What Would be the Effect of a Substantial Hike in the Minimum Wage?

Townhall.com ^ | June 30, 2014 | Mike Shedlock

[Kaslin]

In response to 100% of U.S. Employment Growth Since 2000 Went to Immigrants, reader Mike wonders what effect a rise in minimum wage would have.

Mike Writes ...

Hi Mish.

Thanks for a very interesting post. I hope the mainstream media will pick up on this.

Here's a question for you: Do you think a rise in the minimum wage would bring more citizens into the workforce and and reduce the welfare rolls?

By the way, I am against laws that restrict the free will of consenting adults, employers and employees alike. But I am curious about the results of a substantial hike in the minimum wage.

Best,
Mike

Predicting the Results

It is not easy to predict the precise results. People on both sides of the debate cite studies that purportedly support their point of view.

Nonetheless we can say certain things, even if we do not know the final result.

A hike in the minimum wage would:

1. Encourage more people to seek work whether there is work or not. Thus, the participation rate would rise putting upward pressure on the unemployment rate.
2. Encourage businesses to outsource or seek other means of reducing head count such as employing software or hardware robots.
3. Encourage more immigration if businesses cannot find ways to reduce headcount.
4. Ultimately, businesses would have to hike prices, accept lower profit margins, or find other ways to reduce costs.
5. If businesses chose to hike prices it would put upward pressure on price inflation. In turn, unions would demand still more wage hikes.
6. If businesses chose to eat the costs, it would put negative pressures on the stock market.

With so many possibilities, some of them conflicting, it is impossible to predict the precise results. Regardless, interference in the free market is not a good thing. Thus, the overall result of a hike in minimum wage must be negative, regardless of what minimum wage advocates suggest.

[Lou L]

Danny, your argument discounts inflation across the board for all other goods and services from an increase in the minimum labor cost. You can't just look at wages and say there's an automatic multiplier to the economy, regardless of the percentage of jobs lost. And if there's a multiplier from increased wages, there's a negative multiplier for increased costs and taxes. So yes, those still working will have more money in their pockets, but that's negated by increased costs everywhere: housing, energy, food, transportation, etc.

I respect your input, and I agree with your statement that the effects are "uncertain" from such a raise in the minimum wage. Specific effects, yes, but the general effects are well-known. My intuition and logic tell me that it's not an experiment I want to attempt.

[zeestephen]

Re: “A hike in the minimum wage would: Encourage more immigration if businesses cannot find ways to reduce headcount.”

Not sure I understand the rationale for that prediction.

If the minimum wage is $15/hour, no matter how many foreign workers you import, your cost is still $15/hour.

More legal immigration would just increase the number of unemployed workers, and also increase the number of people on some form of public welfare.

[zeestephen]

Re: “So when Minimum Wage goes up, EVERYONE in the Union get an immediate raise.”

I read that again and again here at Free Republic.

Why would any rational business manager agree to a contract like that?

He would have absolutely no control over a political decision that might bankrupt his company.

Also, I had a union job about 25 years ago, in Minneapolis, which was a big union town in that era.

There was nothing in my contract about the minimum wage.

[cableguymn]

You find it alot in public union contracts

[zeestephen]

That does not surprise me.

[bert]

There are many variables that are germane.

I suspect that now, presently, the raise would ultimately be inflationary and that is the goal. To pay for Obamacare, to make it palatable, there needs to be an across the board minimum wage pushed increase.

In the recent past, when we were beyond total employment, the rise in the minimum wasn’t really felt because most were employed at rates at or beyond the increase. That is although the minimum was raised, few actually got a raise.

Today it is different because in theory there are lots of unemployed and there has not been wage pressure on employers. The Democrats began the hue and cry in December 2012 but it has not gained traction. The need to bail out Obamacare is getting serious so the pressure is intense. Several moonbat cities have done their part by increasing the wages locally. If there is no general national increase, they will be in trouble as businesses shed workers to exist.

[DannyTN]

"Danny, your argument discounts inflation across the board for all other goods and services from an increase in the minimum labor cost.... "

Yes it does. It's a simplified argument that also ignores that if there is a change in total wages, that money came from somewhere, and is presumably a drain on investment capital, that could have been invested elsewhere.

You're right that there is a negative multiplier for increased costs and taxes. I think the inflation effects will only negate the positive impact in part. At least in the short run.

But I really think the biggest danger is raising it without restoring the import tariffs. That's telling Joe that his labor costs are mandated to go up 30% but his off-shore competitor Chang still gets to compete in Joe's market with labor costing 1/10th the old cost and faces no increase whatsoever.

[DannyTN]

"Danny, your argument discounts inflation across the board for all other goods and services from an increase in the minimum labor cost.... "

Yes it does. It's a simplified argument that also ignores that if there is a change in total wages, that money came from somewhere, and is presumably a drain on investment capital, that could have been invested elsewhere.

You're right that there is a negative multiplier for increased costs and taxes. I think the inflation effects will only negate the positive impact in part. At least in the short run.

But I really think the biggest danger is raising it without restoring the import tariffs. That's telling Joe that his labor costs are mandated to go up 30% but his off-shore competitor Chang still gets to compete in Joe's market with labor costing 1/10th the old cost and faces no increase whatsoever.

[Cboldt]

The black market would grow, and we’d all be rich! Well, one of those two would happen.

[Alas Babylon!]

#7. If businesses couldn’t compete while doing 5, and couldn’t recoup the costs in 6, they would close, AND ALL THEIR WORKERS WOULD HAVE A MINIMUM WAGE OF $0.00!!!!

[RipSawyer]

The short answer to all of is, if you really believe that a minimum wage creates good results then you should raise it to TEN THOUSAND DOLLARS AN HOUR OR MORE. After all, if it really works then the higher the figure the better, it’s just plain common sense. Strangely no one seems to be suggesting a minimum wage high enough to really do some good, almost as if they know deep down that the minimum wage is just a con job.

In reality raising the minimum wage accomplishes about as much as you can accomplish by dipping water with a bucket to try to create high and low places in the surface of a millpond. All you can do is create some small ripples that soon subside and everything returns to its natural state.