This week the governors of New York and California signed into law plans to raise the minimum wage in their states to $15/hr. The move has been praised by some and has resulted in panic from others. For those of you who believe that this $15 minimum wage will be an economic disaster, I’m here to ease your fears.
Isn’t Raising the Minimum Wage by 50% Crazy?
Currently, California’s minimum wage is $10/hr. $15/hr would be a 50% increase. Wouldn’t that be way too much of an increase for businesses to handle? Well, neither state plans to make the minimum wage $15/hr tomorrow, or even next year. The California bill will have the state raising the minimum wage every year until it reaches $15/hr in 2022. Minimum wage will only increase by 50 cents in 2017, only a 5% increase. In New York, the plan is to get minimum wage up to $15/hr in three years, in New York City only. Eventually it will be $15/hr statewide but they haven’t decided exactly when that will be. Sounds a lot more reasonable now, right?
Won’t This Just Cause Unemployment?
Many people believe that raising the minimum wage will cause unemployment. $15/hr doesn’t help you if you don’t find a job. Critics claim that those who this plan is intended to help, will be the ones who will be hurt the most because they’ll have trouble even finding employment. And this belief is rooted in accepted economic theory. Price floors cause surpluses, meaning more people are willing to supply their labor than there are employers willing to pay for that labor, resulting in unemployment.
The problem is this theory hasn’t necessarily played out in reality. Economists David Card and Alan Kreuger have studied the effects of increasing the minimum wage and found that increasing minimum wage does not cause unemployment. You can read their paper on the subject here, but I’d advise against that. Scholarly papers aren’t much fun to read.
You don’t need to read this paper though, you can see how the minimum wage effects employment for yourself. We’ve had a minimum wage in the United States since 1938 and we’ve had periods of both high and low unemployment since. There’s also a really great, more recent example to use. California, one of the states raising their minimum wage, has raised their minimum wage twice in the past two years, in July of 2014 and January of this year. In June of 2014, California’s unemployment rate was 7.5%. A year later, unemployment was down to 6.2% and as of February of 2016, even with another dollar increase in the minimum wage, unemployment is down to 5.5%.
I’m not saying that there won’t be some jobs lost due to the minimum wage increase. I’m sure there will be some employers who feel they’ll have to lay off some people to get by. But a significant increase in unemployment is very unlikely. It’s not a good reason not to raise the minimum wage.
Won’t Inflation Effectively Erode Away the Increase in the Minimum Wage?
Another reason many don’t support increasing the minimum wage is that they believe it will cause inflation. The logic here is that businesses would be forced to raise their prices to pay for their increased labor costs. Minimum wage workers wouldn’t be better off as their new raises would be offset by higher prices. So why even bother? There’s two problems with this line of thinking.
First off, there’s no evidence that there is any link between raising the minimum wage and inflation. Historically, it hasn’t happened, and we’ve raised minimum wage many times. Prices aren’t determined by costs, they’re only part of the equation. Businesses can’t just raise prices and expect customers to not notice.
Let’s use the market for yachts as an example. One would assume that an increase in the minimum wage would increase the cost of producing a yacht. So you would expect yacht businesses would want to increase the price of the yachts to offset the costs. But if they did that they would sell less yachts. It’s not like workers making minimum wage would now be able to afford yachts with a $15 minimum wage. The point is, business don’t get to dictate their profitability. They just can’t raise prices with no consequences.
But I could be wrong. Prices might go up but there’s no chance they will rise enough to offset the increased minimum wage. Let’s do some simple math to prove it. A company has $2 million in expenses. $1 million of that is labor expenses. Minimum wage goes up 10% but that doesn’t mean labor costs go up 10%. A higher minimum wage isn’t going to effect the pay for senior management. We’ll say only a quarter of the company’s current labor costs will be effected. 10% multiplied by 25% results in a 2.5% percent increase in total labor costs.
