Beware unintended consequences of minimum wage hike

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The classical economist Frédéric Bastiat warns us to look for the unseen or hidden results of laws, not just the obvious effects. Let’s try to take his advice regarding the proposal to increase Colorado’s minimum wage to $12 per hour, which voters will decide in November.money6

A bit of background: Colorado already has a minimum wage higher than the federal one, and it is automatically increased for inflation. In 2006 voters approved Initiative 42 to put this in place. Since 2007, the minimum wage has gone up from $6.85 to $8.31 (less for tipped employees). We can expect this will be somewhere over $9 by 2020, depending on inflation.

This year’s Initiative 101 would increase the minimum wage to $12 by then.

It is easy to see what happens to those who both keep their jobs and get a pay hike. They have more money to spend on housing, food, education, and so on. Other things equal, it is always good for an individual to get paid more. So it’s understandable why many people at a gut level think a minimum wage hike is a good idea.

But, in something as complex as our economy, other things are rarely equal. Fiddling with one part of the economy usually results in changes elsewhere—changes we may not expect and that may cause harm.

When evaluating the measure, remember Bastiat’s warning. One unintended result would be that some people would lose their jobs, and employers would create fewer such jobs than they otherwise would.

You’re going to hear a lot of back-and-forth claims about how much minimum wage hikes affect employment, and under what conditions. The free-market Common Sense Policy Roundtable claims the proposed measure would cost 90,000 jobs by 2022.

But icon_op_edmost voters are not going to look up the latest academic studies on this. If you do look them up, you’ll find, as economist David Neumark has shown, that the vast majority of economists think that modest increases in minimum wages have modest job-loss effects, and more dramatic increases have more dramatic effects, especially in the longer-term.

Even nonspecialists can agree on this: It is a fantasy to think that a substantial minimum wage hike will cause no job loss.

Try an example. Let’s say you own a business. You pay yourself $40,000 per year, and you pay ten employees each $9 per hour (we’ll round). So that’s about $18,000 per employee each year, or $180,000 in total wages. Now, under the new law, you have to pay $12 per hour. That’s about $24,000 per employee, or $240,000 total.

Now you’re spending another $60,000 a year in wages. So, instead of paying yourself a salary, you’re taking a $20,000 loss. As many business owners learn, they’re not required to pay themselves minimum wage.

What are you going to do? You might: 1) Close your business and put all ten employees out of work. 2) Let some of your employees go and try to get more output from the rest by buying better computers or by demanding faster work. 3) Outsource the jobs to somewhere like China. That’s what the minimum wage law means to you.

Another problem with minimum wage hikes is that they are terrible at addressing the needs of poor families. As Neumark points out, “57% of poor families with heads of household ages 18–64 have no workers, based on 2014 data from the Current Population Survey (CPS).” Minimum wage laws do nothing for them except make a job harder to find.

And many minimum wage workers, such as teens living at home, contribute to their family’s income—they may be relatively well-off. Neumark reports that “if wages were simply raised to $10.10 with no changes to the number of jobs or hours, only 18% of the total increase in incomes would go to poor families, based on 2010–2014 data.” Meanwhile, about a third of benefits “would go to families with incomes at least three times the poverty line.”

If you really want to help struggling families, do something like donate to a local charity, offer career-advancement classes, or start your own business and pay whatever salaries you can afford. Don’t support a badly targeted, job-threatening ballot measure as your feel-good deed.

There’s no such thing as a free minimum wage. The effects include throwing some people out of work, who will then get the real minimum wage of zero. Those who can’t get an entry-level job can’t earn the work experience they need to make more money later.

Before you vote, remember both the seen and the unseen.

Ari Armstrong writes at AriArmstrong.com and is a frequent guest author for the Independence Institute, a free market think tank in Denver.

 

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