A few thoughts on the relationship between employment and minimum wage

Seattle’s Minimum Wage Experience 2015-16

This is a great case study of employment and minimum wage. Most people would agree that raising the minimum wage will decrease employment. Some people are more radical than others. For instance, this guy (or should I say clown?) thinks not having a minimum wage at all would be best. Well, we tried that before and it ended in disaster. Without minimum wage, businesses lowered wages year after year to maximize profits. Less employees took jobs and eventually we were stricken with deflation. From a social perspective, the damage is much worse.

In any event, I have long believed that marginal increases in minimum wage, say, 2% (the inflation rate), are the best solution because it does not shock the economy. As an example, if minimum wage is $10 and you increase minimum wage by 2%, then it is only a 20 cent increase per hour. While workers might scoff at this meaningless raise, the reality is this method is the safest for the economy, businesses, and their job safety. Using my method, employers have plenty of time to adjust other costs before wages reach an unprofitable level.

Also, the notion that employers fire people when wages get too high is overblown. Employers fire people when they are no longer profitable to keep on staff. Obviously wages are a variable in this equation, but the real determining factor is profitability. If demand for products and services is strong then the minimum wage does not matter.

A better argument against minimum wage is that raising minimum wage increases the price of goods and squeezes the middle class as their wages do not increase. This is a great argument because it is a true statement. Businesses typically pass increased costs (or share increases costs) with the consumer. That said, we have gone through significant periods without minimum wage hikes and the cost of goods has still increased meaningfully (we can all remember what a loaf of bread costed 10-15 years ago). Again, this goes back to business operations. Businesses will increase prices to capture the most profits regardless of wages. That said, I am willing to concede that as minimum wage gets too high (what is this level?), there will be negative affects on employment.

This study attempts to answer that question. This study in Seattle shows evidence that up until minimum wage is $13/hour there is not a disemployment effect. That said, it is likely this $13/hour value is inflated because, during the period of this study, Seattle had a strong employment market. This means that low-wage jobs likely had more supply than demand so employers were more willing to pay the minimum wage without hesitation. But, even if this number is overstated by say, $1.50/hour (13%), this would still put minimum wage at $11.50/hour for Seattle without any disemployment effects.

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