Issues & Insights

Who Does A Minimum Wage Hike Really Help — The Poor, Or Those Who Push It Out Of Self-Interest?

McDonald's workers strike for minimum wage. Photo: Fibonacci Blue, licensed under the Creative Commons Attribution 2.0 Generic license (https://creativecommons.org/licenses/by/2.0/deed.en).

Supporters of every effort to raise the federal minimum wage, including the one just announced, go to great lengths to insist it will have no adverse effects on low-skill workers. They claim the poor will all benefit. In fact, however, many it is supposed to help will be harmed, while the self-defined “altruists” who support it will be helped.  

Apartheid-era South Africa provides a useful template. White labor unions backed “equal pay” laws to supposedly help black workers. But they dramatically raised the price of hiring blacks, with less education, skill and productivity, in addition to being discriminated against, relative to whites. Black unemployment jumped, harming many supposed beneficiaries, but white union members gained by the resulting increasing demand for their services.

The key to such self-interested altruism is to artificially raise the price of a substitute. Consider an analogy to ice cream and frozen yogurt.

Suppose City A passed a law raising the minimum allowable price of a scoop of ice cream there to help their sellers. The price would rise. But customers would buy less ice cream as a result. Total earnings of ice cream sellers in City A could go up or down, depending on how much the quantity sold fell relative to the price increase.

And even if total earnings rose, those sellers who bore disproportionate sales losses or are forced to close would be harmed. But that higher price of ice cream will increase the demand for frozen yogurt, benefitting all those sellers with higher prices and sales.

So if we wanted to predict who would back a higher minimum wage out of self-interest, we would look to those producing substitutes, even if supposed beneficiaries are harmed. Where do we find them?

Unions and their members benefit from raising the national minimum wage because it will increase the cost of low-skilled labor, which is a substitute for union labor. For instance, if the minimum wage was $8 and the union wage was $40, employers give up 5 hours of low-skilled work for every union worker-hour utilized. But if the minimum hourly wage were increased to $10, employers would only forego 4 hours of low-skilled work for every union worker-hour employed.

Employers who already pay more than the increased federal minimum wage also gain from increasing the labor costs of rival employers in their region. For instance, Wal-Mart, which already pays more than the federal minimum, backs a higher national minimum wage, but has opposed raising state minimum wages above what they pay.

Workers, whether union or non-union, and their employers in high cost-of-living areas, where virtually everyone earns above the federal minimum wage, especially where the current state minimum wage is higher, also gain from the increased production costs imposed on rival firms where wages are lower.

Because all those substitutes for minimum-wage workers will see increased incomes, so will others along their whole supply chains. They too would find it in their interests to support increases, and local boosters and politicians would also gain from joining the bandwagon benefitting themselves.

All these groups with their self-interests aligned with higher minimum wages can also publicly signal being pro-worker and compassionate without it costing them a cent. And the harder they push the “this is all about helping poor workers” line, the more others who don’t examine the issues carefully can also be convinced to support higher minimum wages.

The large number of people who are economically connected to substitutes for minimum wage workers routinely claim their support for raising the minimum wage is altruistic concern for poor workers, but their incentives reveal that it can be at least as well explained as concern for themselves. Unfortunately for the former, however, as Mark Wilson summarized it, “evidence from a large number of academic studies suggest that minimum wage increases don’t reduce poverty levels.”

So poor workers are not helped as a group, and many poor individuals are harmed substantially by higher minimum wages, and the only hypothesis consistent with the facts is advancing one’s own interests.

Gary M. Galles is a professor of economics at Pepperdine University. 

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1 comment

  • No one ever thought about the impact of COLA!

    With one stroke of the pen, the do-something Legislature has bought the votes of the high wage earners and the financially challenged. Higher wage earners are rejoicing as the impact on their wages will be fantastic in the next 10 to 20 years. Our elected officials never look at the unintended consequences that higher wages for everyone will benefit the rich more than those on minimum wage.

    The new minimum wage crusade will result in ALL wages increasing. Cost Of Living Adjustments (COLA) to wages favors the well paid: For example: a 3% COLA adjustment for someone making $100K will result in their compensation being almost $135K in 10 years (a $35K gain), but for someone making $30K, their compensation will be $40K in 10 years (a 10K gain). The unintended consequence of raising the minimum wage would be $25K more for the well compensated as the financially challenged continue to fall further behind.

    Throwing money as a band aid to cover the rising costs for everyone buys votes for reelection, but does not heal the wound of WHY the costs are rising.

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