Five Reasons Why Minimum Wage is a Bad Idea

Five Reasons Why Minimum Wage is a Bad Idea

Minimum wage is a surprisingly popular idea, with a majority of Americans supporting increases ranging from $10.10 to $15 per hour. Despite its popularity, there are several reasons why minimum wage is a bad idea for everyone, especially the people it is supposed to help. I’m no economist, so I can’t claim to be an expert, (on second thought, if Bill Nye’s degree in engineering makes him an expert on gender studies, then maybe my degrees in engineering make me a leading economist…) but I think that the arguments against minimum wage ought to at least be thoroughly understood by those who support it. On that note, here are five practical, common-sense reasons why we should get rid of minimum wage.

  1. Setting the wage lowers the value of the dollar, driving inflation
    This is really the fundamental problem with minimum wage, and I think its something that most people either don’t understand or don’t recognize, so I’m going to spend some time explaining.

    Say that I work a low-skill job flipping hamburgers at McDonald’s. The work that I am able to do in one hour has a certain economic value, probably related to how many burgers I’m able to flip. Its value is greater than the value produced if I watched Netflix for an hour, but less than the value produced if I wrote software for an hour. The value of my work can only be defined by what it’s worth to my employer relative to other things I could be doing. And, more importantly, the value or worth of my work is completely unaffected by what my employer pays me. As Luke Brandon from Confessions of a Shopaholic puts it, cost and worth are very different things.

    To illustrate the difference between cost and worth, consider an example. Suppose that the government passes a law that says the minimum cost for cell phones is $700. Cell-phone companies can charge more for nicer phones, but can’t charge less than the minimum price. This means that cheap flip phones which used to cost less than $100 are now just as expensive as a brand new Google Pixel or iPhone. That would be good news for the manufacturers of cheap cell phones, right? Wrong! No one in their right mind is going to pay $700 for a cheap cell phone, because the cheap cell phone isn’t worth it. Charging more for cheap cell phones doesn’t make those cheap cell phones worth more.

    So, what happens when the government “charges more” for low-skill work? By setting the minimum wage, the government is assigning a monetary number to the worth of the work that a low-skill worker can accomplish in one hour. By setting the price of an hour of low-skill work, the government does not (nor can it) raise the worth of the work. Rather, it raises the cost of low-skill work, which consequentially lowers the buying power of the dollar.

    Why is this a problem? Minimum wage proponents usually argue based on the notion of a “living wage.” But, suppose an employer has a job that really isn’t worth a living wage to him. If the employer is forced by the government to pay a “living wage,” what has really happened? The value of the work done certainly hasn’t increased. The only logical alternative is that the value of the money paid to the employee has decreased. This is the fundamental problem with minimum wage: Minimum wage decreases the value of your money.

    To illustrate this point, consider a related example. Suppose that an oil company, say BP, had a complete monopoly on oil sales in the U.S. This would allow them to essentially set the price of oil and gas arbitrarily high. In setting a high price of oil, BP isn’t really increasing the value of a barrel of oil or a gallon of gas. The value is in what a consumer can get out of a gallon of gas, which doesn’t change. All that BP accomplishes is increasing the dollar amount associated with that worth of oil. This weakens the dollar and makes it worth less. This is phenomenon is actually a driver of inflation, as seen during the 1970’s and 1980’s with the OPEC oil cartel.

    The government setting minimum wage is no different. The government gets to set the price of low-skill labor to be arbitrarily high. But by increasing the price of a thing without increasing its value, the value of money must necessarily decrease.

    Minimum wage drives inflation

    Does minimum wage drive inflation? United States Inflation and Minimum Wage from 1774 to 2016 (Sources: CSI Study and US-DOL)

    While correlation does not always imply causation, it is interesting to note that for the 150 years or so before minimum wage was established in the U.S., we experienced almost no inflation. Despite claims to the contrary (which conveniently ignore pre-1980 data), “wage push inflation” is a real effect of minimum wage. Now, I’m no economist, and I fully acknowledge that there are other factors at play that affect inflation. That said, the fundamental principle of decreasing the value of money by increasing the cost of low-skill labor is just common sense.

