According to leading economists, including famed billionaire investor Warren Buffett, minimum wages can actually raise unemployment by giving employers less incentive to hire and more incentive to automate and outsource tasks that were previously performed by low-wage employees. Higher mandated minimum wages also force businesses to raise prices to maintain desired profit margins. Higher prices can lead to less business, which means less revenue and therefore less money to hire and pay employees.
The Push for a Higher Minimum Wage
There is no question it is tough to make a living and support a family on a minimum-wage income. Confounding the issue is the fact that minimum wage increases have not kept pace with the cost of living since the 1960s. Relative to living costs, the value of the minimum wage in the United States peaked in 1968 and has been on a downward trend ever since. The federal minimum wage stands at $7.25 per hour, as of 2015. Had it kept up with inflation and cost of living increases since the late 1960s, it would be close to $11 per hour.
Feeling the pinch of lowered real income, minimum wage employees, as well as advocates on their behalf, have gone to great lengths in the 2010s to raise awareness about the plight of low-wage workers. Several large U.S. cities, including Seattle and Los Angeles, have responded by raising the local minimum wage to $15 per hour.
How Companies Respond to Higher Minimum Wages
In a perfect world, a higher minimum wage would mean nothing more than the lowest paid workers at fast food restaurants, grocery stores, and so forth would make $15 per hour instead of $7.25 per hour. Everything else about these companies' business models would remain the same.
Most economists agree that the world is imperfect and confounded by many other variables that are affected by a minimum wage increase. Most businesses, for example, set their budgets at least a year in advance, designating a fixed amount of money to wage expenses. Obviously, changes in business volume throughout the year can necessitate on-the-fly adjustments to wage expenses. For the most part, companies have a set idea of how much they want to spend on hiring workers.
When forced to pay workers more per hour, companies have to hire fewer workers or assign the same number of workers fewer hours to keep from going over their predetermined wage expense limits. Many companies do just that – or, when possible, they ship jobs overseas, where the per-hour expense of an employee is significantly lower.
Automation is another alternative into which many companies, particularly in cities such as Los Angeles and Seattle, are looking to avoid higher wage expenses. Rather than giving their order to a live employee at the counter, fast food customers may soon input it into a computer, which also accepts payment and even deposits the paper sack full of food when it comes out of the kitchen.
Higher Wages, Higher Prices, Fewer Employees
One of the most important metrics for a business is margin, which is another word for profit. Margin is the difference between revenues and expenses, and any successful business has a target margin it tries to maintain.
When expenses rise, which happens when a higher mandated minimum wage pushes up a company's wage expense, revenues must also rise for the company to maintain its margin. Therefore, many businesses respond to higher wages by raising prices.
When the cost of a fast food hamburger increases to cover higher wages, many customers respond by not buying hamburgers. After all, most people do not eat fast food because it is delicious; they eat it because it is cheap. When customers jump ship, companies struggle to stay in business. Many Seattle restaurants have already folded since the city's $15 minimum wage went into effect. When that happens, those $15 per hour jobs disappear as quickly as they came.