Pricing Workers Out of Jobs

Many arguments I’ve heard—and made—about raising the minimum wage rely on the presumption that anyone working a full-time job should be rewarded, at a minimum, with sufficient compensation to enable her to feed and house her family. The argument, at its core, is fundamentally one based on morality, on right and wrong.

The science of producing, distributing, and consuming goods does not operate according to moral principles; it operates according to economic principles. It is relatively common to find economists who argue that governmental coercion—through minimum-wage legislation—that forces the worker to raise the wage she charges has the same effect that raising the price of a car or a house has on their sales: demand falls as the price rises. These economists argue that no economic principle is more solid than the one that explains that raising the cost of engaging in some activity results in decreased frequency of people engaging in that activity. Thus, they say, raising the cost of employing low-skilled workers will result in the employment of fewer low-skilled workers.

Despite the arguments by these economists to the contrary, the majority of the American public does not understand that artificially pushing wages up through minimum-wage legislation causes loss of jobs for low-skilled workers or causes them not to be hired. An argument I recently read, posited by an economist, is that the politicians and other proponents of minimum wage legislation also complain about the greed and profiteering by business owners; therefore, he says, it is understandable that the public (who are in general economically uninformed) would support an increase in the minimum wage, assuming that such a hike is fully paid for out of excess profits of greed-mongers. However, the argument goes, most minimum-wage jobs are in competitive industries such as food service and retailing that do not generate enormous profits. Those businesses, he says, earn just enough to satisfy their investors.

The argument that businesses whose profit margins already are razor-thin could simply increase their prices to cover increases in costs of employing low-skilled workers is faced with the counter argument that higher prices will reduce demand, thereby lowering the number of employees necessary to meet that demand.  No matter how you cut it, unskilled workers loses with increases in minimum wages, according to economists and others who support these arguments against increases. While some workers will benefit, the ones who lose their jobs or see their hours cut will suffer. And the effects will trickle—some say surge—through the economy to the everlasting regret of those who succeeded in pushing the increase through in spite of solid economic arguments against it.

In another post, I’ll present arguments in support of raising the minimum wage and will explain which of the arguments makes the most sense to me.