Last week the House passed a bill that would increase the federal minimum wage to $15 an hour over the next five years. Proponents say it will put more money in the pockets of working-class people. Others worry that it will lead to a reduction in the number of jobs available to entry-level workers.
A recent report issued by the CBO found that increasing the federal minimum wage to $15 an hour would likely raise wages for 27 million people, but it is also likely to cost 1.3 million their jobs. However, before we place too much confidence in these predictions, we should recognize that labor markets and individuals are extremely complex. The more significant and comprehensive a policy change is, the less we are able to predict the real impact it will have.
Humans Are Complicated
Human behavior is the product of a variety of different motivations. Each individual has their own unique values, needs, wants, goals, fears, and limitations. Their feelings change all the time, and so does their willingness to do certain things or engage in particular activities. Predicting exactly what one individual will do in a specific situation is very difficult. Trying to predict what thousands of individuals will do in millions of different situations is near impossible.
This is exactly what we are trying to do when we attempt to predict the impact of increasing the federal minimum wage to $15 an hour.
As situations become more complex, our ability to understand the complexity and predict how the affected parties will react decreases drastically.
Each employer will react differently to an increase in the minimum wage depending on the values they hold, the financial situation their firm is in, the additional value created by each of their employees, their ability to automate different tasks, and a number of other factors.
The effect of raising the minimum wage will depend almost entirely on the context of the situation and the individuals involved—context that is so complicated and rapidly evolving that we would struggle to grasp it fully even if we focused on just one person.
Trying to predict how a single firm will react to a change is one thing. Trying to predict how an entire country will react is another thing entirely. As situations become more complex, our ability to understand the complexity and predict how the affected parties will react decreases drastically.
The larger the increase in the minimum wage and the more people it covers, the more complex the situation becomes. A federal increase that more than doubles the minimum wage from $7.25 an hour to $15 an hour and affects nearly 30 million people over just a five-year span would be extremely complex.
This should give us pause because the unintended consequences of an increase this large could be severe, especially to smaller and more vulnerable firms. Large corporations can often afford to pay their workers more. Small businesses do not have the same luxury. Many who support increasing the minimum wage are also worried about the increasing consolidation of the American economy. A federal increase of this size could very well contribute to that consolidation.
We have no idea how the national labor market will react to a change this large.
In addition, there has been a growing push toward automation, particularly when it comes to low-wage jobs. Increasing the federal minimum wage could spur even more research and development into how employers can mitigate the need for human labor. Some have already predicted that over 36 million Americans are at risk of losing their jobs because of developments in AI technology.
Are all of these possibilities destined to occur if we raise the federal minimum wage to $15 an hour? Of course not. That’s the point. We have no idea how the national labor market will react to a change this large. An increase of this magnitude and scope is far outside the bounds of any research that has been conducted. Raising the federal minimum wage to $15 an hour would be a drastic alteration to our current policy, and we should have humility when proposing drastic alterations to an extremely complex system.