Monday, April 11, 2016

The Unintended Consequences of Raising Minimum Wage

My PhotoRoots in Ripon
11 April 2016
Chuck Roots

Minimum Wage Increase
Recently, my daughter, Laura Spence, wrote an article for her Face Book page. She takes on the new California law signed by Governor Jerry Brown, authorizing a gradual increase to the Minimum Wage until it tops out at $15.00/hour. I asked her if I could share it with the readers of my Roots in Ripon column. Enjoy!

So many of you are excited about the new California $15 an hour minimum wage increase because you think you will be making more money.  And you will, sort of. Let me explain to you how the minimum wage increase actually works.  

 Let’s say you are a small business owner and your profit (personal take-home) is $100,000 a year after all of your expenses (using nice round numbers for simplicity).  As the business owner you have 2 full-time employees who currently make $10 an hour working a 40 hour week.  As the employer, on top of the wages you pay, you are also responsible for the overhead: insurance, sick pay, taxes, gas, transportation costs, etc.  Now if you take those same 2 employees and increase their hourly wage from $10 an hour to $15 an hour they go from making $20,000 a year to $30,000 a year (accounting for two weeks of vacation).  That is now $20,000 more a year (or the equivalent of hiring a 3rd employee). 

Now, as the business owner, are you going to take that out of your $100,000 a year take-home profit leaving you with $80,000 a year? Or will you pass that raise increase and additional expenses on to your consumers by raising your prices? Of course you will pass it on. Keep in mind that along with the business owner’s prices being raised, all the prices of doing business up and down the chain go up:  taxes go up (got to pay the government more, too), insurance goes up, transportation costs go up, overhead goes up, etc., etc.  So instead of raising prices just a little bit to cover the salary expenses, business operators will raise their prices a LOT to cover ALL their expenses in order to make a profit!  A cheeseburger for $1.50 will now be $3.00; a $5 latte will now be $7; a $20 clothing item will now be $25; a $20,000 car will now be $25,000, etc. So tell me, are you really making more money? Technically, yes, you will bring home more money (But maybe not! Since you will be making more, your personal taxes go up too!). In the long run your money will not go as far, and you will be just as broke as you were before.  

Now what about those people who already make $15 an hour? They either worked their way up to that amount, or they have acquired a skill in their trade (went to school to learn it). What happens to them?  Do they get a wage increase too?  Nope! They lose that pay difference and will now be making what everyone else makes (reducing their value to the company, or damaging the incentive to work harder). And they have to pay the higher prices along with everyone else. 

Minimum wage was not designed to be a lifelong career choice, or to support a family. It’s meant to be a stepping stone or a starting point for young people to gain experience and learn by working their way up the career ladder. I wish that the lawmakers in Sacramento would stop assuming they know what is best for “We the People” and allow the free market to run itself. They obviously have no clue how this all works!  

Wake up California!  We will ALL be losing in this deal. Raising the minimum wage is one more step toward embracing socialism. If you think otherwise, then you are severely mistaken! But don’t just take my word for it. Study any country that has attempted to engineer socialism. Cuba, Greece, Russia, England, and others. It never works! It never has, and it never will.

Next week I will delve into the life of the first player to be inducted to the Baseball Hall of Fame.


  1. It is always so enlightening when someone "proves" their argument by making up facts and figures out of thin air. There is actual research on this issue, but why waste time with reality when you can just make things up.

  2. So enlighten the rest of us. What "actual research" are you talking about?

  3. As a starting place:

    Scholarly debates over the minimum wage have taken a distinct shape over the past two decades. In the 1990s, Princeton’s Alan Krueger — now Chairman of the White House Council of Economic Advisers — and his colleague David Card produced a seminal paper that has framed much of the subsequent debate. Those scholars examined the results of a New Jersey law raising the minimum wage, comparing the outcomes in the fast food industry to those in the bordering state of Pennsylvania, where wage laws remained the same. Their study called into question textbook assumptions about how labor markets might work. The findings included:

    The data indicated “no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.”
    Further, “prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers.”
    That paper’s implication was that the neoclassical models, which suggested the opposite would happen, didn’t comport with reality — data triumphed over theory. For the next decade, the economics profession saw an extended debate about whether that paper’s fundamental insights were right and could be extended to support policy. Krueger and Card had to defend their findings in a follow-up to the original paper. In 2000, dozens of pages of an issue of the American Economic Review were dedicated to this fight, as Timothy Taylor notes at his “Conversable Economist” blog.

    Subsequent studies

    Some subsequent studies have generally supported aspects of Krueger/Card. A 2004 study of available literature, “The Effect of Minimum Wage on Prices,” analyzed a wide variety of research on the impact of changes in the minimum wage. The paper, from the University of Leicester, found that firms tend to respond to minimum wage increases not by reducing production or employment, but by raising prices. Overall, price increases are modest: For example, a 10% increase in the minimum wage would increase food prices by no more than 4% and overall prices by no more than 0.4%, significantly less than the minimum-wage increase.

    In a 2010 study published in Review of Economics and Statistics, scholars Arindrajit Dube, T. William Lester and Michael Reich also looked at low-wage sectors in states that raised the minimum wage and compared them with those in bordering areas where there were no mandated wage changes. They found “strong earnings effects and no employment effects of minimum-wage increases.”

    A 2012 paper published in the Journal of Public Economics, “Optimal Minimum Wage Policy in Competitive Labor Markets,” furnishes a theoretical model that lends some support to the empirical insights of Krueger/Card. The paper, from David Lee at Princeton and Emmanuel Saez at UC-Berkeley, concludes: “The minimum wage is a useful tool if the government values redistribution toward low wage workers, and this remains true in the presence of optimal nonlinear taxes/transfers.” However, under certain labor market conditions, it may be better for the government to subsidize low-wage workers and keep the minimum wage relatively low.

  4. Thanks for submitting your comments, though I have to question the voracity of the claims made, based on the fact that it comes from Alan Krueger, a member of the current administration, which has a vested interest in "fundamentally transforming America". One does not make it into this administration without having socialistic (communist) leanings. And the data indicates that the cost was passed on to consumers, which leads to inflation of prices.

    "Well, the inflation was minimal." A little here, a little there; it adds up.

    The 2012 paper you cite says “The minimum wage is a useful tool if the government values redistribution toward low wage workers . . ." Redistribution of wealth is not a legitimate function of government under the US Constitution; it is communism, the only virtue of which is the equal spread of misery.

    It goes on to say, "it may be better for the government to subsidize low-wage workers and keep the minimum wage relatively low." Again, not a legitimate function of government. In order for the government to subsidize wages, it has to tax. It is robbing Peter to pay Paul, which is theft.

    None of these studies make mention of the fact that those who have worked hard gaining skills and experience, proving themselves worth being paid more, will not likely receive comparable pay increases. When people work hard and see others who are unwilling to work that hard being paid the same as them, it is a motivation killer.

    However, minimum wage increases ARE useful tools for union bosses negotiating wage increases for their members. Nowadays, the biggest class of union employees are government employees, who are paid from . . . tax money.

  5. You make some decent arguments, some of which I agree with, some I don't. There are a lot of issues raised by such a significant raise in the minimum wage and they are worth examining and debating.
    My complaint about the original article was not his opposition to an increase in the minimum wage, but rather the author's attempt to prove a thesis based on purely made up scenarios.

  6. It is not uncommon for a person to use analogies to make a point. Although Laura's scenarios are "made up", they serve well to illustrate her point; that being, there are unintended (supposedly unintended) consequences when government messes with the free market.

    Thank you for engaging in civil discourse!


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