns your body, your thoughts, your ideas, your work ethic, and therefore, your ability to deploy those factors at any wage you see fit? The government?
To be sure, the biggest, most well-established businesses will not be affected. They have massive balance sheets and armies of financial analysts who can figure out how to profit. But the local mom-and-pop business operating on a shoestring or the startup business that is counting every penny, not so much.
The risk in raising the minimum wage to $15 per hour is that the most vulnerable, youngest, least-skilled, most poorly educated people are deprived of their greatest competitive advantage—price competition! Removing this advantage and condemning these people to unemployment, black markets, or other far worse alternatives is not my definition of helpful or moral.
The Bottom Line
The impact of raising the minimum wage to $15 per hour will be relatively modest in the macro data, due to the small amount of the workforce getting paid the minimum wage and the large number of outside factors in play in an economy. People and businesses will adapt and we will forge ahead like always. However, raising the price of labor will reduce the demand for labor, as Econ 101 will teach us. Employers over time will automate more, reduce hours, and raise prices, if they are able to avoid closing up shop.
The people that do keep their job will undoubtedly benefit. These people having more money will help them improve their quality of life tremendously. But the unseen side effects will be that the people most in need of minimum wage employment will likely not be the people that obtain employment at the higher wage, as the productivity of their labor is lower than the cost to employ them. Without being able to enter the labor force at this level, they will find it difficult to ever gain the skills and experience that would raise their productivity above the $15 per hour threshold, making it not economically viable to employ them.
On balance, this will be a net negative for the economy, but the economic impact will be small. Repercussions on specific groups of people will be larger. The moral and philosophical impact of making voluntary exchanges between free people illegal and harming our country’s most vulnerable groups will be larger.
I want higher wages for working people as much as the next guy. This is not how to accomplish that universal goal.
Additional Recommended Reading:
- Basic Economics by Thomas Sowell
- “Raising the Minimum Wage: Misguided Policy, Unintended Consequences” by Robert P. Murphy, Charles Lammam, and Hugh MacIntyre
- “Minimum Wage Increases and Individual Employment Trajectories,” part of the NBER Working Paper Series
What’s your take? Do you agree or disagree with my points?
Let’s discuss in the comment section below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.