Big rises in minimum wages can be very dangerous to the society. Simply put, such big rises can be a gamble with people’s futures.
Will raising the minimum wage stimulate consumer spending? Before pondering that important question, consider another which may matter just as much. Will a high minimum wage help the poor? A global movement towards much higher minimum wages is giving people (researchers and policymakers) cause to ask these questions.
Studies have found that when prices rise, demand falls.1 If the minimum wage is set carefully, it can sometimes be an exception to this simple rule. On the other hand, big rises in minimum wages can be very dangerous to the society. Simply put, such big rises can be a gamble with people’s futures.
Generally speaking, modest minimum wages are good, simply because they do not seem to sap a demand for labor. There is plenty of academic evidence to suggest that at low levels, say 50 percent of median full-time income, minimum wages do not destroy many jobs.2 Take Britain. In 1998, it set a new minimum wage of £3.60 for adult workers over the age of 22 years and £3.00 for those aged 18-22 years.3 During that time, doom-mongers predicted that jobs will vanish. But, they were wrong: so far, Britain’s employment proved resilient. And by making workers value their jobs, minimum wages can even boost productivity and reduce staff turnover.
This simple evidence that modest minimum wages may not sap demand and may not kill jobs have encouraged many people to clamor to make minimum wages far more generous. The campaigners in America seemed to be more vocal in that regard. They want the government to increase minimum wage by more than 50 percent, from today’s stingy $7.25 and hour to $15 an hour. It should be noted here that this value represents about 77 percent of America’s median income. More important, though, is that they have had some success. For instance, the New York city and other similar cities now have plans to phase in a $15 minimum wage.4 Not surprisingly, the Democratic candidates of the upcoming presidential election, particularly Hillary Clinton, support the policy. In countries like Britain, it is the technocrats who usually set the wage floor or the minimum wage. Given the popularity of a higher minimum wage, British Conservative government has plans to compel these technocrats to shift the wage floor from 47 percent to 57 percent of median pay. Germany has also introduced a minimum wage. In places like Cologne, which is one of the country’s largest cities, minimum wage legislation seems reasonable because it will not consume a high percentage of the median pay. However, it is not a good economic policy in the poorer east of the country where it is worth a generous 62 percent of median pay.5
The unhappy truth is that by moving towards sharply higher minimum wages, policymakers are promoting a policy that may be politically sexy but economically unsound. In other words, they are merely accelerating into a fog. The long-run effects of modest minimum wages are still unknown. What about the effects of big rises in minimum wages? Little is known about what such a policy will do at any time horizon. Given Britain’s experience, some policymakers are convinced that low minimum wages are harmless. However, it is reckless to assume that much larger ones must be harmless too.
Bumpy rides ahead
Workers obviously like higher minimum wage. But what they fail to understand is that high minimum wage will, in the long run, push some of them out of the labor force for good. Just consider this: Suppose a construction worker loses his job in a recession. Naturally, he can expect to find a new one as soon as the economy picks up. The outcome would be different if that worker is a cashier with few skills who works in a store. This is because the introduction of a high minimum wage will make the cashier to become more expensive to maintain than a self-service checkout machine. So he will be out of luck since his employer, the store, will simply replace him with a self-service checkout machine. Yet both the British and American politicians seem to have strong defense for a higher minimum wage. In their views, a strong economy can generate enough jobs to replace those lost to a higher minimum wage. In as much as their argument may sound good politically, the jobs are still lost anyway. So, in a practical sense, Milton Friedman (an American economist) was right: minimum wages are a form of discrimination against the low-skilled workers.6
From an entirely practical standpoint, this is not a good time to be raising the cost of workers. Technological advances are empowering more employers especially on making hiring and firing decisions. Employers can now easily replace people with computers and robots – a feat that imperils jobs. But some jobs are hard to automate: employers cannot automate jobs like nursing care and some low-skilled positions such as cleaning.
Some other millions of low-skilled workers are vulnerable to replacement. For instance, employers can easily replace low-skilled workers driving lorries, picking products of warehouse shelves and sitting at checkouts and receptions. And that is exactly what employers will do if the minimum wage is raised. Simply put, a high minimum wage can be an incentive for employers to replace these workers with technology. Workers in tradeable sectors such as tourism and manufacturing are equally vulnerable to higher minimum wages.7 This is because the high minimum wage will encourage their employers either to outsource their work or to hire low-paid counterparts from abroad.
The fundamental lesson here is that minimum wages are a bad way to combat poverty. According to the Congressional Budget Office, only 10 percent of the income benefits go to those beneath the poverty line. In Britain, it is the richest 10 percent household that will benefit more from higher minimum wage than the poorest 10 percent. This is because many low-paid people in Britain are their family’s second earners.8
A final point: a minimum wage is not free. This is actually one aspect of minimum wage which people tend to ignore. Taking this argument further, someone must pay for the hike in wages. Some people hold the view that companies will shoulder the burden of higher minimum wages. But that argument is merely a product of hope rather than logic and evidence. So, should the consumers bear the cost then? Naturally, companies would prefer to pass the cost to the consumers. The problem is that if this happens(and it does happen), the poor will still suffer as the burden would fall heavily on them, for one reason: the minimum wage would turn into a subsidy funded by sales tax – a revenue raiser that, again affect the poor adversely.9
The bottom line
Governments can use better tools to help the poor. Tax credits are a good example. By using tax credits, the government can help the poor more efficiently. This is because as much as 75 percent of the benefits from tax credits end up with the employers. So instead of automating jobs, the firms that receive such credits are usually motivated to employ low-skilled workers.
History does show that minimum wages have very powerful emotional and political appeal. Nevertheless, it would be the best for the governments to deal in evidence and logic, not in sentiment. This does not mean that a modest minimum wage is not good. As a matter of fact, if they are modest, minimum wages can work as part of the country’s policy mix. In contrast, if the government set it too high, they will end up harming the very poor people which they are supposed to help.
1Minimum Wages: A Reckless Wager. (2015, July 25). The Economist, Retrieved August 5, 2015 from http://www.economist.com/news/leaders/21659741-global-movement-toward-much-higher-minimum-wages-dangerous-reckless-wager.
3Chalabi, M. (2014, January 16). UK Minimum Wage: A History in Numbers. The Guardian, pp. Retrieved August 5, 2015 from http://www.theguardian.com/news/datablog/2013/oct/01/uk-minimum-wage-history-in-numbers.
4Luckerson, V. (2015, July 23). Here’s Every City in America Getting a $15 Minimum Wage. Time, Retrieved August 5, 2015 from http://time.com/3969977/minimum-wage/.
5Minimum Wages: A Reckless Wager, op. cit., p. 9
6Perry, M. J. (2013, February 13). Milton Friedman Responds to President Obama’s Proposal to Raise the Minimum Wage, the Most ‘Anti-Black Law in the Land’. American Enterprise Institute, Retrieved August 5, 2015 from http://www.aei.org/publication/milton-friedman-responds-to-president-oba….
7Minimum Wages: A Reckless Wager, op. cit., p. 10