Raising unemployment: why $10.10 won’t help

In his State of the Union address, President Obama stated that he was in favor of raising the national minimum wage to $10.10 per hour – a 39% jump from the current wage of $7.25. The President stated, “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty.” As inflation has continued to increase over the years, wages have not, resulting in a price level too high for those in low-paying jobs. However, economic forces suggest that raising the minimum wage is not the right answer.

I have previously stated here that an increase in the minimum wage would raise price levels and accelerate inflation in the U.S. In this post, I will instead focus on the loss of employment that a minimum wage increase would bring.

The fundamental theory behind labor demand is that as wage prices increase, businesses will demand fewer workers. When this demand is less than the supply, or total number of workers available at that wage, there is unemployment. When there is already unemployment (even exceeding 8% in more than seven U.S. states), an additional increase will further reduce demand while supply increases. The result? Fewer jobs and more unemployment. Dr. Joseph Sabia, an economist at San Diego State University, quantified the potential effects of the wage hike in this article in the Wall Street Journal today.

“[A raise to $10.10] could result in a nearly 16% reduction in low-wage jobs”

Mr. Sabia’s research shows that a 10% increase in the minimum wage could result in a decrease in available employment by 2.1-4.2% for young, minimum-wage workers. A jump of nearly 40% could be crippling in a slowly recovering U.S. economy. As the wage rate goes up, small businesses in particular have monumental increases in labor costs. Often, they must choose to lay off workers, shorten work hours, or raise prices. All of these options are devastating to the working class, as even those who keep their jobs must pay more for their goods and services.

How would a $3 raise in the minimum wage effect a typical U.S. small business, such as an Ann Arbor restaurant? An MLive article here details the responses from various Ann Arbor and Jackson small business owners, including Daniel Pratt of Ann Arbor’s Hard Knock Grill:

“If you’re paying a dishwasher $10 an hour, then cooks and other staff, who might have a higher skill set, are going to expect a similar increase. An $3 increase (per hour) a person would be a drastic, drastic change.”

And how would Mr. Pratt accommodate this change?

“Ultimately, prices would have to be raised.”

Dan Lopez, owner of local restaurant Lopez Taco House, would choose the other probable solution. “We’ve been slow lately anyway. I’d have to make cuts.”

Whether from raised prices or decreased employment, small business owners and low-income Americans won’t be the winners from the President’s proposed increase in minimum wage.

3 thoughts on “Raising unemployment: why $10.10 won’t help

  1. schultka

    I definitely agree with the argument you make. While minimum wage workers may desire a higher pay in order to support their families, it would be hard for the government to do this without increasing everyone’s wages altogether. Highly skilled workers have received a lot of schooling in order to make the salaries that they do and it would be unfair to raise minimum wages without raising these highly skilled workers’ wages as well. Just as you stated, if wages were to increase, businesses would then have to raise prices in order to compensate for their losses. As a result, this might decrease consumer spending and hurt the economy overall.

  2. Corbett

    I think this and your other post “To make more, you’ve got to pay more” are fantastic explanations for why minimum wage laws are the most absurd thing ever. What I think is most interesting about minimum wage supporters is they think it will solve the problem of income inequality, but I honestly don’t see that as a problem. You pointed out that as the poor make more (the dishwashers), the rich will be paid more (the chefs). There will always be poor people and there will always be rich people. In my mind, the more important issue is income mobility – how can the dishwasher successfully become a chef and make more money

  3. cjamesj

    I think this is a very relevant topic, and is something I have personally blogged about in the past. I have continuously made arguments in the past that align with yours, arguing a minimum wage spike may decrease hours worked a week and keep employees from getting benefits.

    However lately I wonder if these fears are warranted. I could see the immediate results reflecting our current predictions however, I am starting to feel the effects may be reversed over time. I think the best way to answer this question is increase the minimum wage in test cities that are representative of the nation as a whole. This is something major corporations already due when testing projects before launching them to the entire country.

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