Recently, several news outlets reported that Vermont is raising its minimum wage and will now become the state with the highest minimum wage in the nation. Seattle is looking to raise its minimum wage to nearly $15 per hour. Before these events dozens of states and cities had already raised their minimum wage above the federal minimum wage of $7.25 per hour. The Colorado minimum wage is now $8.00 per hour and $4.98 per hour for “tipped” employees. This wage is indexed for inflation, so it will continue to rise as the economy expands.
As is often the case, before any of these increases, opponents predicted doom, massive layoffs and closing businesses. In the case of various cities raising their minimum wage higher than the rest of the state, many opponent experts claimed that businesses would flee the cities raising wages.
None of that ever happened.
Why Higher Minimum Wage Doesn’t Affect Businesses
The argument against minimum wage goes something like this:
- Businesses will flee to areas with lower minimum wages
- Businesses will fire workers or cut employee hours
- Businesses will raise prices
- The economy will suffer
The fact is, however, that after all of these states and cities raised the minimum wage, none of these things actually happened.
Businesses Leaving Higher Minimum Wage Jurisdictions
The reality is that there are very specific jobs that pay minimum wage. These jobs tend to be those that can be done with lower skills, and those for which there are many people wanting and/or needing that type of employment. Jobs like this that can be outsourced to other countries where wages are far below the federal minimum wage of $7.25 per hour, already have been. What are left are jobs that cannot be moved, so these jobs cannot “flee” to areas of cheaper wages.
For example, many minimum wage workers are fast food restaurant workers. The guy that owns Papa John’s often complains about laws that may increase his labor costs. He can be as mad as he wants about a higher minimum wage in Colorado than he would like, but there is no viable way for him to deliver pizza from Kansas. There is no way to flee to the lower minimum wage states surrounding Colorado. The same thing goes for janitors, receptionists, landscaping, and any other manual labor. They have to do their jobs in Colorado; they cannot be moved.
Eliminating Jobs and Cutting Hours
This is the argument that seems hardest for people to understand. Businesses with minimum wage employees typically cannot cut jobs or hours. Remember, they pay minimum wage for a reason, to keep costs as low as possible. If it takes two cooks, two cashiers and one manager to run a fast food restaurant, then that’s what it takes to run the place. If you could do it with one cook, don’t you think they already would? Why pay for an extra cook when you are trying to pay the minimum wages?
The same thing holds for something like a janitorial business. If you have to clean an entire office building overnight, and it takes four people to do so, you can’t just cut to three people. Either the cleaning wouldn’t be acceptable to the client, or you wouldn’t finish the job.
In the end, minimum wage jobs are typically filled by minimum staffing. There are no jobs to cut.
Did you notice that you pay more for some things than you did a few years ago? Of course. It’s called inflation and it happens all of the time, regardless of whether or not you increase the minimum wage. An increasing population increases demand for goods. When the supply of goods is elastic (can be expanded) then the supply expands. When the supply in inelastic (you can make any more than you are already making) then prices rise.
Gas prices have risen dramatically in the last several years. These price changes are much more than you’ll see for anything from a higher minimum wage, yet inflation has remained tame. As it turns out, economic growth (or lack thereof) is a much bigger influence on prices than minimum wage labor costs.
For example, a few years ago, rising dairy prices made cheese more expensive. Even though there isn’t necessarily a lot of milk in McDonald’s cheese slices, the rising prices put franchise owners in a pinch. As a result, McDonald’s stopped offering the Double Cheeseburger on its Dollar Menu and replaced it with the McDouble, which is the same sandwich except with one slice of cheese rather than two slices. Earlier this year, McDonald’s abandoned its Dollar Menu for something called the Dollar Menu & More in order to raise prices on certain items. McDonald’s Happy Meals increased in price when nutrition advocates forced the company to include apples in all Happy Meals instead of the much cheaper fries. In other words, costs change, and often increase, for a multitude of reasons. Business figures it out, the economy absorbs the changes and things move on.
In the end, food costs set prices more than labor costs at fast food restaurants. The same is usually true for retail establishments as well. Don’t forget the average retail or food establishment that pays minimum wage sells hundreds of items per day using a couple dozen workers. A price increase of just a few cents covers increased wages for the entire staff.
The biggest thing people forget is that minimum wage employees make up a rather smaller part of the economy. Even most fast food places pay at least slightly more than minimum wage, especially after someone has worked there long enough to prove they won’t be a deadbeat calling in sick all the time. For non-fast food restaurants, over half the employees make a much lower minimum wage that accounts for the customers paying part of their wages as tips.
The biggest ripple from a higher minimum wage comes from those making slightly more than minimum wage. If you were making $10 per hour when the minimum wage was $7.55 per hour and then the minimum wage is $10 per hour, you might feel like you deserve a raise. This does indeed happen. However, these raises are almost never 1-for-1. Someone making $3 more than minimum now might see a 50 cent increase when the minimum wage increases a dollar. This is also one of the reasons that these increases are never done all at once. In Vermont, for example, the current minimum wage is $8.73. Next year, the minimum wage will be $9.60. That’s a pretty big jump, but it still only affects people within a dollar or so of the current minimum. The following year it goes to $10 and the to the $10.50 you keep seeing the headlines.
All of this is basically moot, as the most important factor in the economy is the number of people that are employed, even more so than what they are paid.
Minimum Wage Indexed for Inflation
One of the reasons these increases are so contentious is that they don’t occur for years, and by the time someone decides to play catch up, the increase is relatively large. However, when the wage is linked to inflation, the minimum goes up quietly and without much disruption. Colorado workers saw an increase of just 22 cents per hour this year. That amount is hardly a blip on the overall costs of any business and both prices and staffing can adjust slowly to this change over time.
Where this gets really interesting is all of the states that have not increased from the federal minimum wage will have a larger gap with the states that have increased and indexed their rates. If we accept the fact that these jobs cannot be moved to the cheaper states, then that means simply that the incomes in the other states are lower. Will that make those states lower cost places to live, or just places with lower overall quality of life.
It looks like time will tell, and it won’t take very long to find out.