Minimum Wage Fail

It is truly uncompassionate; politicians, bureaucrats and interested parties instituting forced minimum wages that make it illegal to hire teenagers, minorities, the less educated and the less fortunate. In his Op-Ed Minimum Wage Fail, Rick Turnquist notes that forced minimum wages are actually reverse Robin Hood-ism, taking jobs and income from the poorest to give to those who are better off.

One of the Left’s most prized ideas is the concept of a minimum wage. “Fight for $15” and similar slogans abound on social media, promoting the idea that everyone is entitled to a “living wage” and demanding that private (and government) employers pay this minimum wage regardless of the economic consequences involved.

Always creative in their destruction, the Left has come up with a new, related concept – that of “Hero Pay”. We’ll see that “Hero Pay” laws actually cost jobs and end up hurting the very people they are intended to help.

Whenever governments interfere in free markets by artificially setting prices or tampering with supply and demand, bad things happen. Let’s take a look.

Economics 101

As is so often the case with Leftist ideas, the idea of a minimum wage ignores the basic laws of economics and human nature, which are in their own way as immutable as the laws of physics or mathematics.

Put simply, as shown in the graph below, the “equilibrium price” of labor (that price at which the demand exactly meets the supply) is shown at W*. The “equilibrium quantity” of labor (that price at which the number of workers needed exactly meets the number available) is shown at L*.

The intersection of L* and W* is the point at which every worker is employed at the price which employers are willing to pay for their labor.

When the minimum wage is artificially raised – say by government force – from W* to Wmin, there will be more people who want to work for the higher wage (shown as the intersection of the LS line and the S curve. At that rate, however, there will be fewer employers willing to pay the higher rate, so the number of workers who will be hired at the higher rate goes down (shown as the intersection of the LD line and Demand curve). The result is that there will be workers who want jobs but will be unable to find them, represented by the “unemployed workers” line shown on the graph.

Over time, the effects of minimum wage laws will result in fewer jobs being available for those between the Wmin and W* lines. Unfortunately, those individuals who are between the lines are most often teenagers, minorities, the less educated and the less fortunate. These are the people harmed by making it illegal to hire them. For them, the minimum wage is $0.00.

Studies Say…

The first minimum wage law enacted in the United States that wasn’t struck down by the Supreme Court was in 1938 setting the minimum wage at $0.25 ($4.70 in 2021 dollars). In the decades since, economists of all stripes have studied the question of whether the laws of economics hold true for minimum wage laws. Not surprisingly, there are studies that support conflicting views of the effects of government intervention in labor markets.

This study by the supposedly “nonpartisan” Congressional Budget Office (CBO) finds that raising the federal minimum wage from $7.25 to $10, $12 or even $15 per hour would result in anywhere from 100,000 to 3,700,000 jobs being lost, depending on how high the minimum wage is set.

The study found that “Increasing the federal minimum wage would have two principal effects on low-wage workers. For most low-wage workers, earnings and family income would increase, which would lift some families out of poverty. But other low-wage workers would become jobless, and their family income would fall—in some cases, below the poverty threshold.” [Emphasis mine]

Another study found that an increase to a $15 per hour minimum wage could mean the loss of over 6 million jobs. And, as the study found: “…despite the fact that there would be some Americans whose wages would be lifted by a higher minimum wage, the effect on the poor would be minimal—of the increase in income for low-wage workers, only 6.7 percent would go to families in poverty. In other words, this is reverse–Robin Hood- ism: taking jobs and income from the poorest to give to those who are better-off. The wealthy, whom demagogues now attack, would be untouched.”

To repeat: Only 6.7% of the increase in income from the minimum wage of $15 would go to workers who are actually in poverty.

Adults work to support their lives and their families. The ways that one develops the necessary skills and knowledge for their productive labor to be worth anything to employers are education, training and prior experience. That first entry-level job is so important to learning how to work. Making it illegal to hire someone on who is just starting out on the road to adulthood is a real disservice to them and causes all sorts of problems and social pathologies.

Money Laundering

The hit show Ozark portrayed a financial wizard who was skilled at money laundering for a drug cartel. “Money laundering” is “the concealment of the origins of…money, typically by means of transfers involving foreign banks or legitimate businesses”. Or, in the case of money in politics – from one group of people, through unions, to the Democratic Party and their politicians. The Left in America has become very adept at this type of money laundering, taking money from the earnings that unionized workers give to their labor unions, which in turn donate monstrous sums to support the Democratic Party, Democrat politicians and the progressive infrastructure.

Unions benefit from higher minimum wage laws even though very few union members actually earn the minimum wage. This is because the wages they negotiate with business and government employers are based on a formula – either a percentage or a “premium” amount above the minimum wage. By extension, Democrats benefit from higher minimum wages because it generates more cash to help them stay in power.

