Raising the Minimum Wage

By Joe LaFiandra

The new president has implemented a series of progressive executive orders. Other actions are in the wings, including asking Congress to enact an increased minimum wage of $15 an hour, from the $7.25 (in Virginia) an hour presently in effect. What I am going to present in this article are the consequences of this action. 

If you think this is a good idea, why stop at $15, how about $20, or even $50? It doesn’t feel right, does it? Why not? You’re right, who is going to pay for it, and are there unintended consequences when you mandate a higher than justified minimum wage for the economy.

 In economics, as in the more exact sciences such as physics and chemistry, there are laws of nature that can’t be violated. We will examine what is going to happen based on history. As someone once said, “There are no free lunches.” The truth is the minimum wage was never intended to be a living wage but, a starter base for workers.

Getting back to the $15 an hour minimum wage, Bloomberg News noted that “A team of economists, including the University of Washington’s Jacob Vigdor, have been studying the employment effects of Seattle’s move to increase its minimum wage to $15. In 2016, Seattle, a high-wage city, had hit a $13 minimum, on its way to $15. The economists found that this led to a nine percent reduction in low-wage jobs. 

“The pay increase it generated didn’t make up for the reduction in employment, and earnings fell for low-wage workers overall.” In addition, the Congressional Budget Office stated that, “Raising the federal minimum wage to $15 an hour would result in an estimated 1.3 million jobs lost  nationwide.”

 Many restaurant workers who rely on tips would see their minimum wage also raised; and this could lead to a reduction of servers. So, workers would see a rise in their income, but there could be fewer of them working. 

When families go out to eat, they will be faced with increased meal prices. The same will happen when they go to the supermarket or department store. Wage earners will then be chasing the increased prices of goods and services, because of the minimum wage increase. Nobody wins. 

Another unintended consequence is the fact that many small businesses will go out of business, since they work on thin profit margins. History has proven this over and over again. Plus, the timing of adopting a $15 an hour minimum wage couldn’t be worse. With Covid-19 shutting down hundreds of thousands of restaurants and other businesses nationally, the increased minimum wage will ensure that they never reopen. 

A higher minimum wage will also increase the use of automation in service industries such as restaurants. A good example is the use of self-serve beverage kiosks. Automated hamburger and sandwich makers are currently being tested, and soon will be used because of increased labor costs. These lost jobs will never return, because once automation replaces human labor, it stays in place.

The rise in the minimum wage will have a major effect on manufacturing companies, who will have incentive to make products off shore. It will be so much cheaper to build products in countries with low labor rates, such as China, Vietnam, Indonesia, and Central America, that manufacturers will build more factories off shore. Jobs that could have stayed in America will now disappear. The balance of trade between the U.S. and these countries will also be affected, since we will be sending our money off shore.

In a recent Wall Street Journal editorial entitled “Yellen vs. Yellen on the minimum wage,” the new Treasury Secretary, Janet Yellen, was quoted saying in 2014 that she “wouldn’t argue” that the nation would lose 500,000 jobs if Obama’s proposal to raise the minimum wage to $10.10 an hour were enacted. It wasn’t. Now she says that the effect on jobs would be “very minimal” at $15 an hour. As the editorial points out, it isn’t very minimal, if you are one of the 500,000 who would lose their job.

Even if the increase in the minimum wage is brought on gradually, it will affect an economy that is still recovering. If you combine the effects of raising the minimum wage with the loss of jobs in the energy sector, the economy will take a major hit. 

It looks like the administration has the votes to pass the increase in the minimum wage, but when people lose their jobs because of these political decisions, they tend to vote out those politicians who made the decisions. Remember, the election in November 2022 is not that far away.