A case against the minimum wage

Henry and Charles work at Big Bob's Burger Boutique in Lexington for $7 per hour. Henry is 40 years old. His life hasn't gone well - his wife left him a few years ago and he struggles with alcoholism. He's in financial trouble: he pays child support payments, he can barely afford his mortgage payments, and he hasn't saved anything for retirement. Charles is a 19-year-old university student studying biology. His life is going well - his grades are good, he has a steady girlfriend, and his parents are paying for his university fees so his income from the Burger Boutique goes mainly towards partying on the weekends.

You're a citizen of Lexington. Lexington is considering raising the minimum wage from $7 to $9. How will you vote? Won't you give poor Henry and Charles a helping hand?

 

In a spectacularly unlikely turn of events, your vote makes a crucial difference, passing the proposition 132,592 votes to 132,591. The minimum wage is increased to $9. Henry and Charles are excited. Maybe Henry won't have to foreclose on his home. Maybe Charles will be able to attend Burning Man this year. On Monday, Bob calls Charles and Henry into his office.

"As you know, the Boutique is open all day. But we make most of our money at lunchtime; we're just breaking even in the morning and evening. Well, we were breaking even. But with the new higher cost of labor, I'd be losing money if I kept the store open all day. I'm afraid we'll only be open at lunchtimes from now on. And so I need to let one of you go."

Bob pauses, looking at the diligent, good-looking college student and the tired, paunchy divorcee.
"Henry, I'm afraid I can't keep you on."

Henry tries to find another job, but the number of job-seekers in Lexington has jumped suddenly for some reason. He starts drinking heavily, loses his home, and now begs for change outside the Burger Boutique.

Charles makes it to Burning Man and has a great time.
 

In a spectacularly unlikely turn of events, your vote makes a crucial difference, defeating the proposition 132,592 votes to 132,591. Henry is sad but resolves to work harder in the hopes of a raise. Charles is outraged and protests against the callousness of Lexington voters.

Over time, Henry learns more about the burger business. When a new office complex opens in the neighborhood the following year, demand for burgers increases. Bob hires new staff and promotes Henry to manage them. Henry saves his home and hopes to open a Burger Boutique franchise of his own someday soon.
 

The usually stated purpose of the minimum wage is to help the poor. The point of the story is that the minimum wage can increase unemployment, and this effect is targeted towards the most vulnerable of minimum-wage workers. Furthermore, according to this paper from the Department of Health and Human Services, 71% of minimum wage workers have family incomes at least 50% higher than the poverty line - i.e. the not-poor. A disproportionate number are teenagers. When the minimum wage rises, some workers see an increase in income at the expense of other workers who lose their jobs. It is reasonable to expect that the ones who lose their jobs are likely to be minorities, women, the illiterate, the most unskilled - that is, the actually poor.

This is standard economics. Artificially raising the price of something reduces the amount that buyers want to buy.

The unemployment effect of minimum wage laws is very small at the low minimum wages governments have mandated. Of course, the higher the minimum wage, the bigger the unemployment effect. There was a significant Supreme Court ruling in 1923 where elevator operator Willie Lyons contested the minimum wage of $66 per month, which destroyed her $35 per month job. The court ruled the law unconstitutional, but minimum wage laws were later found to be constitutional in 1938. According to a survey run by the University of New Hampshire in 2007, 73% of economists believe that a 50% increase of the minimum wage would result in employment losses.

Laying off workers and not hiring them in the first place are not the only ways employers can save money when confronted with minimum wage laws. Neumark and Wascher (1998) found that "minimum wages substantially reduce training received by young workers".

Instead of supporting minimum wage laws, I suggest that those who want to use government power to help the poor should instead support the negative income tax, as described by Milton Friedman in Capitalism and Freedom. In short: through a negative income tax, your income is supplemented if it's sufficiently low. The higher your income, the less the supplement, up to some point where the supplement cuts out and you begin paying tax. The disadvantage of this idea is that it reduces the incentive to seek increased income, since an extra dollar earned results in less than an extra dollar received. Of course, this is a disadvantage of the income tax at every level and society seems to find this tolerable.

The USA has a negative-income-tax-inspired program called the Earned Income Tax Credit.

For an opposing view, see here, here, here and here.