Posted on January 5, 2006

How The Minimum Wage Hurts The Poor

I can’t remember the last time I heard someone other than an economist speak sensibly about the minimum wage. Here is the ultimate “You can all have everything you want without any consequences” political promise. You’re poor? Well, us powerful guys and gals in Congress are going to snap our fingers and give you all a raise. Then you can be part of the American dream.

Of course it doesn’t work. While those poor folks are standing behind the podium, looking photogenic as their Representative or Senator talks about how, if reelected, he’ll see to it that every last one of these downtrodden souls can afford not only an HDTV but also a Harvard Education for their children, the sad truth is they’re being screwed. That’s the dirty secret of feel good minimum wage boosting proposals: the people they’re intended to help are those they hurt most.

It ought to be easy to figure see why. Let’s say I run a small business. Now, like all the other moderately successful entrepreneurs out there, my profit margins are paper thin. If I run a grocery store, for example, it’s likely I take home a penny for every dollar of food sold. And a big chunk of the 99 cent per dollar expenses is wages. In this small store, I employ twenty people. Most of them are teenagers working evenings and weekends so they can afford to stay on top of the Playstation and Xbox arms race they routinely engage in with their peers. But a few, the ones who work during the day when everyone else is at school, are actually poor. They’re doing everything they can to support themselves on wages I give them.

Then a new guy comes into office. He’s going to help these employees of mine and he’s going to do it by forcing me to pay them not $5.15 but $6.15 every hour. Suddenly, by political magic, they’ll be able to afford the extra baby formula. Which is all well an good if that’s actually what happens. But sadly, many these hard workers, instead of getting an extra buck an hour, will soon be making nothing. I’ll have to let them go.

Maybe I’ll fire because I’m a mean capitalist and there’s nothing I like better than stomping the poor under my thousand dollar boots, but that’s rather unlikely. Instead what happens–and it’s what any freshman economics major couldn’t told that politician would happen–is that I just can’t afford to keep them all around. To keep the math behind this unfortunate forcing of my hand simple, let’s say my store is only open one hour a day and, during that hour, all twenty of my workers are punched in. At $5.15 an hour, my total payroll expense is $103 daily. Thanks to this new legislation, however, it’s jumped to $123. Twenty bucks more. Where’s that money going to come from? The thing is, the politician doesn’t care. He’s done his part in forcing me to give my workers “what they deserve.” His hands are clean and he walks away to solve more problems in equally mislead fashion.

But I’ve got to figure out how to get an extra twenty dollars. I could sell more food but, hey, if it were that easy, chances are I’d have been doing it long ago. I might dock my own pay but it’s a good bet that wouldn’t come close to covering the difference. Maybe I’ll jack up the prices on my food–except, as the economists say, demand curves aren’t vertical. If the price goes up, the amount of food I’ll sell will drop. My only remaining option is to let people go. Four of them, in fact. So while sixteen of my original twenty workers are taking home the extra dollar, four of them are filing for unemployment. At least the politician kept his office so he can continue to help the poor.

The hurt caused by minimum wage laws doesn’t end there, however. While we can measure the number of jobs lost when wages are forced to increase (20% loss in the case of my hypothetical grocery store), there is no way to get an accurate count of the jobs not created in the first place. It could’ve been that, in just a couple of months, if business had continued to grow, I would’ve stuck an ad in the paper and hired five more grocery store clerks. Thanks to the minimum wage hike, I fired four instead. Because those five jobs never existed to begin with, they don’t count as a loss.

Proponents of minimum wages usually j”ump in right about now with, “But we’re only talking five or six or seven dollars an hour. Surely American businesses can afford that.” I guess I’d rather leave it up to the businesses themselves to determine what they’re capable of paying. They surely know more about their daily cash flow than any law maker. F.A. Hayek demonstrated the truth of that knowledge disparity half a century ago. And if it’s true that the minimum wage helps the poor, why stop comfortably below the ten dollar mark? How about twenty dollars an hour? That’d be a living wage. Clearly very few people would be employed if that were the baseline wage. Even the most big hearted minimum wage supporter can see that. But, then, what makes him or her think slightly lower wages are any different. The minimum wage costs jobs and it does so primarily by driving our poorest and most unskilled out of the workforce.