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.
Notes
- Investopedia, s.v. “Law of Demand,” accessed April 10, 2016, http://www.investopedia.com/terms/l/lawofdemand.asp
Christopher John Lindsay 
Very straight forward analysis on minimum wage increases. The wage increases haven’t kept up with inflation and productivity since the 70s and 80s. A lot of profits bigger corporations are making I believe are moneys that should actually be worker wages that they have pocketed since they aren’t being forced to pay higher wages. What can workers do about it? Many restaurant workers and other low skill jobs don’t have union power and a lot of people in these situations take the only job they can find. I find that $15 isn’t the golden goose but increases to the minimum wage is needed I believe. I wrote a piece here if you’d like to read it: https://karstenkares.wordpress.com/2015/07/14/minimum-wage-a-compromise/
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As an Australian where minimum wage is standard, it seems absurd to me that someone can’t earn enough money to simply survive on in this day an age in a first world country.
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My brother in law recommended that documentary to me. I will have to order it.
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While I am glad to see you back up your statements on the 15$ minimum wage (as many who fight against it don’t) but I have to disagree. The hightened minimum wage is all about trying to enter the state of the virtous cycle, where new income doesen’t all go to the owners and leaders of companies. Robert Reich does a fantastic job at explaining this in his 2013 documentay “Inequality for all”. It’s a well argued point, but it isn’t as simple as supply and demand.
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It’s funny, there’s a lot of socialists on Word Press. I bought Das Kapital to try and understand their worldview. Actually, that was the same day I bought a copy of the Koran.
Anyway, I try to stay open-minded and appreciate a wide variety of views. Economics is certainly some heady stuff.
Best wishes,
Paul
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Thank you, Paul. I really appreciate your encouragement.
“If Socialists understood economics, they wouldn’t be socialists.” Friedrich Von Hayek
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Well-done! Yes, I find these things best thought of as cycles. The GDP cycle, for instance. We can see the relationships between labor wage and consumer spending. And between labor (as a commodity through reification) and business purchasers.
You are absolutely right about the supply and demand for $15/hr. laborers. As the cost of labor increases, the demand for that labor will decrease (by necessity).
A price floor (like a minimum wage) prevents us from knowing the true market price of labor.
An arbitrary rise in the wage floor threshold should cause quite a bit of chaos for the near term. It will be interesting to know how much products and services have risen in price once the whole system finds its equilibrium point.
–Paul
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Excellent analysis. One wonders why our politicians don’t understand something so basic. Nice job.
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