The most recent congressional debates regarding the minimum wage have largely been over what level the minimum wage should be set at. The arguments for one minimum rather than another have been speculative, unsubstantiated, and arbitrary. Rather than arguing over the standard of living one is entitled to, which is inherently demeaning and nearly impossible to quantify, the question that ought to be discussed instead is: should minimum wage laws exist at all? Those who call for the elimination of the minimum wage have been dismissed by way of straw man arguments and a general misunderstanding of the intellectual movement. For much of the United States’ history no minimum wage requirement existed, and when it was first introduced, simply questioning its legitimacy and effectiveness was a much more prominent subject.
The concept of a minimum wage in the United States was first introduced by Franklin D. Roosevelt in 1933 via The President’s Reemployment Agreement. In order to decrease unemployment during The Great Depression, President Roosevelt aimed to limit the hours worked by individual workers in order to incentivize companies to hire more people. If a company employed two workers whose output required them to work for 45 hours a week and suddenly the maximum number of hours each worker could work was cut to 30, then that company would need to employ an additional worker in order to produce the same level of output. After realizing that this would simply cause the level of income for existing workers to drop, this folly was patched by implementing a minimum wage so that existing employees would get paid the same amount while working fewer hours. In Adkins v. Children’s Hospital, The Supreme Court eventually found this to be unconstitutional. In response, The President made an attempt to increase the number of Supreme Court justices to swing the vote in his favor; however, his effort was thwarted as it was also ruled unconstitutional. After reelection, judicial turnover, and what one historian calls “political bullying,” FDR was able to tack the federal minimum wage mandate onto the Fair Labor Standards Act in 1938.
Paradoxically, the legislation that was originally introduced as a measure to boost employment is now criticized for having the opposite effect. Critics of minimum wage laws often claim that establishing or raising minimum wage will increase the unemployment rate. While this is not necessarily true, it is one of three possible outcomes that consequently happen when raising the minimum wage.
Establishing a minimum wage effectively places a price floor on an economic good and causes inefficiency in the market for that good. That is to say, setting a minimum price above the natural price of an economic commodity will force the market to stray away from equilibrium by inflating supply and limiting demand. Applying this economic law to minimum wage means that setting a minimum wage above the natural wage lowers the number of people employed, while also increasing the number of job seekers. As the price for labor increases, companies will not be able to hire as many employees, while at the same time, more people will be looking for jobs as they see a greater benefit from joining the work force.
There are two other consequences that could arise from the implementation of a price floor. The less likely of the two remaining outcomes is price inflation. For businesses to maintain margins (or simply stay afloat) as their production costs are forced higher, they raise the cost of the goods produced. This means that as the cost of labor required to provide a good goes up, companies raise the price (thus passing the labor cost on to the consumer) in order to maintain the same level of profit. As the manufacturing processes of many goods are outsourced, this scenario is becoming more unlikely.
The final possible outcome occurs of a minimum wage hike is smaller profit margins for businesses. This occurs when businesses decide that raising the price of their good will decrease the demand for that good such that simply absorbing the additional cost in labor would have a smaller impact on the bottom line. This seems to be the ideal outcome for those who are proponents of a minimum wage, despite the significant consequences.
Thus the implementation of an “effective” minimum wage necessarily comes at the cost of unemployment, price index inflation, or smaller profit margins. Likely, the effects will be spread across all three. Each potential effect has its own impact on the economy and the well-being of individuals in the economy.
The rise in unemployment is the most is perhaps the most egregious impact public welfare that comes as a result of minimum wage legislation. As UCLA economist Thomas Sowell says, “Unfortunately, the real minimum wage is always zero, regardless of the laws.” Intuitively, the most unskilled labors will be the first to be laid off as their employers are the least capable of justifying paying a new, higher wage (evident by the fact that teenagers, often unskilled, are one group negatively impacted by minimum wage increases). Thus, the legislation ends up hurting the unskilled citizenry that it intends to help. Sowell claims that it even makes it easier for racial discrimination: “surplus labor resulting from minimum wage laws makes it cheaper to discriminate against minority workers than it would be in a free market, where there is no chronic excess supply of labor.” This phenomenon manifested itself during the FDR presidency: The Davis-Bacon Act, the National Industrial Recovery Act, and the Fair Labor Standards Act all imposed government-mandated minimum wages, which caused black workers to be priced out of jobs, evidenced by the drastic fall in black employment in the wake of said legislation.
The increase in price level caused by the minimum wage would also have a negative effect on the economy. Naturally, as price goes up, demand and, therefore, consumption falls. This effect is prominent in, but not limited to, restaurant business: a 2012 study showed that a 10% increase in the minimum wage yielded a 4% increase in menu prices. While the select few who maintain employment benefit from higher wages, it is at the detriment of the general public.
Lastly, shrinking margins for businesses also has a negative, albeit delayed and intangible, impact on the economy: lower investment. Companies that see their margins pinched by the mandated increase in cost of labor have less profit to pay to their investors and reinvest back into their business. In aggregate measures, this means that the economy’s prospect for productive capacity has been limited. This lack of private sector investment can cause an economy to become stagnant. However, minimum wage increases do incentivize businesses to increase investment in one very particular area: automation. Investing, like any decision, is based on a risk-benefit analysis. Companies that see their costs of labor increase are simultaneously seeing the rise in the benefits of automation investment – the risk stays at roughly the same level. When previously faced with exuberantly high labor costs, companies invested in offshore labor, now some companies are eliminating human labor all together.
As unhealthy as a minimum wage is for a society on any scale, the implementation of a minimum wage on a federal level seems reckless. Controlling labor prices on a one-size-fits-all basis does not make pragmatic sense as there are a wide array of economic ecosystems in the United States. Price levels vary, and an increase in minimum wage, take for example the recently proposed $15 per hour minimum, wage would have drastically different impacts in Manhattan, NY than in Harlingen, TX. Yet, perhaps the greatest injustice caused by the entire minimum wage debacle does not manifest itself in the economic impact, but its infringement of personal liberty. Because of this constricting legislation, two individuals are no longer allowed to freely and mutually engage in an agreement so long as that agreement involves labor for compensation less than $7.25 an hour. Individuals are no longer allowed to engage in contracts that they deem to be beneficial, if they do not meet the arbitrary price floor set by U.S. Congress. And that is insulting, irresponsible, and oppressive.