In the United States and Canada, many municipal, state, and provincial governments are raising the minimum wage to $15 in the hope of reducing poverty and income inequality. Unfortunately, good intentions do not always produce good results. Raising the minimum wage to $15 will create winners and losers in the job market because of a basic economic principle: the law of demand.
According to the law of demand, “all other factors being equal … the higher the price, the lower the quantity demanded.”1 For example, if the cost of an airplane flight to Hawaii increases by 25%, consumers will demand less plane tickets. Minimum wage labour is not immune from the law of demand because labour is a service purchased by companies. If all other factors remain equal, the higher the price of labour, the less hourly units of labour a company will purchase from workers.
The central problem with raising the minimum wage is the government can control the wage, but companies control the number of hours that they buy. The consequence of increasing the minimum wage to $15 is some workers will receive a wage increase with little or no reduction in hours, while other workers will have their hours reduced or be laid-off.
When the government increases the minimum wage, a company has numerous options to reduce labour costs. These include
- Reducing its hours of operation.
- Reducing the number of staff working per hour.
- Hiring part-time employees instead of full-time and no longer paying benefits.
- Relocating to another state, city, or country where wages are lower.
- Investing in labour-saving technology.
Advocates of a $15 minimum wage believe that companies can simply pay for the increased labour costs out of their profits. While many large, successful corporations might be able to afford to pay some (or all) of their workers $15 per hour, this does not mean that all companies can do so and remain profitable, especially smaller businesses. More importantly, if a company cannot make a profit due to increased labour costs, it will go out of business, and workers will earn $0 per hour.
While advocates of a $15 minimum wage believe it is about achieving fairness for workers, forcing companies to pay more for labour has unintended consequences. The most experienced and productive workers might earn more, but inexperienced and less productive workers will earn less. At $15 an hour, there are many workers that companies will no longer employ (or hire) because they can’t make a profit from their labour. In the private sector, making a profit is more important than what is “fair” for workers. Profits are to a company what blood is to the human body. Without profits, a company cannot exist.
- Investopedia, s.v. “Law of Demand,” accessed April 10, 2016, http://www.investopedia.com/terms/l/lawofdemand.asp