The Costs of Minimum Wage


    There is a concern that forcing wages up through a minimum wage increase will cause businesses to uproot and take their jobs to other countries. This concern is fairly easily answered through the use of a border tax adjustment. When a nation passes legislation that makes certain goods more expensive to produce domestically, usually in the form of a direct tax, an adjustment can be placed on equivalent imports. By treating minimum wage like a tax, the U.S. government could counter outsourcing by imposing a border tax adjustment on foreign imports that pay less than the price-adjusted equivalent of the American minimum wage. This would prevent companies from fleeing overseas to try and take advantage of lower wages.

    There is also the argument that raising minimum wage will cause companies to cut jobs. Jobs get cut because they are unnecessary or inefficient. Either the person at the job is less qualified than someone who wants the job or the job itself has become obsolete. It is hard to have sympathy for under qualified workers because their grip on their job is denying a stronger worker their proper employment. With regards to obsoletion, every single improvement in labor efficiency, since the dawn of society, has turned out to be a good thing. Whether referring to the development of Stone Age agricultural techniques or the replacement of human calculators with mechanical and then electronic ones, reducing the number of people needed to accomplish a given task is always positive for society in the long run.

    I have heard that raising minimum wage will force companies to raise prices. This is a real concern. If companies have to pay their workers more to produce goods, then they may have to increase the price of their goods. However, such an increase could leave them vulnerable to competition. Say, for example, that the price of rubber duckies goes up because the rubber ducky industry needs more money to pay for a minimum wage increase. However, some of the rubber ducky companies don’t raise their prices and, instead, cut the wages of their upper level management. These companies would suddenly have a notable advantage over their competitors and would likely capture huge profits as people flocked to their lower prices.

    Following that last concern, there is the fear that companies will cut the wages of middle income employees, instead of upper level, to finance wage increases for their lower income employees. As with the concern regarding price hikes, such action would make a company vulnerable to competition. Mobility increases with wealth. A janitor living at the poverty level might be unable to afford the costs associated with moving, even if the move would grant access to higher wages. However, a doctor may move across several state lines for a proper raise. Thus, companies that maintain or even increase their mid-level wages while others cut them will find themselves with access to a more productive workforce.

    In addition to debunking arguments against minimum wage hikes, I’d also like to point out a few of the society-wide benefits of such an increase. A minimum wage increase would alleviate some of the financial stress on poor families. You don’t have to be a psychology major to see how less stress could translate into healthier home lives for children and adults. Less stress at home might give poor children better opportunities to succeed in school and other productive activities.

    We have a serious problem with nutrition in the United States. Much of this problem stems from healthy food being too expensive for many Americans. Allowing the poor to loosen their belts a bit could enable them to improve their food quality. Healthier eating leads to healthier bodies which will cut down on the medical expenses of both the poor themselves and the government programs that assist them.

    Finally, raising minimum wage could turn out to be profitable. Most minimum wage employees fall into one of two groups: the poor or the young. Both of these groups are notoriously bad at saving money. Poor families often cannot afford to stash their earnings in a bank while teenagers, due to their general lack of financial responsibilities, tend to burn through their cash for pleasure. The result is that most of the money that goes to these groups is reinvested in the economy. An increase in minimum wage would work like a private sector stimulus package. Every dollar that corporate America lost to a minimum wage increase would be likely to come back with interest and actually increase profits over time. However, this outcome is only possible if all companies pay higher minimum wages.

    Looking at an economic model, it is easy to see how raising minimum wage leads to higher prices and unemployment. However, this conclusion does not account for a wide range of externalities. This does not mean that such models are invalid, quite the contrary: it just means that they should not be used as the sole basis of a policy decision. Models represent reality; they provide insight but not necessarily truth. Certain economic models hint that a minimum wage may cause unemployment and price spikes, but without certainty.

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