As Mark Berman, the executive director for the Center for Union Facts wrote in the Wall Street Journal several years ago:

“Minimum-wage hikes are beneficial to unions in other ways. The increases restrict the ability of businesses to hire low-skill workers who might gladly work for lower wages in order to gain experience. Union members thus face less competition from workers who might threaten union jobs.

This view is not speculation. A 2004 study in the Journal of Human Resources by economists William Wascher, Mark Schweitzer and David Neumark determined that lower-wage union workers typically see a boost in employment and earned income following a mandated wage hike. Never mind the corresponding drop in jobs and earned income for nonunion minimum-wage workers. They may have been priced out of the jobs they need, but that is not the union’s concern—its members have landed higher wages and reduced competition for jobs.

Such considerations are worth keeping in mind when contemplating the president’s wage proposal and the fervent Democratic support for similar and often more ambitious measures, such as Iowa Sen. Tom Harkin’s bill to raise the minimum wage to $9.80. Labor unions spent an estimated $174 million on the 2012 election, with 91% of the money going to Democrats, according to the Center for Responsive Politics. Now many union members could see their paychecks grow as the result of a Democrat-backed mandate—even though the overwhelming majority of scholarly evidence says that these wage increases have a negative effect on employment.”

Indeed, in Colorado during the 2016 election, unions and union supporters donated over a million dollars, or 62% of the total raised (much of it from out of state), to pass Amendment 70 which has driven the minimum wage in Colorado to $12 per hour by January 2020. (it’s now $12.32). While the COVID-19 pandemic accounts for much of our current unemployment rate, the rate had started to creep up following the enactment of Amendment 70.

“Hero” Wages

Recently, leftist politicians in Long Beach, CA mandated that grocery stores pay an extra $4 per hour in “hero pay” to their employees. The predictable result? The stores, owned by Kroger, are closing. Not only will the “hero” employees not get a raise, now they don’t even have jobs.

As reported by a CBS affiliate in Los Angeles, Kroger is closing two Long Beach stores “directly in response to the passage of the new law”. This new law requires “…grocers with at least 300 employees nationwide to provide their employees with an extra $4 per hour for at least a period of 120 days”.

Kroger has also announced plans to close another three stores in the city of Los Angeles, which passed an even more egregious $5 per hour pay mandate in early March.

Let’s be clear, the results of this government mandate to increase the minimum wages paid to these grocery store employees are:

  • Some number of grocery store workers, many of them earning minimum wage, will lose their jobs
  • Shoppers in the area will have fewer choices regarding where to shop and what to buy
  • Federal, state and local governments will lose sales, income and other tax revenues because of the diminishment of economic activity
  • Some people, discouraged, may look to government benefits to survive.
  • The real tragedy, of course, is that none of this had to happen. An ill-conceived “feel good’ measure passed by progressive politicians to pander to socialist ideology has reaped the true harm that all such measures create.

The answer? Let free people and free businesses decide how much somebody’s labor is worth in a free transaction. Don’t elect politicians who support bigger and more obtrusive government. Understand that the true minimum wage is zero.



3 Responses

  1. This is “Spot On”! I have been saying this for years. The politicians promise to raise the minimum wage, and they get elected. They in turn follow through on their promise and wages rise. Businesses can’t justify paying an “unskilled person” for that level of pay. Jobs lost. A couple of other points. I do have my degree in Economics, so I get it. Higher wages mean fewer employees to do the same amount of work. Job satisfaction and burnout occur making the process, whatever the industry, less productive. This in turn causes a shortage of goods and services. Supply and demand then increases prices causing inflation. So, and I have read the studies, in the end after inflation, the net gain is $0. Prices rise at almost the same rate as the minimum wage very quickly. But hey, what do I know? These “career” politicians are way smarter than me.

  2. All the ones promoting the change in minimum wage are not involved in profit making businesses.
    Profit drives our economy. Just try running a business and not make a profit.
    No way to pay taxes, payroll, rent, utilities, buy supplies, and on and on.
    Unions do not make a profit, the business they work for has to earn a profit to exist.
    We are looking at government bail out of failed businesses and the pensions they promised.

  3. It should be obvious to anyone with a clear mind that economic growth and labor demand drive up wages and incomes, not mandates from the government. A minimum wage job is the first step on the ladder to the higher skills and valuable experience the young lack. Does anybody wonder what youths who can’t get legitimate jobs might do? Maybe illegitimate activities like drugs and other criminal activities? National policy that has made capital exceedingly cheap and labor more expensive with benefit mandates has only made the employment situation worse with capital-labor substitution (i.e. automation). MW laws are mostly a political panacea with little positive effect beyond helping politicians get re-elected.

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