The Plight of the Minimum Wage in a Rising Cost Economy

When discussing the concept of raising the minimum wage in the United States to, say, $15 an hour, it is essential to clarify that not every good or service is dependent on federal minimum wage labor. Only a fraction of workers indeed make the minimum wage, and in most decent-sized cities, the prevailing wage is considerably higher.

Regional Variations and Cost of Living

The primary issue with changing the federal minimum wage is its large regional variations in the cost of living. For instance, raising the minimum wage does not take into account the specific cost of living in different parts of the country, where the prevailing wage can be much higher.

Moreover, the increase in the minimum wage may lead to the automation of jobs that were previously filled by unskilled labor. This reality is evident when observing trends in the food service industry, where the traditional roles of teenage employees have transitioned.

Impact on Consumer Prices and Unskilled Workers

Assuming a wage increase of $3 per hour, a full-time worker would see a weekly increase of $120. Assuming that the cost of a Big Mac increases by $0.25 and other consumables increase by roughly the same amount, the worker would likely remain at the same or even gain slightly.

The common conservative argument that higher wages equate to higher consumption is largely false. In reality, the increase in minimum wage benefits the worker for every hour worked but does not necessarily lead to proportional increases in spending. A worker who buys a Big Mac every hour for 40 hours would be affected by only a $25 increase over a month, which is negligible.

Taxes and the Burden on Workers

It is crucial to remember that minimum wage earners do not actually receive the full wage due to deductions for taxes. This means that while their hourly wage might increase, a significant portion of their income is retained by the state and federal governments.

Outcomes of Minimum Wage Increases

There are four potential outcomes of increasing minimum wages:

Automation: High wages could lead to increased automation, reducing the number of low-wage jobs required to produce the same amount of goods and services. This could benefit those who keep their jobs while increasing unemployment for those who lose their jobs. Price Increases: Higher wages could result in price increases for services, such as food. In this scenario, low-skilled workers might benefit from lower prices of goods they don’t produce, such as aircraft, while becoming more expensive for those they do produce, such as oranges. Wage Redistribution: Other workers might also receive raises to compensate for the higher wages of unskilled workers, leading to overall wage stagnation but with higher inflation rates. Costs Passed to Employers: Employers might absorb the higher labor costs, potentially leading to reduced profits. This is the scenario advocates hope for, where low-wage business owners, such as the owner of two KFC franchises, become poorer.

The most likely scenario is a combination of automation and price increases, leading to a mixed outcome where some low-wage workers benefit while others lose income. Higher skilled workers may face increased costs for goods and services without corresponding pay increases, exacerbating income inequality.

Conclusion

Raising the minimum wage is a complex issue that cannot be solved by a one-size-fits-all approach. Addressing the challenges of unskilled labor in a rising cost economy requires a nuanced understanding of regional differences and the potential impacts on various segments of the workforce. By carefully analyzing the potential outcomes, policymakers can strive for a balanced solution that benefits all workers without causing unintended consequences.