By Steve Gillman

I am the rare people who has a subscription to Mother Jones and Forbes magazine at the same time. I like to read widely, and that (for me) means reading articles that come from many different perspectives and biases. Mother Jones has important stories that just don’t get covered elsewhere–that need to be covered–even if the reasoning is a bit more rigorous in Forbes. In any case, this post is about the harm that minimum wage laws can do, and a recent article by Forbes.com columnist Art Carden. He points out research that shows a loss of employment resulting from every minimum wage increase.

He refers to the policy of having a minimum wage as “interference that destroys wealth, encourages wasteful rent seeking, and hurts exactly the people it is alleged to help.” Others have suggested that economists should speak out against minimum wages because of the enormous harm they do to the poor. Now, a lot more evidence is probably needed to convince most readers to adopt this viewpoint, but I do like to present you with ideas that you may not have been exposed to before, so let’s look just a little bit deeper.

Some of you might pay to have your yard cared for, or at least $20 to have the grass mowed. Now let me ask you a question: What would you do if the government required you to pay $120 to whoever mowed your lawn? My guess is that some of you would stop having your lawn mowed, thus decreasing employment. Now, if some of you chose to pay the $120, you would probably have the grass cut less often, so there still would be less employment. Of course raising the grass cutting wage from $20 to $120 by law is an extreme example, but it illustrates the principle. There is no good argument for why raising it only 50% or $10 wouldn’t also result in less hiring in the long run (unless the new rate was already the market rate and the change in law just brought up the few laggards).

Let’s look at a better real-life market example. Starbucks coffee has about 170,000 employees and made about $1 billion in profit in the past year. Let’s assume that each employee works about 30 hours weekly. If the government required the company to pay $4 more per hour, the company would have an additional $1.06 billion in labor expense. In other words they would be losing money and heading for bankruptcy if they didn’t cut their work force.

Now some would argue that they would just raise their prices. In the long run they would likely do both; cut employees and raise prices. But in the long run if they and Wal-Mart and everyone else does this, how much do those employees who are left really gain? After all, they may see a bigger number on a paycheck, but if prices are higher for most things, are they making more in real terms? If a government could mandate a reality that we like after all, why not just make it illegal to lay off any employee, require that all are paid $100 per hour, and make it illegal to raise prices. We would all be wealthy, right? I will not get into why this would not work, because I assume I have an audience that is smart enough to see some problems with such an idea.

By the way, why do less than 3% of hourly workers actually work for minimum wage, and the other 97% work for higher wages? Because wages are not actually determined by employers. Businesses do not get to decide to pay whatever they like for help. They are subject to the same market forces as everyone else. Try to find someone to cut your grass for $3 if you’re not sure about this. Or try to tell a Farmer that you want to buy tomatoes for a nickel each. He’ll go to other buyers, just as employees will go where they can make more.

I have to stop here to point out that this issue is much more about people’s feelings than about the science of economics. If a hundred studies showed that there was more unemployment with higher minimum wages, people would still favor a minimum wage because they feel there is some “fairness” to it. But who decides what is a fair wage in a free society? Doesn’t everyone who says yes or no to a job make that decision for themselves? Nobody is normally forced to take a job.

The reality is a bit more complex that most people realize. A minimum wage that simply follows current wage trends probably does little harm and perhaps pulls up wages at the low end without too much loss in employment. In other words, if we set the minimum wage at $4 per hour, few businesses would face the prospect of paying more for help than they could afford. But if we mandated $40 per hour the economy would collapse in a matter of months. So as a political matter, few should bother to fight the basic law, and instead seek to have it applied more reasonably.

But even at the current $7.25 per hour there are studies that showed more blacks losing their jobs in 2009 due to the minimum wage than due to the recession. Even here there is a more complex story in the data. Whites did not suffer as much unemployment from the rising minimum wage (it rose to $7.25 in 2009). In part this is due to the fact that more blacks (as a percentage) work at or near minimum wage. But there is also the matter of people’s subtle prejudices. When a businessman has a choice he will (wisely) choose those qualified employees who are willing to work for less money regardless of race or sexual orientation or any other factors. But if he is forced to pay a high enough wage that all or most employees are hired at the same hourly rate, his prejudices (largely unconscious I think) get to make the decisions for him.

For example, as a young man I worked in fast food for a manager who was openly blatantly prejudiced against blacks. But because he had to staff the restaurant and applicants were not easy to come by at the time, he hired anyone of any race who could do the job for the wage offered. Had the minimum wage been doubled there would have been enough applicants that he could have safely indulged his racist views. As an aside, when he was encouraged by these economic factors to hire without regard to race, he soon became best friends with one of the young black men he hired.

We don’t like what this suggests though, do we? In a given historical time people of this or that race will for whatever reason work for 50 cents less per hour than most others, so business people take advantage of that (whether they realize it or not). But is it better to have more people in a given group unemployed, or is there at least some hope that ability will be recognized and prejudice overcome in the very process of hiring and working with people in spite of one’s prejudice?

So there is this tendency for higher mandated wages to allow prejudice to prevail – just one more way in which minimum wage laws can do harm.

The truth “on the ground” is that many people work at low wages as a way to get into the work force, and then their experience warrants higher pay – experience they cannot get if they are excluded from working because of a high minimum wage. This is why you see the number of people working at minimum wage drop with age (at 25 years-old and above it was just 1.4% of the work force last time I checked). A crappy job is a way to get a better job. After all, if YOU were an employer, would you prefer to hire someone with some experience or one with none at all?

The arguments against a minimum wage don’t end there, but the point was really just to open reader’s eyes to alternate ideas and perspectives. If you consider how shocking it would be to most people to suggest the elimination of the minimum wage, and then stop to realize that at most 3% of the population might be affected by that change (and some only barely), you start to understand how emotional rather than rational the political debate is.

Again, my own feeling is that there is little harm done if the minimum just follows the reality, so it never affects more that 2% or 3% of the workers. At that point few jobs are lost and people feel some fairness in not “allowing” employers to pay peanuts (as though the choice is theirs to make–if it was they would pay the same 80-cents-per-hour that some Asian workers make, which we know would result in shutting down their businesses for a lack of workers). On the other end all we have to do is imagine the effects of a $100-per-hour minimum wage to understand the smaller but real effects of more incremental changes that go too fast and too far.

Check out this post as well:

The Value of Labor