    The problem is not so much the inflation that raising the cost of low skill labor will cause. The real problem is that minimum wage fundamentally will never help the people it is supposed to help, in the long run. The more the cost of low-skill labor is increased, the more inflation will take place. Minimum wage may be able to “outrun” inflation in the short run, but ultimately inflation will always catch up.
  2. Increasing minimum wage encourages employers to get rid of entry-level jobs
    Going back to the oil example, if the price of gas increases, you have two choices. Either you decide that the cost of gas is worth the higher price, or you search for a cheaper alternative (e.g. walking, biking, public transportation, etc.) The same is true when the cost of labor increases. When minimum wage is increased, an employer also has two choices. He can either choose to pay the minimum wage workers more than the true value of their work (thus decreasing the value of the dollar), or he can fire his unskilled laborers and replace them with a single skilled worker who can produce more value in less time (analogous to searching for a cheaper alternative).

    Fast food robots

    Robots are already replacing minimum wage jobs (Image from Zero Hedge)

    This is more than just a hypothetical musing. This consequence of minimum wage can already being seen in the automation of the fast food industry. If minimum wage increases enough, then at some point it will be cheaper for McDonald’s to pay a small team of roboticists to design and maintain a fleet of food service robots, rather than pay a crew of minimum wage workers. By increasing minimum wage, the government is really encouraging employers to take jobs away from the very demographic (low-skilled workers) they claim to be trying to help. It’s no coincidence that an industry that is seeing a great deal of automation also happens to be the single biggest employer of near-minimum wage workers.

  3. Minimum wage hurts small businesses the hardest
    As discussed in the previous point, minimum wage encourages employers to automate low-skill jobs. This option is becoming ever more affordable as the cost of labor goes up and the cost of robots comes down. However, not every business has the money to spend on an expensive robot. While automation may be cheaper in the long run, it requires a significant investment up-front.

    Big businesses like Amazon, McDonald’s and Panera Bread can absorb the upfront cost associated with automation. This is because they usually will have the capital required for the initial investment. But a Mom and Pop shop down the street may not have thousands of dollars sitting around to spend on a robotic employee. While big businesses can save money by getting rid of minimum wage employees, small businesses are stuck paying their low-skill employees more than they’re worth. Small businesses will have to cover the cost of their over-priced labor by increasing the cost of their products, which gives big businesses an unfair advantage.

  4. Minimum wage discourages low-skilled workers from gaining skills needed to succeed

    We are worth more

    Contrary to popular belief, holding a sign proclaiming that you are “Worth More” does not increase the worth of your labor. (Image from International Business Times)

    The simple fact is that there are some jobs that simply don’t produce enough value to live on. That’s why they’re called “entry-level” jobs. They’re supposed to be a point of entry into the job market. These are the jobs you should have when you’re still in high school and have no dependents, not when you’re trying to provide for a family. Minimum wage jobs simply cannot be “living wage” earning jobs, unless they are worth that to the employer.

    But when the government raises minimum wage to an amount deemed to be a “living wage,” they are sending the opposite message to minimum wage workers. Minimum wage sends the message that, regardless of the value you produce, you deserve to earn a living. This is factually incorrect, and no amount of legislation can change that.

    Those currently in low-skill jobs would benefit far more from trying to better themselves to get out of entry-level jobs, rather than protesting for a raise. The reality is that the value produced by a low-skill worker may not be enough to make a living. This is not racist or hateful; it is a cold, hard fact. Minimum wage laws carry the implicit assumption that one ought to be able to make a living and maybe even support a few children doing entry-level work. This simply is not the case, and denying the facts doesn’t do anyone any favors.

  5. Minimum wage makes it harder to enter the workforce

    Minimum wage and unemployment

    Minimum Wage and Unemployment (Credit Henry Payne)

    This naturally follows from (2). The fewer low-skill jobs there are, the stiffer the competition will be for the few remaining low-skill jobs. This could be part of the reason why the unemployment rate for people 20-24 years old is still historically high.

If having a minimum wage is a bad idea, then raising it is a terrible one. The problem is, as I said in the beginning, minimum wage has vast public support. Maybe this is because it seems like a compassionate policy for low-skill/low-income workers. And I’m not saying that people who are stuck in low-paying jobs don’t need help of some sort. What I am saying is that minimum wage simply cannot fix the problem of poverty. Ultimately it will make the problem worse.

Politicians have a choice. They can either continue to raise minimum wage, thus driving inflation and encouraging employers to get rid of the remaining available entry-level jobs, or they can get rid of minimum wage and make it easier to get into the job market and acquire skills necessary to get a higher-paying job. It’s easy to appeal to hyperbole about the poor single mother who’s struggling to make ends meet, but ultimately the economy does not care about our tough situations. The only viable path out of poverty is to increase the worth of your labor. As compassionate as minimum wage laws may seem, they ultimately make things worse for everyone, particularly the people they’re supposed to help.