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Yet Even More on the Minimum Wage

Here’s a letter to a high-school social-science teacher who e-mails me frequently.  He’s always very cordial, but never a fan of anything that he encounters here at the Cafe.  (BTW, there are many other reasons – beyond the one mentioned in my letter – why the ‘firms can simply raise their prices’ argument fails.)

Mr. Mike Sweeney

Dear Mr. Sweeney:

Thanks for your recent e-mail.  You accuse me of being misled by “simplistic theory” to “miss how minimum wage raises the income of underpaid workers.”  You believe that if all employers are forced by legislation to pay higher wages, “none will fear raising their prices [of what they sell] so they can recover the higher cost.”

With respect, it’s you who gazes too simplistically upon reality.

For example, you miss the fact that different firms use different mixes of low-skilled labor with higher-skilled labor (as well as with with non-labor inputs, such as self-checkout cash registers).  A hike in the minimum wage, therefore, will raise the costs of firms using a high proportion of low-skilled workers by more than it raises the costs of firms using a lower proportion of low-skilled workers.  So firms using many low-skilled workers – because they compete not only with each other but also with firms using fewer low-skilled workers – won’t be able to raise their prices to fully cover the cost increase imposed on them by the minimum wage.  These firms, in turn, will over time scale back their operations or adjust their production methods to use fewer low-skilled workers.  Low-skilled workers’ employment prospects will shrink.

The “simplistic” economic theory that you criticize reveals this important reality – a reality that you miss, and one in which legislation ostensibly meant to help low-skilled workers winds up harming them.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030