Consequences of the $15 Minimum Wage

Consequences of the $15 Minimum Wage

By MattKeck | Matt Keck Blog | 25 Apr 2019

It won’t be long before the minimum wage becomes a hot topic in the 2020 presidential election. In 2016, candidate Bernie Sanders often spoke about the need to increase the federal minimum wage to $15 an hour for all workers.

I find the conversation surrounding the minimum wage frustrating because of the lack of honest, nuanced conversation. An honest person can be in favor of a $15 minimum wage, but I rarely find proponents of the policy that acknowledge this policy’s trade-offs.

Some people would benefit from a $15 federal minimum wage. That is certainly true. Some people would also be financially and economically harmed by the minimum wage hike. For that reason, I want to look at the issue from a broad perspective.

Let’s start with the people that the minimum wage benefits. A segment of people will retain their current job and the amount of hours that they work after the minimum wage is increased. For that reason, their income will rise and they will make more money. This is the part of the issue that leftists talk about most, and it is the part where their narrative often ends.

Other employees will be priced out of their jobs and possibly be priced out of the labor market altogether. For an employer to rationally hire an employee, their employee must bring a financial return to their company equal or greater to their hourly wage. Some jobs produce more for a company then others.

This economic principle can be difficult to conceptualize, so let’s look at a simple example. Imagine you walk into a fast food restaurant, and there was no cashier to take your order. You’d be initially confused, quickly realize that you can’t order your food, and then you’d go to a different restaurant that has cashiers.

If that fast food restaurant had one cashier, the restaurant would get a large financial return, since they can’t take orders without a cashier. The cost of having a single cashier is significantly lower than the revenue they would earn if they had one.

Now imagine that you walk into a fast food restaurant and there is one cashier, but there is a long line. At some point, the line would be long enough for you to decide that you don’t want to wait in line. You would leave and find somewhere else to eat. For that reason, the restaurant would likely capture more revenue if they had hired a second cashier.

This is where this scenario ties into the minimum wage. If a cashier would be paid $8 an hour, there are likely many situations that a second or third cashier would be profitable for a company to have on staff. Alternatively, if the company has to pay all employees $15 an hour, they may find that a second or third cashier aren’t bringing in enough additional revenue to justify their wages. This would lead to employers not hiring additional cashiers.

It’s easy to imagine a low skill job that is definitely worth hiring at an $8 per hour rate, but they don’t provide enough value to an organization to see full-time hours at the $15 per hour rate.

An increase in the minimum wage may lead to further automation of low-skilled jobs. In cities and states that have a low minimum wage, they may find that an employee can do a task for $8 an hour, but automating the role would have costs equal to $11 an hour over the life time of the machine. For that reason, it isn’t viable to automate a process in the current economic state. If the minimum wage was artificially increased to $15 an hour, it is suddenly rational to automate the jobs, since it would be cost-efficient for the company.

For these reasons, some people will suffer from a rise in the minimum wage. It will not be a complete positive benefit for all parties. One could argue that there is a net-gain when you consider all the pros and the cons to all stakeholders, but that isn’t the typical argument made by members of the left in the United States.

It should also be considered that minimum wage regulations criminalize consensual agreements that are made between free people. If there is a $15 federal minimum wage, then it is illegal for Americans to work at a lower rate – even if they want to.

Plenty of high schoolers and college students are willing to work at lower rates because they simply want experience or spending money. These regulations would criminalize those agreements. Other adults are generally less skilled, so they can’t provide enough value to warrant a $15 an hour rate from an employer. These individuals would be barred from negotiating a lower rate.

The minimum wage impinges on people’s freedom to negotiate consensual contracts with employers at certain rates. These victimless contracts shouldn’t be criminalized.

You may not find all of these considerations important, but they are all outcomes of an increase in the minimum wage. Although you may still think a $15 federal minimum wage is a good policy, it is important to recognize the trade offs that you’re making.

The conversation surrounding the $15 minimum wage is frustrating because these trade offs aren’t mentioned by people on the left. They don’t acknowledge that people will be priced out. They don’t acknowledge that it gives companies an incentive to automate work. They don’t acknowledge that they are criminalizing a victimless contract between two consensual adults.

Hopefully, people that disagree with me and favor this policy will at least recognize the drawbacks and take them seriously – even though they come to a different verdict on the issue. I’d also like to mention that this isn’t a complete list of unintended consequences, there are likely other outcomes that people, including experts, won’t foresee.

If you want to hear more news and commentary from me, check out my Minds account, Wordpress blog, or my other Publish0x posts. Thanks.

[Photo from Picture of Money, Creative Commons 2.0]

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