In the final presidential debate, former Vice President Joe Biden gave full support to raising the minimum wage to $15 an hour, even in the midst of the economic downturn caused by the COVID-19 pandemic and the government-induced lockdowns that followed.
President Donald Trump’s complaint was that raising the minimum wage would hurt small businesses as it would raise the cost of labor.
But raising the minimum wage would not just hurt many small businesses who need certain types of labor and don’t have the revenue to pay $15 an hour for it. It would also hurt employees whose labor is simply not worth the increase in price.
I don’t think any of us, regardless of what we think about the minimum wage, genuinely want anyone to be compensated unfairly for their work. Nor do we want to see people not make enough to suit their needs.
Minimum wage laws, however, do not help low-income workers make a living. They actually end up pricing them out of the market in many instances.
Imagine you own a small business – a bar, let’s say – and your bar has recently become the hotspot of your small town. You’ve seen a significant increase in profit over the past year, and you’ve decided to use that extra profit to hire someone to do the job you hate doing the most: cleaning the bathrooms.
You hire Ned. Ned is a low-skilled worker with no high school diploma. However, he is a hard worker and is voluntarily offering his labor for $5 an hour, 10 hours a week. If you pay him $5 an hour, you’d be making the same profits as you were before, except your job would be a lot easier with the extra hand.
Now imagine that the government comes to your bar and demands that you must now pay all your employees no less than $7 an hour.
If you pay Ned $7 an hour, you will be losing an extra $20 dollars a week. That’s around $80 per month and $1,040 per year. If your revenue stays the same – and that’s only if people keep coming to your bar at the rate they currently are – you’ll be making over $1,000 less in profit than you did last year.
Keep in mind, you’re fully capable of cleaning the bathroom yourself. Anyone can clean a bathroom. You just don’t want to do it if you can afford to pay someone else to. Are you going to take the loss or are you just going to clean the bathroom yourself?
Of course, you could up the price of your drinks, but maybe that’s one of the reasons your customers keep coming back – because they feel your drinks are affordable. Raising prices could actually deter customers.
Most people, I’d imagine, would just choose to clean the bathroom themselves. Ned, likely, would lose his job.
Was the government helping Ned? Were they helping you? What about your consumer? No! Not at all!
The government only caused Ned to get laid off. You, now, are going to have to spend your mornings scrubbing that nasty commode! And are your customers going to be able to get a better deal on their beer? No!
Let’s assume the government actually wanted to help Ned. Where did they go wrong?
The government was ignorant of basic economics.
They never took into account that the demand for Ned’s labor simply didn’t equate to $7 an hour.
It’s important to understand that employers are consumers of labor and employees are producers of labor. An employee is one who has sold his work (whether that be cleaning your bar’s dirty toilets or designing rockets for SpaceX) to an employer for an agreed upon price.
In any market, the producer is tasked with setting a price that balances the supply and demand of their good or service.
When a price is set below that equilibrium, a shortage is created. Consumers will buy it up too quickly and drain the supply before it can be replenished.
The opposite effect, a surplus, results from setting the price higher than the equilibrium. Most consumers will find the good or service not worth the price. The producer, then, will be unable to sell all of their goods or hours of their services.
That’s exactly what happened to Ned. You – the consumer of Ned’s labor – decided his labor was not worth the extra $1,040 at year. Ned’s labor is at a surplus.
And a surplus in the labor market does not mean abundance. It does not mean a bunch of goodies stored away in some warehouse waiting to be used. It means unemployment.
If it were up to Ned, do you think he would rather offer his labor at $5 an hour and keep his job or offer it at $7 and lose it?
Though the government told you that you could not pay Ned less than $7 an hour, they, in turn, also told Ned that he could not offer his labor at less than $7 an hour. This takes away Ned’s freedom to choose. It takes away his ability to use his labor the way he wants to. Now, unless Ned is able to make his labor worth $7 or more an hour, he will inevitably receive $0.
This obviously won’t happen in every situation. Some small businesses may be willing to reduce profit so they don’t have to let anyone go and many larger businesses can probably afford the increase, but it nevertheless provides incentives for both to let low skilled workers go and either do the jobs themselves or replace them with less expensive alternatives such as machines and computers.
Many who support raising the minimum wage to $15 an hour do so because they truly want something better for other people. But before we make decisions about policy, we must always ask whether or not it is effective at achieving its end goal.
Minimum wage laws price low-skilled workers out of the market, while inviting the government to get more involved in how we sell our own labor. And, to me, neither is desirable.