If you pay them, they will come – Bad arguments for minimum wage hikes

Last week, I wrote about how restaurant owners in New York City have responded to minimum wage hikes by cutting back on the number of hours of labor they buy. I quoted CBS at length but left out a couple of points. These included a common argument in favor of minimum wage hikes.

A wage hike would help put money “into the hands of people who have no choice but to spend it,” said Heidi Shierholz of the Economic Policy Institute.

This is a common argument in favor of minimum wage hikes. They boost the economy and make everybody better off. It rarely comes from anyone with any experience of actually covering a payroll.

Consider how this is supposed to work. One a given day, the government hikes the amount a business has to pay its workers by $Xph. Its ok, people like Ms Shierholz argue, because those workers will will knock off work, pull up a stool at the bar, and hand it right back over in exchange for a Bud Light. Sure, the businesses costs have increased, but so have its sales, though it isn’t clear how this makes anyone better off. Except for Bud Light. Dilly Dilly.

But this assumes that these businesses have the cash necessary to meet this increased cost laying around unused in the first place.

That might be the case for big businesses. And, in the mythology of minimum wage hikes, it is big businesses who pay for them.

But, in the real world, that is not always the case. In Saint Paul, for example, which is in the process of hiking its minimum wage, research by the Citizens League shows that the city’s large employers, such as Allina Health, Ecolab, HealthPartners, and Securian, already pay the majority of their workers at least $15 per hour. The employers who would be impacted by a $15 minimum wage are primarily nonprofits and franchise and small businesses; the independent bookseller whose margins are being squeezed by Amazon, the immigrant store owner competing with Target and Walmart, or the nonprofit trying to give a disabled worker a break. How likely is it that they have piles of cash sitting around to meet sudden increases in costs mandated by politicians?

To think that minimum wage hikes will work the way Ms Shierholz imagines and not simply lead to employers cutting hours or workers, you have to assume that businesses do not face this cash constraint. And, if you assume this, why stop at $15ph? If businesses can meet any politically decreed increase in their costs, why not $33ph?

“Don’t be so silly,” is the usual reply, “Nobody is suggesting that”. Well, some are. But, if you believe that businesses face no cash constraint why is it silly? If a constraint exists at a rate between $15ph and $33ph, why not between $7.25ph and $15ph? There is no reason why the cash constraint should suddenly appear at a minimum wage rate above $15ph. It exists for some firms, mostly small ones, at levels below that too. That is why the balance of empirical literature “shows that minimum wages pose a tradeoff of higher wages for some against job losses for others”.

Support for minimum wage hikes is about as close to belief in Milton Friedman’s mythical ‘free lunch’ as you will find. They seem to offer the prospect of benefits for the poorest paid for by a few who can afford it anyway. Both theory and evidence show that this is just not the case.

John Phelan is an economist at the Center of the American Experiment.