This year to celebrate Labor Day many in the labor movement are demanding that we raise the minimum wage.  Beware the urge to do good when it violates the laws of economics.

Cowpeople working

This year the major cry we are hearing on Labor Day is that we should raise the minimum wage to $15.00/hour.  I say don’t do it.  If you raise the price of something you are going to sell less of it.  Raising the minimum wage is a sure way to kill jobs, increase unemployment and decrease opportunity for the most disadvantaged.  It is a terrible idea and I can show you why.

Example One:  You run a fast food restaurant called Paul’s Burgers and the minimum wage goes up by 50% so you decide to buy an automated order entry system.  It will be like the ones they have installed at airports for boarding passes.  That way you don’t have to raise prices because you can eliminate most of the order writer jobs at the counter.  Good news for your customers: their burgers and the price stay the same.  Bad news for your future employees: there are four or five less entry level jobs at Paul’s.

Example Two: You work in a garment factory in Los Angeles, on a sewing assembly line, sewing sleeves on bridesmaids dresses.  You make just above the minimum wage but during busy times you get lots of overtime.  You welcome the increase in the minimum wage because it means more money for you right away.  But then you notice that the overtime has gone away and during the slow times your only working three days a week.  It turns out that the bosses have started sending the long lead time orders to a contractor in Mexico (or China or Myanmar).  Since labor cost went up it makes sense to organize to send more of the work to places where labor is cheaper.

Example Three:  You run a non-profit business that provides intensive English language and cultural training to recent immigrants from around the world.  Most of your trainers are college student who you train and pay roughly $10/hour for the mostly evening work.  Your source of funds is government grants, corporate sponsorships and private donations.  You welcome the minimum wage increase because it will promote “social justice.”  What you didn’t expect was that now your pretty constant sources of funding will only pay for about 60% as much of your services.  You have to lay off a third of your trainers and can now serve a third less clients.

A higher minimum wage is a trick.  It seems like it will help the poorest people but all it does in the long run is reduce their opportunities and therefore their net earnings.

BTW I think it is hypocritical to support a higher minimum wage and then to buy things on sale.  When you buy something based on price you are sending a signal to the marketplace that you want it to be cheaper.  So you are telling the supply chain that they should lower the cost of the item out of one side of your mouth and out of the other telling them to pay higher wages.  Make up your mind don’t be a hypocrite.