Wednesday, April 27, 2016

The Unintended Consequences of the Minimum Wage.

A few days ago I posted about the economic benefits to minimum wage, which are few and not overly valuable. But a case can be made for some benefit in purely economic terms.   In general, minimum wage laws are created for political reasons – there is a claim of compassion but you shouldn’t be too quick to believe those.  Politicians don’t do things out of compassion, they do them to get re-elected.  Politicians work on the philosophy of delayed blame.  They’ll spend your future money to buy votes today on the theory that when the debt comes due, most voters will have forgotten who to blame.  Sadly, it works really well.

There are a number of downsides to minimum wage laws. Beyond the obvious distortion of the free market (see previous post), there is the tendency to increase them once they’re established. The dangers of what I’m seeing now, which is a trend toward a more than doubling of the Federal minimum wage in the wake of events in two of the most liberal states in the country.  Both New York and California went against all rational advice from economists and did the “Feel Good” thing anyway – assuming that voters will forget who just screwed them by the time the next election comes up.  For those people who manage to keep their jobs, it will be a big win.   For everyone else, not so much. This is going to be lengthy, and hardly exhaustive, but it should give you an idea of what kind of trouble we’re borrowing.

There is strong consensus amongst economists that raising the minimum wage results in few jobs for unskilled and inexperienced workers.  The only big holdout I know of is Paul Krugman, who lives in a world with unicorns.

If destroying entry level jobs were the only effect, it would be bad enough.  The hike from $10 to $15 per hour has resulted in UC Berkeley laying off 500 people.   That’s 500 people whose wage went from $10 to $0.  And believe me – the real minimum wage is $0.  Berkeley is just the beginning – the full effect of that increase won’t be seen for two to five years.  I expect to see more businesses flee California – which they’ve been doing in droves.   It is a business hostile environment. Between the constant assault of regulatory strangulation and now a 53.1% increase in unskilled labor costs – assuming there are no other hidden costs beyond the 6.2% FICA which means that $5/hour is really costing the employer $5.31.

Unfortunately, there is a trickle up of costs. Few employers that depend on minimum wage worker can afford to absorb a 53% hike to what is probably their biggest single expense.  They will have no choice but to raise prices – with that price increase comes a decrease in demand.  So, while prices are up – sales are down.  Since prices are unlike to go up any more than one needs to cover the actual costs in the first round, there will be a net loss in revenue. With that will be a net decrease in what the State collects for taxes.  Yes, that’s one of those little unintended consequences that is so easy to overlook. More so for a state that has a major budged shortfall, and a seriously underfunded public pension.

There may be some good news depending on what labor pool is used. If supermarkets are already paying $15/ hour (which seems unlikely) then the impact to food prices will only come from their suppliers – otherwise, the costs of eating at home will rise even further than the the cost of goods sold.  That will have some mitigating effect on the demand of dining out.  The nice thing about food is that overall, it has a relatively inelastic demand.

When those sales decrease, the demand for raw materials will fall.  Taking a restaurant as an example.  When the prices on the menu increase significantly, people will make the rational choice to eat out less.  So the restaurant sells less, and the minimum wage workers now get fewer tips – oops yet another unintended consequence. The company that supplies the food, and condiments will also lose business, lowing revenue and hence taxes.  If the restaurant sells liquor, those sales will also drop, which is bad because that’s a real profit center for restaurants. Oh, and the state loses even more tax income.

Now, if sales drop enough, a rational business owner will be forced to confront the decision of how to allocate his capital. In other words, struggle along or close up shop and find someplace else to do business.  When those shops close all the employees are now at the true minimum wage of 0$.  And the state now gets hit with an additional tax burden – unemployment compensation.

The suppliers lose even more business – potentially resulting in more layoffs.  Certainly less income and hence – less taxes paid.

You can expect to see capital replace labor in more places, since the relative cost of capital just went down. The nice thing about capital – it doesn’t show up late, rarely takes sick days, and complains about overtime, or not enough hours.

So, we’ve killed jobs for unskilled, inexperienced workers, we’ve put unskilled workers out of jobs, we’ve put skilled workers, and management out of work. We’ve decrease tax revenues and increase the tax burden. We’ve increase overall unemployment. And increased welfare spending. But at least some of those people are making a living wage now – except the prices on everything just went up so that $5 / hour feels a bit more like $1.75/ hour.   Feels pretty good doesn’t it.

At which point I will reiterate my advice – Capitalists – be compassionate, pay as much as you can afford, don’t price yourself out of existence, but if you wait, the government will do it for you. Workers – have a little compassion for all those people you seem so willing to throw under the bus,  $7 or $10 may not be a living wage, but neither is $0.

Well, you get the picture.   It’s too bad that people demanding these huge increases in the minimum wage don’t see it.  Nor apparently do the politicians.   And if you think they do, I would point you to the following:

How White Castle Will Adjust to a $15 Minimum Wage in New York

How High should the Minimum Wage Be? 

1 comment:

  1. Clear concise and inevitable possibly even understated. What many do not realize is that the cost to the employer is nearly twice what the employee takes home.