And labor is only half of total expenses. So the company’s costs would only go up by 1.25%. So even if this company raised prices by that amount, that’s not even close to offsetting the 10% increase in the minimum wage. Minimum wage workers would still definitely be better off, even if prices rise.
But Won’t Workers Currently Making $15/hr Get Screwed Over?
There are many workers who make a little over minimum wage who are worried about an increasing minimum wage. If they’re already making $15/hr will they just be making minimum wage again? They put in the work and earned that higher wage. Why should they just be making minimum wage?
That’s exactly right. Those workers did something to separate themselves from minimum wage workers. Why would this be any different with a higher minimum wage? People who manage minimum workers, like a McDonalds shift manager, make a little more than minimum wage. Probably still less than $15/hr. Do you really think McDonalds could get away with paying them the same as the people they manage? Why would anyone agree to the extra responsibilities without any extra pay?
That’s one of the expected benefits of an increased minimum wage. There will be pressure to increase wages for all lower wage workers. Those making $15-$20/hr now will benefit from a minimum wage increase too. There’s a reason those workers aren’t making the minimum right now. They’re more valuable than a minimum wage worker and their bosses know that already.
Won’t Low Wage Employers Replace Employees With Robots?
I hear this one all the time. A higher wage will force employers to replace their workers with robots. At $10/hr it is more cost effective to use actual humans, but at $15/hr robots will be the way to go. I really don’t know if we’re there yet but is that really a bad thing?
First off, that day will come eventually anyways. New technology always get better and cheaper with time. In the next twenty years we will see humans replaced by robots in all kinds of jobs. Isn’t that progress though? Do we really want humanity spending it’s time doing menial tasks just so they can have a job.
Wouldn’t you rather see those people put towards more productive activities, or maybe even spend less time working? Shouldn’t this be the goal of our species? To build machines to do our busy work for us so we can build and create new things and better enjoy our lives. I know that this all sounds like an unrealistic utopia but if increasing minimum wage gets us closer to what I’m describing, then I think we should do it.
Why You Should Embrace a $15/hr Minimum Wage
If you’re already wealthy I can’t convince you that you’ll be better off. It’s probably not going to be true. But the vast majority will benefit. Not just minimum wage workers. The intended outcome of an increased minimum wage is a transfer of wealth from business owners to the lowest earning employees. I’m not going to pretend that this is not the goal. But you don’t have to be a communist to think this is a good thing.
We know a higher minimum wage will be good for employees making the minimum wage. They’ll be making more money. And we’ve told you that this won’t cause unemployment or inflation already. Also, it won’t just be minimum wage workers getting raises. We’ll see wages rise for many other workers. So where is this money going to come from to pay for these raises? Business profits.
In 2014, after-tax corporate profits amounted to 10% of the total economy, the highest recorded share of GDP ever. In that same year, total compensation was 52.7%, the lowest level since 1948. You think maybe they’re related? Stagnant wages has resulted in record profits. Things can go the other way. Companies can certainly afford higher wages.
So how will this help the “vast majority” as I said earlier? There are a couple key benefits of this transfer from business owners to low earners. The first is that these minimum wage workers are far more likely to spend their new earnings than business owners. Secondly, these workers are more likely to put their money back into the local economy. When we think business owners we think of someone like Elon Musk and Tesla. But he only owns around 25% of the company. The other 75% can be owned by anyone, anywhere.
A company’s owners don’t have to live where the company does business or where there workers or located. A company that does business primarily in California could be owned by people living in Maine. That company who profits from California labor and consumers would not be giving anything back. But a fast food worker might use their new money to buy dinner at a local restaurant.
I don’t know if an increase minimum wage will result in an economic boom. And I’m not 100% sure that there won’t be any unemployment or inflation as a result. I do know that a $15/hr minimum wage won’t cause an economic disaster. I’m sure of that. If I can’t convince you that a $15/hr minimum wage is a good idea, maybe former Secretary of Labor Robert Reich can.