June 13, 2018

Markets & Free EnterprisePolicy

How Minimum Wage Increases Actually Hurt Those They’re Intended to Help

By: Chloe Anagnos

Comedian Chris Rock played a character in the early 1990s called “Cheap Pete.” Pete would walk around a convenience store and ask how much it would cost to buy a soda, a pack of gum, etc. Whenever a clerk told him the price, he would respond with, “Good Lord, that’s a lot of money!”

My dad loved this bit, and anytime I would come home with tips from my part-time job in high school, he’d always quote Chris Rock’s character.

When I read that a movement called the Poor People’s Campaign was blocking traffic in downtown Boston to advocate for a $15 minimum wage, I couldn’t help but hear my dad say, “Good Lord, that’s a lot of money!”

Currently, 30 states including the District of Columbia now have minimum wages higher than the federal minimum wage. It’s expected that Arizona, California, Maine, New York, and Oregon will all have minimum wages at or above $12 by 2020.

Cities like Chicago, Seattle, and San Francisco have already implemented minimum wages higher than $13.

Although supporters of an increased minimum wage may mean well, they don’t necessarily understand the unintended consequences of raising the wage.

As Fergus Hodgson reported for the American Institute of Economic Research, “minimum wage legislation harms job seekers with no skills and whose main competitive advantage is a willingness to work for less.”

Hodgson also noted that businesses react to minimum wage increases by reducing payrolls, cutting benefits, and passing on higher costs to consumers through higher prices.

For example, a minimum wage increase is killing the San Francisco restaurant industry. A study by the Harvard Business School found a direct correlation between minimum wage increases and failing businesses.

“We find suggestive evidence that a higher minimum wage leads to overall increases in restaurant exit rates – depending on the specification, we find that a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of exit, although the estimate is only statistically significant in certain specifications.”

It’s difficult enough for young people to start a business, and imposing mandatory minimum wage increases would make it even worse, especially for brick and mortar shops.

In order to foster entrepreneurship and decrease poverty then, it is important to advocate for a government that does not get involved in the day-to-day operations of businesses–whether it be licensing, excessive taxation, and especially wage requirements. A higher minimum wage doesn’t help those in need when the business can’t afford to hire more employees, or afford to stay in business at all.

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