Minimum wage advocates typically focus on what it takes for a struggling person or family to live in the current economy. The logic goes that if we require employers to pay more, people can afford more. But is that the case? The answer is that history doesn’t bare that out.
In a typical free market, supply and demand of human capital is moved by market conditions that affect not just the bottom earners, but the earners at all levels. Different skills are worth different amounts of money, as are different levels of responsibility. In other words, all types of jobs are priced in the marketplace such that there is incremental pay for incremental skills and responsibilities. It makes sense that if someone has a greater amount of skills, that they would typically tend to make more money than those that don’t, and in most circumstances, those that have more responsibility in the management ladder tend to make more money than those that don’t.
If we then make an artificial adjustment to the minimum amount people can earn, we haven’t really changed the dynamics of the value of incremental skills and responsibilities. Over time, wages will adjust upwards to reward those with greater attributes. These differences don’t go away. The people who used to make $15, when we raise the minimum wage to that level, now demand more, and the people above them demand more as well. The laws of supply and demand take over and all wages tend to adjust up accordingly, such that the costs of all goods and services go up as well, leaving everyone, in the end, earning about the same amount as before, once inflation is considered.
In fact, on average, inflation tends to double every 20 years. In other words, if you’re making $7.25 an hour now, in 20 years, your purchasing power is the same as making $14.50 per hour. So, taking minimum wage in the US to $15 per hour, under a normal amount of inflation, would give you greater purchasing power for the next 20 years.
Unfortunately, it doesn’t work that way.
Since the introduction of the minimum wage in the US in 1935 at 20 cents per hour, each time there has been an increase in the minimum wage, the same purchasing power was met within an average of just 9 years. This means that the pace of inflation increased to meet the buying power in less than half the time it normally would. As the bottom wages were forced to increase, upper wages quickly adjusted to take the buying power away.
So, one might argue that perhaps during that 9 years of increased purchasing power, there would have been a nice effect on the economy as people had greater purchasing power than they did before. However, while there was some benefit to the economy, the average increase in gross domestic product was minimal (an average greater than normal increase of about 0.35% each year during those periods). So, we really didn’t get any bang for our buck at all.
It’s interesting to note that during these periods, while total unemployment seems more greatly affected by factors other than minimum wage, it could be surmised that it hits people at lower incomes harder than upper incomes. As businesses find alternatives to take care of more menial tasks that they might have found more cost effective for employees before, may now take advantage of what is now more appealing costs of technology that replaces people at the lower end of income. At the same time, those who are seeking higher paying jobs tend to fair better. The people we seek to help tend to get hit hardest.
In the end, the concept of a minimum wage is a feel-good policy that accomplishes nothing at all — neither positive nor negative (save short term unemployment for low income earners). It’s just more law and needless authority on the books. If there had never been minimum wages introduced, people would be essentially the same financially today as they would have been without the laws. We cause temporary unemployment and underemployment at the lower end of the pay scales until inflation catches up, then we have no more purchasing power than we did before. Why do we bother with such things? To accelerate inflation? Why? What’s the point?
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