Minimum wage laws hurt more people than they help

Hawaii is considering raising its minimum wage. Again.

As always, the reasons are noble, but the results undermine them and make nearly everyone worse off.

Minimum wage proponents want to reduce poverty and increase the standard of living for the lowest paid workers. This is great, and I support this. Everyone, rich or poor, should rationally support such an objective. Problem is, a minimum wage does not do this.

First, let’s set up a hypothetical business situation. This is going to take a little math, folks. Stick with me.

I have a small restaurant that brings in $1,000/day. Think of that as 200 $5 meals. Supplies, rent and other costs eat $500 of that, and I want to have $150 at the end of the day for me, so that leaves a labor budget of $350/day to hire workers if I choose to. I could hire 2 cooks for $216 ($18/hr, 1 half-time), 2 servers for $80 ($5/hr), 1 janitor for $40 ($5/hr), 2 college kids who hand out flyers for 2 hours each for $14 ($3.50/hr).

$3.50/hour seems low, but college kids can always use a few extra bucks. As could retirees, the houseless, and any number of people who are in need of a second or third job to catch up or get ahead. (FYI, this is the current minimum wage in Korea.)

Now let’s see how my business would react to a minimum wage of $7.25. Since the minimum wage is never reduced, this is a permanent development, so I won’t be considering cutting my own profit.

  • The college kids/retirees/houseless/second jobbers are out for sure. Sorry.
  • I’m not sure I can make $1,000/day without their help, let’s optimistically say $950/day.
  • That leaves me with $300/day to hire workers. My cooks stay ($216), my servers now get $7.25/hr but I’m changing one of them to half time, so $87. That already totals $303, so the servers are going to have to double as janitors (ick).
  • With less help, everyone needs to work more, plus I need to put in more hours on the floor (meaning less time spent growing the business so I can hire more people).

This already doesn’t sound so great. I have cut 3 employees (who will have trouble finding work elsewhere as other employers do the same) and cut one servers hours in half (again, he is going to have trouble finding a second job now). All across the state, people are losing their second and third jobs or getting their hours cut. That doesn’t increase unemployment, the way it is normally measured, but those people are definitely worse off. A few people are better off (like my remaining full-time server, unless he isn’t worth his new higher wage, in which case I’ll try to find someone who is), but at the expense of many others.

France has a minimum wage of about $12, let’s try that scenario for fun.

  • If I keep my prices and hours the same, and my costs don’t increase (humor me for a second) I continue to get my $950/day.
  • I probably have to get rid of my part-time server, making the remaining server work harder.
  • My cooks get $216 ($18/hr, which they won’t be happy with now that the server gets $12/hr), 1 server is $96 ($12/hr)
  • $312, over my budget again, AND I’m putting in more hours again on the floor.

What’s happening as the minimum wage increases is that I, the business owner, am making less profit (with more personal effort, to add insult to injury). The less profit I make, the more I consider:

  • Raising prices. If a lot of fellow business owners think like me, it starts to look a lot like inflation.
  • Replacing people with machinery and software (automation).
  • Closing my business, firing all my employees and entering the job market.

Not surprisingly, these are indeed the three outcomes that result from higher minimum wages. But wait! Recall the goal of the minimum wage law: to help the lowest paid workers. What do these outcomes do for them?

  • Higher prices hurt everyone, but they hurt the poor disproportionately. They put more goods out of their reach and strain their already thin budgets. In other words, this lowers their standard of living.
  • Automation shifts job creation from the lowest paid to the highest paid workers (engineers and the executives who manage them) and puts a greater burden on the remaining lower-paid workers.
  • Obviously the businesses forced to close as a result of escalating minimum wage laws are the ones that rely most heavily on lower paid workers. Even worse, if former business owners seek employment, they further worsen the job market.

Think about it.

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