The Minimum Wage Doesn’t Do What You Think It Does

The blunt instrument's failure leads to further state intervention
By Jordan Setayesh, MisesInstitute
August 1, 2018 Updated: August 1, 2018    

One of the most curious political phenomena is how the general public embraces the idea that the minimum wage undoubtedly helps the poor. The transformation of a policy, which originally was intended to keep minorities out of the labor force, to one aimed at protecting marginalized workers has been a stunning political magic trick.

Such confusion is partly caused by how minimum-wage rhetoric frames the topic. People often argue that businesses can afford to pay higher wages to workers, that a law mandating a minimum wage is philosophically moral, and even that increasing the minimum wage boosts employment.

We must be careful not to give the minimum wage credit for more than it is capable of doing. If an employer pays out $100 per hour in wages in total to his employees, then increasing the minimum wage from $10 to $13 per hour does not increase the total amount of wages paid to employees. It merely mandates that those $100 in wages be paid out in no less than $13 increments per employee.

Thus, minimum-wage laws can only change the distribution of wages paid by employers, and, ironically, the change in the distribution is often in the direction of increased inequality between low-wage workers.

Only One Component of Salaries

Annual salaries have three components: hourly wage, hours worked, and non-monetary benefits. A person’s annual salary is calculated by multiplying his hourly wage by the number of hours he worked and adding the value of non-monetary benefits, such as health insurance. The practical problem with the minimum wage is that it only addresses the hourly-wage component of total annual salary. The minimum wage mandates that a person must make a certain amount of money per hour, but it says nothing about the amount of money an employer must pay out to his employees in total.

Any mandated increase in the hourly wage can be offset by cuts in the number of hours worked and the value of non-monetary benefits.

Is it possible for any government policy addressing salaries to help poor people? A government policy aimed at helping poor people via higher salaries would have to force businesses to increase the total amount of money they pay to their employees as a collective. Otherwise, the policy is merely shifting the distribution of that money amongst workers rather than the total amount of money paid to them.

Since businesses can keep their labor costs at an equilibrium by adjusting wages, number of hours, and non-monetary compensation accordingly, such a government policy would have to address all three components. This would require forcing businesses to hire workers at a higher minimum wage, use a minimum number of total hours of labor, and provide a minimum value of non-monetary compensation.

What would that policy look like? Instead of just increasing the minimum wage, we would also hypothetically have a law requiring businesses to hire each worker for at least 40 hours per week and provide a minimum level of health benefits (or other non-monetary benefits). Such a law would ensure that each worker’s total annual salary would increase and that businesses could not get around the minimum wage by decreasing hours or benefits.

Unfortunately, that creates another problem, as these laws say nothing about how many employees a business must hire.

Tyranny the Logical Conclusion

Businesses could still get around paying out more money in total to their employees by hiring fewer workers. To address this, the government would have to engage in tyranny and pass an additional law mandating a minimum number of employees per business to ensure that the number of jobs available does not decrease. Yet mandating that each company employ a certain number of workers would not guarantee a certain number of jobs available since the number of companies is still able to fluctuate.

Therefore, to truly mandate an increase in total salaries paid out to low-wage workers in aggregate, the government would have to mandate a minimum hourly wage, the number of hours, the value of non-monetary benefits, the number of employees, and the number of businesses.

Given that the two events are logically interdependent, the idea of the government mandating that a minimum number of businesses exist in the economy is as absurd as the idea that the minimum wage can increase the amount of money paid by employers to low-wage workers in total.

What About Downstream Effects?

The caveat to the conclusions of this thought experiment is that they assume businesses keep their labor costs approximately fixed. It is hypothetically possible for businesses to respond by raising prices.

However, we should not be focused necessarily on increasing the absolute amount of dollars paid out to low-wage workers, but rather on increasing the purchasing power of their annual salaries. If a significant number of businesses respond to minimum-wage increases by increasing prices, then the purchasing power of the salary of low-wage workers will be reduced by price increases, making minimum-wage increases in nominal terms only.

The other possibility is that businesses will pare their profit margins to accommodate larger labor costs. However, if this were actually how businesses responded to increased labor costs, then we would expect the total compensation of low-wage workers to increase as a result of minimum-wage increases.

A groundbreaking study on the 2016 minimum-wage increase in Seattle to $13 from $11 showed that the average low-wage worker experienced a $1,500 decrease in annual income. In addition, a review of minimum-wage literature in 2006 indicates that 85 percent of the most robust minimum-wage studies encountered negative employment effects due to minimum-wage increases.

Furthermore, the 15 percent that found insignificant or positive employment effects only focused on the restaurant industry or used data from a short time span. The aforementioned study in Seattle demonstrated that using the restaurant industry exclusively as a proxy for low-wage workers biased the disemployment effects of minimum-wage increases toward zero.

Ultimately, we need to change the questions that we ask about the minimum wage. We should stop asking if workers deserve a “living wage” and start asking if the minimum wage actually helps workers attain that goal.

Jordan Setayesh is a biochemistry and cell biology major at the University of CaliforniaSan Diego. He is a co-founder of the volunteer organization San Diego Health Connect, a student researcher at Sanford Consortium for Regenerative Medicine and a co-founder of the nonprofit Mukta. This article was first published by Mises.org

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.