Why an increase in minimum wage is counterintuitive?
A large number of individuals in America are currently employed on minimum wage, which is anywhere ranging from $7 per hour to $10 per hour; it is understandable why they want politicians and the government to increase the minimum wage for the betterment of their lives, but it is not as simple as it seems.
What is it like to live on minimum wage?
Imagine a middle-aged single mom who works at McDonald’s for $7.50 an hour in Philadelphia, and has to bring in enough money to her household to feed herself and her 1-year old son while keeping a roof over their heads. This was exactly the case for Safiyyah Cotton in 2015, where she had to rely on a combination of McDonald’s wages and an extensive amount of government assistance in order to get by.
Safiyyah required a great deal of carefully allocating her budget to various consumption sectors from food to rent in order to survive. After bringing in a paycheck of $240 every two weeks, Safiyyah spent the majority of this towards her rent, which was $220 per month for a two-bedroom apartment that was split between her and her sister. The remaining rent was covered by government assistance programs. With not much money left to spend, she allocated this towards child care, frozen foods, and her cell-phone bill.
Obviously, living on minimum wage is not easy, and will not provide a decent quality of life. However, what would happen if we rose Safiyyah and everyone else’s minimum wage to $15/hour?
Raising minimum wage can have a domino effect on the economy
Let’s hypothetically assume that one day, the federal government suddenly decided to raise the minimum wage in Philadelphia from $7.50 an hour to $15 an hour. The working class is ecstatic, but economists are panicking. McDonald’s would now have to pay Safiyyah double her original income, which would lead to additional costs for the company, potentially leading the franchise into bankruptcy. If that happened, Saffiyah wouldn’t even have a job anymore! Moreover, if McDonald’s was mandated by law to pay these extra wages for their employees, the only way they could afford this in the long term would be to hike up the prices for all of their food.
By increasing prices for goods and services, there is now less demand for them, and fewer consumers will be willing to pay for them. Food in Mcdonalds is an elastic good, which means that consumers are very sensitive to changes in prices because of the availability of substitutes. If we assume that people with lower incomes are more likely to purchase food at McDonald’s than people with higher incomes, we can quickly see how they are now unable to afford this food due to the hike in prices. This negates the claim that ‘raising the minimum wage will increase the standard of living’ for individuals because an increase in prices also leads to an increase in the cost of living. This is essentially leading to the same problem as before, creating a domino effect.
Being forced to increase costs for unwilling consumers will likely lead to poor-quality, less tasty burgers. If you were the owner of McDonald’s and nobody wanted to purchase your food anymore, I imagine that you would have no incentive to produce the same burgers that your company is known for; after all, what’s the point? It would just increase costs, and it would not be profitable to do so for the small percentage of customers who are purchasing. When these consumers are tired of your mediocre burgers, they are not going to keep purchasing, which deepens the issue at hand here! Before you know it, McDonald’s has gone bankrupt in this hypothetical world — nobody saw that coming.
Why an increase in minimum wage is counterintuitive
1. An increase in unemployment
For many businesses, labor is one of the largest costs that they incur. If a minimum wage is raised to $15/hour, there would be many layoffs in the job market because businesses cannot afford to pay their workers. Also, this would likely lead to an increase in outsourcing to markets across the globe such as the emerging BRIC countries (Brazil, Russia, India, China) where the minimum wage is significantly lower. This would dramatically reduce the number of jobs in the domestic country in sectors from manual labor to services.
2. An increase in competition for low-skilled jobs
With a minimum wage of $7.50 per hour, only employees who are worth $7.50 will be hired; other over-qualified workers will seek other jobs that recognize their worth. However, if we raise the minimum wage to $15 per hour, over-qualified workers may take these jobs that were originally worth $7.50 an hour because it is now worthwhile to do so. This means that there is increased competition for lower-skilled, inexperienced workers because of fewer jobs available for them, and a higher incentive to acquire more skills and education.
Think about it this way: If you were an employer, would you rather hire a high-skilled worker who requires no training, or a low-skilled worker with no experience? Hiring the low-skilled worker would just increase costs, and because he/she is more likely to get fired in the future, this would just add on to training and interview costs for a new employee as well as a loss in opportunity costs. This means that the ones who need the job the most, the lower-skilled workers, would be the first ones to be forced to leave the job market.
3. No significant decrease in poverty
According to a Congressional Budget Office report, increasing minimum wage from $7.25 to $10.10 per hour only reduces the number of people living in poverty by 900,000. When you factor in that raising the wage supposedly will benefit 16.5 million people, this is only a 0.5% decrease in poverty level, which is nothing. If $100 B is spent to increase the minimum wage and take 900,000 people out of poverty, this is equivalent to spending $110,000 per person, which does not economically make sense.The fact is, no matter whether you believe we should raise the minimum wage or not, it is factually proven that it will not reduce poverty.
It is clear that many individuals in America are negatively affected by a minimum wage that in some cases, is not enough to help them get by. However, we need to realize that simply raising the minimum wage is not as simple as it seems, and its consequences likely exceed the benefits.