President Obama has proposed raising the Federal Minimum Wage from $7.25 to $9.00 per hour, saying that “no one who works full-time should have to live in poverty.” There are of course two ways to bring his wish to fruition. The first is to prevent anyone in poverty from being able to work full time. The other, which Obama probably meant, would be to increase the wages of working full time so that those currently living in poverty will be paid more money. These are also the two areas that need to be examined when considering the effect of minimum wage laws on the economy: the effect on unemployment and the effect on cost of living vs. wage.
The first effect should be obvious. The most fundamental law of economics proves that when the price of something goes up, the demand for it will go down (all other things equal). So increasing the price of labor has the direct effect of lowering demand for jobs. Simply put, unemployment rises with the minimum wage, although the degree of how much is argued.
Then you get the argument that this may be the short term effect, but long term the “extra” consumption will create more jobs as the economy improves. Actually, the opposite is true. The market takes some time to equalize, so the long term effects will be worse than the short term. Employers are given more incentive to find ways to automate and save on labor, which has just become more expensive. If an automatic burger flipper cost $8 per hour to run, it now becomes cheaper than hiring a person to do the same job for $9 per hour.
The consumption argument similarly fails when examined. Increasing the amount of money an employer pays a single employee does not change the total amount of money the employer pays all employees. One person spending $10 does not have any more impact on demand than two people paying $5 each. Because money within the business is simply being reallocated, no net increase in consumption can be expected.
In regard to the issue of cost of living vs. wages, raising the minimum wage also has the opposite effect as what is intended. First, the decrease in demand for labor means that people who are newly unemployed (or unemployable) will no longer receive on the job training they would have received if they were employed (at a lower wage). Time spent in employment increases the value of the employee as they gain experience and expertise. The truth of this should be made obvious by unpaid internship programs. As the value of the employee increases, their wage in a competitive market increases. In this sense, increasing the minimum wage can be compared to raising the price of tuition at a university.
Finally, we get to the people who are not fired, who were being underpaid, and now receive a better wage then they had previously. This too has no net benefit to the economy. In a normal market, there are people who choose not to compare what different employers are willing to pay them (or look for a better job to put it another way). This is just like how some people do not shop around for the best deal. So we are, in effect, giving these people a better deal on their wage by raising the minimum.
This targeted benefit is quickly overwhelmed by the market equalizing. Even ignoring all of the previously mentioned economic drags that the minimum wage creates, you still have the issue of inflation on the cost of living. As a business increases the amount of money it spends to operate, there is a direct incentive to increase the price of their goods. In a vacuum, this will result in the cost of living rising at an equal rate as the cost of wages. Even if the business is operating at a high profit margin, there is no incentive to decrease the profit margin as the cost of labor will rise equally to all employers in the pool.
This can be illustrated by looking at the eight states with the highest minimum wage in 2011 (California, Massachusetts, Vermont, Connecticut, Illinois, Nevada, Oregon, and Washington). Every single one had either an unemployment rate above the National average, a cost of living above the national average, or both. Washington had the highest minimum wage at $8.67 per hour. The cost of living was the 15th highest in the country, and unemployment was 9.3%, above the 9.1% national average at the time. Nevada had a minimum wage of $8.25, and surprisingly their cost of living was below the national average (20th lowest). However, their unemployment rate was 13.4%. Conversely, Massachusetts (minimum wage $8.00) only had an unemployment rate of 7.4%, but their cost of living was the second highest in the country.
All of these factors operate in a complex economic system, and cannot always be measured individually. However, no effect of raising minimum wage ever creates wealth. As a result (which has been measured time and time again throughout history) raising minimum wage does not have the effect of reducing poverty. The people who the program is intended to help actually suffer the worst from it.
Milton Friedman, The Unholy Coalitions of the Minimum Wage: http://www.zerohedge.com/news/2013-02-16/milton-friedman-unholy-coalitions-minimum-wage
Thomas Sowell, Black Unemployment: http://www.youtube.com/watch?v=3ZDcMjz2hVk
Thomas Sowell, Employment and Price Controls: http://www.youtube.com/watch?v=eNrHW1E8hRI
The Wall Street Journal, Strong Support for Raising Minimum Wage: http://blogs.wsj.com/washwire/2013/02/21/poll-strong-support-for-raising-minimum-wage/
Time, Why We Should Raise the Minimum Wage: http://ideas.time.com/2013/02/21/the-promise-of-more-why-we-should-raise-the-minimum-wage/
Libertarianism, Minimum Wage and Workers’ Rights: http://www.libertarianism.com/content/96/Issues
Forbes, Obama’s Minimum Wage Hike: A Case of Zombie Economics: http://www.forbes.com/sites/jamesdorn/2013/02/20/obamas-minimum-wage-hike-a-case-of-zombie-economics/
Forbes, Why Shouldn’t We Increase The Minimum Wage to $20/hour? http://www.forbes.com/sites/quora/2013/02/20/why-shouldnt-we-increase-the-minimum-wage-to-20hour/
Find the Data, Minimum Wage by State: http://minimum-wage.findthedata.org/
Media Matters for America, The Minimum Wage: Myths & Facts: http://mediamatters.org/research/2013/02/15/the-minimum-wage-myths-amp-facts/192692
U.S. Government Accountability Office, Employment, Earnings, and Status of Key Industries Since Minimum Wage Increases Began: http://www.gao.gov/products/GAO-11-427
Daily Paul, Myths about the Minimum Wage Laws: http://www.dailypaul.com/274773/learn-the-facts-myths-about-the-minimum-wage-laws
Minimum Wage, Myths about the Minimum Wage: http://www.minimumwage.com/myths/