Sunday, November 26, 2006

A Minimum Wage Increase: Some Expert and Not-So-Expert Analysis

Becker and Posner offer their sophisticated criticisms of a proposed minimum wage increase. Here's my less sophisticated take on it.

If the minimum wage is increased by legislation, the costs faced by industries who employ minimum wage workers will increase (as may those of industries who employ other low wage workers whose wages increase through the "ripple effect"). These increased costs will have one or more of the following effects (it could be some combination thereof):

  1. The affected companies will increase prices to cover the increased costs
  2. The affected companies will accept lower profits
  3. The affected companies will reduce their costs by firing some workers or deciding not to hire some people they had previously planned to hire
Those who support the minimum wage increase may argue that #2 is the appropriate outcome. However, this possibility is somewhat deceptive. While it is possible that companies could choose to reduce their profits, the long term effect would be diminished investment in the industry due to lower profit rates. Thus, ultimately there would be job losses as a result.

If #1 occurred, it is likely that the increased prices would have a big impact on the poorest of the poor, as jobs that rely on minimum wage workers often disproportionately cater to them (e.g. fast food).

And finally there is #3. If #1 and #2 are not chosen, then the most likely result of the minimum wage increase will be job losses for those in low wage jobs.

So, anyway you slice it, a minimum wage increase will be bad for large numbers of poor people. Granted, those who keep their jobs at the higher wage will be better off (assuming prices don't rise too much). But it's a mistake to ignore the others who will be affected.

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