The Negative Effects of Raising the Minimum Wage

Like any public policy, raising the minimum wage has its pros and cons. I’ve already discussed the benefits associated with raising the minimum wage previously, but it’s only right if I also discuss many of the unintended consequences of this policy. Here are five of the worst negative side effects of raising the minimum wage:

1.Raising the minimum wage increases unemployment.

One of the most basic concepts of economics is the law of demand. The law of demand states that all things equal, as the price of something increases, individuals consume less of that thing. In this case, as the price of an employee increases (hourly wage increase), the quantity of employees (or employee hours) demanded decreases. In fact, the Congressional Budget Office of the United States estimates that an increase in the federal minimum wage from $7.25 to $10.10 would result in an additional 500,000 unemployed individuals. 1

As the cost of having an American employee increases, the employers will be incentivized to either outsource their labor or automate the process which the employee is currently doing. Examples of trends toward automation are the increased emphasis on mobile ordering 2 and self-service kiosks at fast food chains 3 and grocery chains 4. Examples of outsourcing include using foreign labor to complete the customer service and manufacturing aspects of a business. An increase in the minimum wage is sure to accelerate the process of both automation and outsourcing.

2.Raising the minimum wage disproportionately hurts minorities and low-skilled workers the most.

When the minimum wage is increased, companies may be forced to let go of workers in order to not go out of business. They would also be more selective with their employment opportunity. As a result, the individuals that end up hurting most are those that have the lowest job skills and no previous work experience. Minorities are also disadvantaged by a minimum wage increase, as implicit biases make many employers perceive that a minority’s abilities are less than their white counterpart. Also, because minorities are disproportionately exposed to a terrible school system and segregated communities, they are more likely to receive a poor education and no relevant job training. In 2016 Black teenage unemployment was approximately 28.4%, White teenage unemployment was approximately 14.8% 5. If the market was allowed to reach its “free-market” equilibrium, then the unemployment rate for both groups would hover somewhere around the natural rate of 4-6%. Despite potentially lower wages, this would disproportionately help minority communities more in providing many more jobs alongside the benefits that result from being an employed individual.

Low paying jobs are oftentimes the first job that an individual is exposed to. The value that the job provides extends much further than just the paycheck. A job provides job training, networking abilities, resume building, and upward mobility. However, if the minimum wage is set too high, then the individual may never even get these opportunities to begin with and end up in a vicious cycle of unemployment. Many economists like to think of minimum wage jobs as the first few steps in the economic ladder. A high minimum wage may break those first few steps, making it even harder for people to climb up.

3.Raising the minimum wage hurts small businesses the most.

Larger corporations have the advantage of automating several processes and understanding the global marketplace enough to be able to outsource their jobs in the event of a minimum wage increase. The mom-and-pop small businesses down the street aren’t as lucky. As a result, the businesses that end up hurting the most are precisely the ones that fuel American entrepreneurship and innovation the most: small business. Perhaps this is why 60% of small business owners believe a minimum wage increase will harm most small businesses, according to a Gallup poll 6.

Larger corporations also rely less on labor and more on capital when compared to small businesses. For example, large restaurant chains almost exclusively have a dishwashing machine due to the amount of traffic that they receive, whereas a small restaurant may instead rely on an individual to wash the plates by hand. A higher reliance on labor makes small businesses particularly vulnerable to any raises in the minimum wage as they would be hurt disproportionately more.

4.Raising the minimum wage increases the prices of goods and services.

This point should be very obvious, but it’s still important to point out. Raising the amount of money paid to employees through a minimum wage increase forces employers to pass on the increased costs onto their consumers. This increase in costs would be most apparent for goods and services which rely most heavily on minimum wage workers, such as food, food preparation services, hospitality services, American manufacturing goods, and many other goods and services 7. In fact, a 2013 study by the Federal Reserve Bank of Chicago predicts that an increase in the minimum wage would lead restaurant and other employers to pass down nearly 100% of the increased costs onto their consumers 8. This indicates that any wage increases that some minimum wage workers receive would be at least partially offset by increased costs.

5.Raising the minimum wage would increase high school dropout rates and may disincentivize high school and college enrollment.

Raising the minimum wage may incentivize teens to focus more of their hours on labor as opposed to education. In states which give students permission to discontinue school before they are 18, a 10 percent increase in the minimum wage reduced teenage school enrollment by two percent. It should be noted, however, that raising the minimum wage has no effect on student enrollment in states which force students to stay in school until they are 18 9. However, just because students are enrolled in school by force doesn’t mean that they are devoting a beneficial amount of time to their education. After all, every hour that they spend on school work is an hour that they could have spent making a higher minimum wage at their local fast-food chain. The result of an increase in the minimum wage could mean much worse long-term consequences as a result of lower educational attainment.


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