I recently found myself surprised by the level of disagreement I have encountered among self-identified Republicans concerning the minimum wage. Though the right side of the aisle is undoubtedly intellectually diverse, I thought they would surely agree that the federal minimum wage should not be increased by the U.S. government. After all, the U.S. market economy’s track record has consisted historically of ensuring every household has a TV and dryer, and that multiple coronavirus vaccines are distributed within months of the virus’s emergence. The U.S. government’s economic track record consists of — well — ensuring social security goes bankrupt and amassing $27 trillion in debt and counting. Still, the popularity of a federally-mandated minimum wage has endured. In my experience, this support is founded on a widespread ignorance of the principle of market incentives which have fueled and continue to fuel American prosperity. Unfortunately, economic jargon alienates many individuals from looking further into topics such as the minimum wage. In this article I hope to provide some clarity to these issues through simpler explanations of market behavior.
It is easy to understand why raising the minimum wage is a popular idea — everyone wants to make more money, and no one wants to see masses of people on the streets because their wage is insufficient. With a $15 minimum wage (the number proposed by the Biden administration), everyone with a full-time job would make $600 a week! It seems commonsense, then, that we raise the wage. If people can make more money with one signature on a bill, why not? This philosophy begs the question as to why the United States did not undertake such action decades ago. Why hold higher salaries back from a segment of the American public if you do not have to? Is it simply to enrich big bad Bezos, lobbyists, or other wealthy individuals so often reviled by the American public for supposedly hoarding wealth at the worker’s expense? I would respond to someone advocating an increased minimum wage with the predictable question, why don’t we pursue legislation mandating a $20 minimum wage, or $50, or even $100? If financial success for many Americans is just a signature away, why not make the minimum wage as high as possible? Presumably, the answer would make itself evident to the minimum wage advocate at this point. Doing so would destroy the economy, because most businesses simply cannot afford to pay employees such wages while remaining both profitable and efficient.
Even a $15 minimum wage would have a massive ripple effect on the American economy. Take McDonald’s and all companies like McDonald’s, which are likely to pay at least a small portion of employees minimum wage. If the federal government enforced legislation mandating each of these businesses pay their low-level employees $15, considerably higher than the market value of their work, mass unemployment inevitably would result. McDonald’s will simply install electric kiosks in their dining rooms in favor of cashiers, as the one-time cost of that installation would become far cheaper than consistently paying a team member more money than they bring into the company on an hourly basis. The Congressional Budget Office estimates that 1.4 million jobs would be lost if Biden’s $15 minimum wage idea becomes federal policy — mostly underprivileged, unskilled workers. Nor will these team members be able to easily find another job which requires their skillset, as most jobs for which they are qualified will disappear from the market. Even if a worker is fortunate enough to keep his/her job, the company must make up for lost profit elsewhere. This may come in the form of reduced hours for workers, increased prices for consumers, or a myriad of other possibilities.
Here begins the domino effect. As unemployment rises in the United States following the minimum wage legislation, more citizens become reliant on welfare programs in order to survive. As the welfare state grows, the government will look to extract the necessary funds to support such programs from the pockets of Americans in the form of taxes. Americans as a whole, then, are left with less buying power than before, thus resulting in a less-stimulated, stagnant economy. Businesses, suffering from the decrease in buying power per household in the United States, will see decreased profit or even net losses, thus laying off workers and beginning the vicious cycle again. Matters only worsen once the government decides printing money is the answer to a stagnant economy. Such action would decrease the value of everyone’s dollar and increase the prices of consumer goods, which would gradually become unaffordable for many Americans due to inflation.
Hopefully it is clear by now why a high minimum wage does not work economically. One persistent argument I have encountered at this point is the fact that a minimum wage may still have merit, as there is such great wealth inequality in the United States. It is only moral for a wealthy business owner to pay a high wage to his/her hardworking employees — legislation just ensures this happens. After all, once businesses amass a certain level of profit, there is no incentive for them to pay or treat workers well. Firstly, this argument ignores the fact that most business owners are not Jeff Bezos, and that minimum wage will, in fact, hit “Main Street” businesses who already operate on tiny profit margins considerably harder than it will hit large businesses who have greater resources at their disposal, which brings us back to incentive. If potential American business owners are not led to believe the system in place values their success, where is the incentive to start a business if the risk so dramatically outpaces any potential reward? American businesses such as Pfizer and Moderna, who are now vaccinating the world, may not exist today if their entrepreneurs did not believe there was to be payoff for starting a business which offers good products. Alternatively, the companies may have floundered at their outset had they been compelled to operate under even narrower margins than new businesses already endure, due to a $15 minimum wage.
Furthermore, the latter part of this argument is predicated on a misunderstanding of incentives in economics. Because we live in a relatively free market system, the incentive for Amazon, for example, to continue to pay workers well as profits increase is the fact that it needs to attract enough potential employees to compensate for the increase in demand for its services. This principle is why many companies provide healthcare for their employees. Businesses do not do this for fun or out of simple good will. Virtually every activity in economics is attached to some incentive, and the incentive for high pay and employer-based healthcare is the same — namely, to ensure they are attractive to workers who will actually carry out the functions of their business on the ground. Of course, a wider applicant pool increases a business’s chances of finding a better fit for the position, in turn increasing the quality of the firm’s output. This view of economics also misunderstands the nature of the wealthy CEO. Business owners generally do not simply hoard wealth in their bank accounts, sitting on piles of money laughing at their menial laborers. Rather, they invest their wealth either back into their business, improving its efficiency, or they invest by other means such as stocks, bonds, etc., thus stimulating the economy further as a whole. Many start charities not limited to the United States, (e.g. Bill and Melinda Gates), aiding the international economy as well, or at least affecting the lives of many impoverished populations for the better. Surely Jeff Bezos enjoys the portion of the wealth he has chosen to access at this point, but to act like the good of the American worker and the good of the business owner are mutually exclusive is a notion born out of a caricatured view of economics.
All of this points to the beauty of the free market in America, principally because the preservation of the free market understands that monetary success is a strong incentive both to work well and pay well. American products tend to be of high quality precisely because we strike that balance and let the free market work as it will. There is a mutual understanding within a free market economy that both workers and employees must work fairly and efficiently in order to achieve success. For instance, in 2018, Amazon, the boogeyman of successful American business, resolved to have a minimum wage of $15 per hour for all of its American workers, without government prompting. If businesses are robbed of some initial success due to restrictive regulations or a compulsory $15 minimum wage when there is no way to afford it, the convenient services which Amazon provides as well as the hearty salaries even its lowest-level employees may expect — without the job cuts premature legislation would have caused — may never arise. In fact, Amazon produced half a million jobs in 2020 at a time of high unemployment, and its median wages have increased steadily since the company’s inception. Nor is a world without any minimum wage an unimaginable travesty. Countries such as Sweden, Denmark, Iceland, Norway, and Switzerland have all survived and prospered with no minimum to this day.
With only a cursory understanding of economics and a grasp of the incentives which underlie market activity, it is impossible to seriously postulate that a minimum wage is the best way to ensure our workers’ standard of living improves or that America’s production reaches its fullest potential.