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.

[Gay State Conservative]

Minority unemployment would skyrocket.

[Organic Panic]

#5 is all you need to know.

[freedumb2003]

When this whole up the minimum wage thing got started there was a video of a vending machine that makes gourmet burgers.

OK libs, go for it and watch the uneducated idiots who made bad life choices get replaced,

Of course that is the true lib endgame - total reliance on the gummint

[rktman]

Well, after all, they want their share of the increased “profits” that the evil management folks are placing on consumers. It’s only fair right? For some reason they apparently never think of overhead. Just the mansions that the board of directors live in. Been on both side of the fence in the unions and managing union employees. Some of the folks get it. Others, not so much. Management/admin is ALWAYS trying to screw them over. Be happy you have a job during this “recovery”.

[2ndDivisionVet]

Minority unemployment is already at 50% in some demographics.

[Ooh-Ah]

Many years ago when I worked for the DC Wage Board I learned that Union contracts had their wages tied to the Minimum Wage. In other words, raising the minimum wage hiked MANY wages!

[cableguymn]

and THAT is why libs want to raise the min wage..

the people actually making it are just pawns in the game.

[Paine in the Neck]

Set the minimum wage to $X/hr.

The consequence of that is to make it illegal for anyone with skills worth less to the marketplace than $X/hr to be employed.

[Salgak]

The REAL reason for the push on Minimum Wage, is most Union Contracts start their scale at a give amount above minimum wage.

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

[Gabrial]

Use of robotics would accelerate and replace jobs. Personally I would prefer a Big Mac prepared by a machine over one prepared by a germ infested pimpled teenager.

[DannyTN]

1. Encourage more people to seek work whether there is work or not.

That's a good thing. Who doesn't want to reduce the welfare and disability roles? The key is to create the environment where there are jobs for them.

2. Encourage businesses to outsource or seek other means of reducing head count such as employing software or hardware robots.

Yes, import tariffs are important to keep jobs from going off-shore. Robotics is coming and we will be dealing with the fall out sooner or later.

3. Encourage more immigration if businesses cannot find ways to reduce headcount.

Failure to address immigration will ruin this country, regardless of what we do with minimum wage. It might ruin it a little faster if we raise the wage but leave the borders open.

4. Ultimately, businesses would have to hike prices, accept lower profit margins, or find other ways to reduce costs.

That's true. The economy will seek equilibrium again. But it is not super fast. Thus the short-term effect of raising the minimum will have real benefits or consequences.

5. If businesses chose to hike prices it would put upward pressure on price inflation. In turn, unions would demand still more wage hikes.

Unions are unions. A zebra is not going to change it's stripes just because you put in a minimum wage hike. Policy should not be based on what unions might or might not do.

6.If businesses chose to eat the costs, it would put negative pressures on the stock market.

Probably. But if the flow of funds to greater numbers of individuals results in increased demand in the marketplace, that would result in positive pressures. Hard to know which will win in the short term or long term.

Everybody in our country would be playing by the same rules, but raising it without restoring the import tariffs is crazy and will result in more off-shoring.

[KenD]

Actually, I've just recently been to Sydney, Australia where the minimum wage is nearly $20/hour. It is very clear that a high minimum wage, in part, causes prices of everything to go up. So, what has happened there is, prices have gone up to the point where the CURRENT argument THERE is that "The minimum wage isn't a living wage, we need to raise it."
They are chasing a phantom. NO amount of increase in minimum wage will make middle class families out of those in the lower economic strata, ONLY hard work, promotions and raises will do that.
Another impact of the high minimum wage where I was is that the cost of a home is WAY above what young families can afford... that is if they wanted to buy the pretty poor housing I saw... old, run down 2 bedroom 1 bath homes hear train tracks for $480,000.
Why-oh-why can't we learn from what is going on in other countries?

[Pearls Before Swine]

If the minimum wage rises, union contracts that are based on a multiple of the minimum wage would rise in response. Right?

[Lou L]

Probably. But if the flow of funds to greater numbers of individuals results in increased demand in the marketplace, that would result in positive pressures. Hard to know which will win in the short term or long term.

I don't follow your logic here. How would a rise in minimum wage increase the flow of funds to a greater number of individuals? The rest of your points and comments suggest that fewer people would be working. Those that were working would have more dollars in their pockets, but price increases everywhere else (inflation), would allow them to buy fewer, more costly things.

Thus, a raise in the minimum wage would have a negative effect on the marketplace.

[Luircin]

I’d be unable to find a job even more.

[xzins]

Let’s just be done with it, and issue each American a check for a million bucks. Then we’ll all live in paradise city.

[TangoLimaSierra]

Use of robotics would accelerate and replace jobs. Personally I would prefer a Big Mac prepared by a machine over one prepared by a germ infested pimpled teenager.

That is some major truthery.

[DannyTN]

"I don't follow your logic here...."

Well it depends on what the net effect is. You would expect that some employers who are willing to pay $7.25 won't pay $10. And so some jobs will be lost. But we don't know what percent that is.

Let's say the economy has 100,000,000 minimum wage jobs at $7.25, and the minimum wage results in a 50% decrease in those jobs. Those jobs were earning $725,000,000, now you have 50,000,000 jobs earning $10 so that class of jobs after the wage increase is earning $500,000,000. Total wages in the economy dropped by ($225,000,000). In this scenario, you ended up with fewer people working and total wages is less to boot. That's definitely negative for the economy.

But lets assume that only 10% of the minimum wage jobs gets cut. That's leaves 90,000,000 working at $10/hr for total wages of $900,000,000. Total wages went up by $175,000,000. The initial effect is fewer people working, but more total wages flowing into the economy. Those workers may be more likely to turn around and spend those additional wages. Which could fund another 17,500,000 $10 jobs. Resulting in a net increase in employment.

There's a muliplier effect on the wages. Basically the same money muliplier that occurs in banking. Those wages get spent creating wages for others.

Thus the effects of raising the minimum wage are uncertain, and could be a negative or a positive to the economy.

[DannyTN]

"I don't follow your logic here...."

Well it depends on what the net effect is. You would expect that some employers who are willing to pay $7.25 won't pay $10. And so some jobs will be lost. But we don't know what percent that is.

Let's say the economy has 100,000,000 minimum wage jobs at $7.25, and the minimum wage results in a 50% decrease in those jobs. Those jobs were earning $725,000,000, now you have 50,000,000 jobs earning $10 so that class of jobs after the wage increase is earning $500,000,000. Total wages in the economy dropped by ($225,000,000). In this scenario, you ended up with fewer people working and total wages is less to boot. That's definitely negative for the economy.

But lets assume that only 10% of the minimum wage jobs gets cut. That's leaves 90,000,000 working at $10/hr for total wages of $900,000,000. Total wages went up by $175,000,000. The initial effect is fewer people working, but more total wages flowing into the economy. Those workers may be more likely to turn around and spend those additional wages. Which could fund another 17,500,000 $10 jobs. Resulting in a net increase in employment.

There's a muliplier effect on the wages. Basically the same money muliplier that occurs in banking. Those wages get spent creating wages for others.

Thus the effects of raising the minimum wage are uncertain, and could be a negative or a positive to the economy.