Why Raising the Minimum Wage Doesn't Work

Raising the minimum wage sounds good.  Sure, if a worker got paid more, he wouldn't be starving right?  It sounds so good that it's been tried over and over again.   But like so many other things, it may sound good in theory, but in practice (i.e. reality) raising the minimum wage doesn't help alleviate joblessness or eliminate poverty.  It actually makes things worse.

This came up because my husband and I disagree on this issue and a friend was arguing for raising the minimum wage on Facebook.  I decided it was time to go through the reasons why raising the minimum wage won't work and my blog is a much better place to do it than Facebook. 

So let's look at an example (the one my friend gave).  A person working 40 hours a week at $7.25 an hour is below the poverty line. (40*7.25*50 = $14,500 a year).  The poverty line for a family of two in the US (not including Alaska and Hawaii) is $15,730.  Raise that to $9.00 hour for the same 40 hours and he isn't, right?  (40*9.00*50= $18,000).  The math sounds good, which is why it makes a good selling point for a democratic politician.

In theory, if you tell companies they have to pay their workers a living wage, they'd just agree and comply, right.  Well, theory isn't reality. The companies that believe in paying their employees well, like Costco, already do and wouldn't be affected by a change in the minimum wage.  The companies that don't, like Walmart, aren't going to spend more money on workers.

The main problem with raising the minimum wage is that it doesn't mandate how much companies actually spend on workers as a whole, nor does it affect the economics that created the situation as a whole.  So let's go back to that example of the 40 hour worker.  Small companies simply don't have that much money and larger companies won't.

What would really happen to that person working 40 hours a week at minimum wage?

  • First of all, the example is way too simplistic.  Right off the bat, I can tell you that in order to work 40 hours a week at minimum wage, you 'd have to be working more than one job.  Existing laws already mandate that full-time workers (40 hours or more, varies by state.  Some states are 35, some are less, none are more than 40) must receive benefits.  Most, if not all, minimum wage workers do not receive benefits.  And the cost of working 2 or more jobs is higher than one because of the logistics involved.
  • Second, companies are not likely to increase their overall spending on labor (workers) just because the government mandated a wage increase.  From the standpoint of the company, this means an increase in costs leading to a decrease in company revenues.  That might risk the CEO's bonus.  So if you raise the wages, what do you have to cut in order to come out the same in overall labor costs?  That's right - hours. So the person working 40 hours a week could easily find their hours cut by approximately 8 per week (or more) so now they only work 32 hours a week. ( (40*9.00) - (40*7.25) )/9.00 = 7.77 (round to 8 hours)   40-8 = 32 hours per week.  So great, the person works less hours but  makes the same amount of money.   Now, companies might not cut everyone's hours.  They might just eliminate some people instead.  So a few workers are better off, but then others are out of a job.  That doesn't increase jobs.  Or perhaps they hire less people.  Both are common answers.  But, they still need workers you say.  Well, less and less people get to do more work.  The people who are still employed must work harder for the same pay.
  • Some companies might choose to pass the increase off by raising the price of their goods.  I.e. raise the price of each pizza by $.15 .   This is extremely unlikely.  Most companies that routinely employ minimum wage workers compete partially on the price of their goods, which means that any increase in the price of the goods means potential sales lost.  Again, not a strategy the company can pursue.
  • This is a global economy.  When the costs (this includes workers' wages) of producing goods increases, the company starts looking for a place where they can produce the same goods cheaper because they can't raise their prices and they are competing with companies in other countries whose costs are much lower. So then the jobs disappear entirely. This is what happened to the textile industry in the southern US states.
  • The person working that minimum wage job runs the risk of being replaced by a machine.  For example, the receptionist at a small company gets replaced by an automated phone system.  The company saves money but loses in customer service.   The company could easily decide that the savings from employing one less person more than makes up for the lack of customer service.

A few people would benefit, but not many and overall, the poverty rate would not improve. 

For more detail on the research behind raising the minimum wage, see the The Concise Encyclopedia of Economics - Minimum Wages by Linda Gorman.  It's a fairly good summary and the studies are detailed along with the history of the minimum wage.

Now I'm all for getting people above the poverty line.  I just don't think that raising the minimum wage is the right way to do it.   To post a comment, please email me to request a user ID.