Study: Minimum wage hikes raise crime
Research has documented time and time again, the unintended negative consequences of the minimum wage. By making it costly to hire some people at certain wages, it leads to job…
Why well-intentioned government policies to help the poor often fail.
In November 2021, St. Paul residents voted to pass one of the strictest rent control policies in the country. Advocates argued that rent control would halt spiraling housing prices and improve stability, especially among low-income renters of color. But the ink was barely dry in the capital city when developers started pausing projects and renters faced imminent rent hikes. The policy has since been loosened to make it more accommodating to new housing supply — albeit only slightly.
But the damage has already been done. Since the passage of the ordinance, St. Paul has seen its building permits plummet, while its neighbor Minneapolis has seen the opposite. And while some developers are ready to get back into the market after these changes, others have left for good, reasoning that the changes were not enough incentive to resume planned projects. The result? St. Paul renters will have to contend with fewer housing units, and with it, higher prices.
But this example isn’t exclusive to rent control. Too many times, well-intentioned lawmakers advocate for a policy to help some disadvantaged group. But in the end that policy ends up hurting the people it is intended to help.
The minimum wage is another well-tested example. Proponents claim that raising the minimum wage pushes workers out of poverty. Yet evidence indicates that in most cases, raising the minimum wage costs workers — especially the young and low-skilled — their jobs, pushing them further into poverty. To the extent that workers do not lose their jobs altogether, they might get their work hours cut, or end up with unreliable schedules.
Nowhere is the harm of minimum wage increases more evident than in the Twin Cities. According to research produced by the Federal Reserve Bank of Minneapolis, after both Minneapolis and St. Paul passed ordinances to gradually raise the minimum hourly wage to $15, job losses occurred, especially in the restaurant industry which almost exclusively employs low-skilled workers.
Why is this the case? Certainly, helping the poor is a noble cause, but the reality is that in the free market, people generally act in their own self-interest. This is not to be mistaken with being selfish. Instead, what economists mean by self-interest is that economic agents are only likely to undertake economic activity when it profits them or make them better off.
The landlord does not rent out a house to be nice, but rather to make money, which he or she uses to spend on other needs and wants. Similarly, businesses do not hire workers out of charity. They get value from employees who produce output, enabling them to make a profit. In the same way an employee does not work just to pass the time, but rather to exchange his or her skills and time for income.
If a company offers too low a wage in comparison to a worker’s skill, that employee would likely quit and find a better-paying job. And if an employer finds that hiring a worker would cost more than the employee’s skills are worth, the employer will likely not hire that person. And if a landlord knows they won’t make money by renting a house, they will likely not invest in housing.
We live in a world with finite resources. However, we have infinite wants and needs, so we must decide how to efficiently and effectively allocate these resources — be it time or money. Profit is the incentive that drives where and how people invest their time and money.
That is, as long as there is a profit to be made in doing so, landlords will invest their time and resources to increase housing supply — which will lead to lower prices — and employers will invest time and resources to hire workers — which will raise wages. It is in their self-interest to do so.
Policies like minimum wage hikes and rent control increase costs for landlords and employers, making it hard for them to turn a profit, which then discourages housing production and hiring. This inadvertently hurts the low-income individuals these policies were intended to help in the first place.
Consider, for example, a teenager whose skill-level only allows him to produce output worth $10 per hour. If the minimum hourly wage is $15, an employer would be losing $5 every hour by employing him. It would not be worthwhile to employ such an individual.
As Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”
People only invest in providing a good or service when there is a profit to be made. Well-intentioned as they might be, most government policies to help the poor — like rent control and minimum wage — disincentivize profit. And that is why they not only don’t work, but often lead to disastrous unintended consequences since they limit productive economy activity.