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Minimum Wages Make Jobs Worse

The last few years have seen regular protests across the nation for a $15 minimum wage. There is consensus among all but the most liberal economists that a hike in minimum wages leads to a lower quantity of jobs for low-skilled workers. But it stands to reason that it also has the side effect of lowering the quality of jobs.

For many people, work is already rough. This does not mean work has no value or purpose, or cannot be fulfilling. On the contrary, it has divine purpose. Work is a critical source of happiness and human flourishing and we should take a certain pleasure in our vocations. Yet, people often get paid to work because there is sacrifice involved. It is supposed to be inconvenient, demanding, and sometimes ruthless.

Some of the hardest jobs are low-wage jobs that involve mindless, repetitive, or labor-intensive work that returns few rewards. Contrary to popular belief, hard work itself has little to do with earning a high salary. Those who say this confuse hard work with work ethic, and forget the role that things like talent, planning, education, and opportunity play in getting a person out of a dead-end job. Repeating the myth only keeps low-wage earners trapped and frustrated.

These jobs are low-wage not because they are easy, but because the tasks involved require no experience or special skill, meaning anyone can do them. The fundamental supply and demand curves we learn about in Econ 101 show that if the supply for that kind of labor is high, relative to demand, the price (wages) will remain low. In other words, the more qualified people that are lined up for the same job, the lower the pay.

[pq]Markets, feeling the pressure of unfavorable change, can adjust in a million different ways.[/pq]

On the employer’s side, as the price for labor goes up, the demand for labor (job openings) goes down. This is the basic formula used to show that minimum wages reduce the number of available jobs. However, predictive models such as supply and demand curves can only estimate outcomes with one essential caveat: all else being equal.

The problem with statistics is that they are static; they capture snapshots in time. Supply and demand curves do not chart cause and effect along a time continuum, they simply snapshot two variables in a given situation to predict where a third variable should be (price being one of the three).

Once we introduce the dynamic nature of economic activity over time, the prediction becomes fuzzy. While it is true that immediate reactions to changes may follow expectations, humans are creative forces, and creativity is by nature unpredictable. Markets, feeling the pressure of unfavorable change, can adjust in a million different ways to absorb or redirect costs—I’ll show how below. In other words, all else does not remain equal.

This does not mean costs are erased, only that they are obfuscated, broken into pieces and distributed, making it difficult to determine the real long-term effects of any given change. (Bad public policies, for example, are often celebrated because their initial benefits are clear, while their far-reaching costs are hidden.)

With that in mind, we must account for all options available to the creative employer under the pressure of higher wages:

  1. Do not hire, do not demand more, do not grow
  2. Pass on increased costs to the customer through higher prices
  3. Find ways to cut costs and keep products at the same price
  4. Do not hire new workers, but expect more of existing ones
  5. Hire new workers, but demand more from them

Most objections to minimum wages focus on the first two options—both of which are horrible for any competitive business. If profits are high and competition is low, there may be room to increase costs to the consumer without losing business. Even if margins are tight, this may still be an option so long as the competition falls under the same wage laws. Thus, government regulations—especially at the federal level—can have the same effect as monopolies by raising all prices without fair competition.

The third option is likely to happen regardless of conditions, though added pressure of higher wages will increase this tendency and erase any benefits otherwise gained.

But if a company in a competitive environment wants to keep consumer costs as low as possible, one of the most reasonable responses to a politically imposed wage hike is simply to demand more productivity from workers (options 3 and 4) and make otherwise low-wage jobs much more taxing.

The irony of this conclusion is that the very workers such wage laws seek to help are the ones most penalized in the process—low-wage jobs become harder to come by, and those fortunate enough to find employment will labor harder, but still feel cheated by the company and undervalued in society, because, after all, they are only being paid the “minimum.”