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They Can Afford It! – Not

In my latest column for AIER I take on the often-heard argument that hikes in minimum wages will not harm low-skilled workers because rich companies “can afford it.” Two slices:

The most obvious error in using the “they can afford it” argument to justify a hike in the minimum wage is that having on hand enough cash to purchase something at a particular price is hardly a condition sufficient to ensure that such purchases will be made. Bernie Sanders, Ro Khanna, and my protesting students presume that if the minimum wage is hiked, Walmart and other employers of low-skilled workers will simply dip into their cash reserves to cover the costs of paying higher wages. But this presumption is mistaken. Even if Walmart has in reserve billions of dollars of cash, nothing compels Walmart to spend any of these reserves on higher wages. The ability to pay for something doesn’t make purchasing that something an attractive deal for the wealth holder. You, I’m sure, can afford to buy baby diapers. But if you don’t have a baby, the ‘affordability’ of baby diapers to you will not prompt you to run out and buy them. The gain you’d get from owning diapers is less than the cost you’d incur to buy them.

And so it is with the employment of low-skilled workers. Because a hike in the minimum wage pushes the cost of employing some workers above the gain the firm gets from employing these workers, the firm adjusts to the higher minimum wage by changing its employment practices to ensure that every dollar it spends employing labor brings in for the firm more than a dollar in revenue. Workers who cost more to employ at the minimum wage than these workers contribute to any firm’s bottom line will not be employed.

This fact holds true regardless of how profitable or rich firms might be. Just because Elon Musk can afford to employ someone at an annual salary of $100 million to daily shine his shoes doesn’t mean that he’ll employ such a person at that wage if the government declares that the minimum annual pay for shoe-shiners is $100 million. Likewise, just because Walmart might be able to ‘afford’ to employ at $15 per hour a worker who generates no more revenue than $11 per hour doesn’t mean that Walmart will employ that person at $15 per hour simply because the government raises the minimum wage to $15 per hour.

There is, however, a deeper economic point: Even companies with unusually high net worth cannot, in fact, afford to pay workers more than those workers contribute to the companies’ bottom lines.


One additional point is worth mentioning: Even if the above analysis using Walmart were wrong – that is, even if the likes of Bernie Sanders and Ro Khanna are right to insist that a hike in the minimum wage will cause none of Walmart’s and other ‘rich’ corporations’ low-skilled workers to be laid off – the case for raising the minimum wage would not be much strengthened. The reason is that many employers of low-skilled workers do not have large net worths. Relatively few local restaurants, local nurseries, McDonald’s franchisees (which are companies distinct  from McDonald’s, Inc.), and local retailers have billions (or even millions) in net worth. Therefore, for the likes of Messrs. Sanders and Khanna to point to the high net worths of companies such as Walmart and McDonald’s, Inc., as a reason why hikes in the minimum wage would have no adverse impact on any low-skilled workers is uninformed and unreflective nonsense.

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