With the recent debate on minimum wages, left wing groups aren’t backing down anytime soon. San Francisco and Seattle have both raised their minimum wages to $15 an hour, beginning a debate about the impact of a drastically higher minimum wage on the national economy. On July 22, Senator Bernie Sanders introduced legislation in Congress that would raise the federal minimum wage to $15 an hour. Supporters of his bill argue that $7.25 is a “starvation wage” and needs to be raised to a livable pay.
While on the surface this may seem like a reasonable way to help alleviate poverty, it is nothing more than economic snake oil. Sanders’ bill fails to account for the difference in purchasing power among states. This is not a ‘one size fits all’ solution; adjusting the federal minimum wage will affect Americans around the nation in different ways. Some locations are more expensive than others. New York City is much more expensive than Cleveland, Ohio. It costs more to live in California, than it does in Oklahoma. According to a national map completed by the Pew Research Center, the purchasing power of metropolitan areas varies drastically by region.
Alan Cole, an economist at the Tax Foundation, mapped the differences of purchasing power by state. In a Washington Post article, Cole stated that “there is a strong correlation between the purchasing power parity data and the minimum wage amount, which shows that local policymakers are actually responsive to the conditions of their states.”
Beyond the variation in purchasing power, raising the minimum wage also puts pressure on businesses. In a Forbes article, Art Carden, an economist at Samford University, described the economic implications of increasing the minimum wage.
“Demand curves slope downward, which means that people wish to buy more of something as it gets cheaper and less of something as it gets more expensive. Supply curves slope upward, meaning people are willing to do more of something as the rewards increase and less of something as the rewards decrease. In competitive markets, minimum wages create unemployment: While they draw more people into the labor market, they reduce the amount of labor companies wish to hire.”
Even more troubling is the fact that government-mandated wages can create unemployment. How? For example, a company has $100 to pay ten employees at $10/hr. If the minimum wage is raised to $11/hr, the company still only has $100 to pay their employees and can retain only nine employees. Therefore, companies could downsize their workforce to adjust to the higher wage levels.
Businesses also have another option to offset the higher prices of retaining costlier employees. Diana Furchtgott-Roth, a former chief economist for the Department of Labor, published a recent article in the New York Times warning about the dangers posed to the labor market by raising the minimum wage. She wrote, “With a $15 minimum wage floor, Seattle will say goodbye to many of its low-skilled workers, most of whom serve the retail and leisure and hospitality sector. They are likely to be gradually replaced by self-order kiosks that use touch screens instead of cashiers in restaurants, and self-scanning checkout booths in drugstores and supermarkets.” A year ago, Panera introduced a new plan to implement store kiosks to online and mobile ordering. This will greatly benefit Panera, but what will happen to their employees? They will have to look for work elsewhere.
Increasing the minimum wage has serious consequences, especially for many of the workers it seeks to aid. Lawmakers should instead look to pro-growth economic reforms to boost both sagging employment rates and stagnant wages for lower-income workers.