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$15 Minimum Wage: You Can Change the Wage, but Not the Laws of Economics

By Sean Williams - Jun 6, 2015 at 6:29AM

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Seattle and Los Angeles both recently passed laws that boost their minimum wages to $15 per hour. While intended to give minimum wage workers a "living wage," it could have a number of other, less desirable consequences.

Source: Wikimedia Commons user Delphi234. Dark purple represents nominal federal minimum wage, while light purple factors in the effect of inflation in 2013 dollars.

With the exception of marijuana, few issues have sparked the attention of Americans more than the debate about a rising minimum wage.

The last time the federal government raised the minimum wage, which currently sits at $7.25 per hour, was in 2009. Inflation following the Great Recession has luckily been averaging well below historical norms, but minimum wage workers have nonetheless seen their minimal buying power erode on a steady basis each and every year since 2009.

Workers fight for a "living wage"
The basis of the minimum wage debate revolves around the idea of paying workers a "living wage." A living wage is simply the amount a worker would need to earn on a monthly or annual basis in order to meet what's considered basic living expenses (i.e., food, electricity, and a roof over your head, for example). Right now, that's just not happening for many minimum wage workers. Assuming a minimum wage worker managed to find a 40-hour per week job, he or she would net just $15,000 per year in income -- and that's before taxes are taken out. For context, the federal poverty level in 2015 is $11,770 for an individual.

Source: Flickr user OFL Communications Department.

Now understand that multiple states, and even cities within states, set their own minimum wage levels higher than the federal minimum wage. Washington state offers the highest minimum wage in the country, at $9.47 per hour, and last year, the Seattle City Council voted unanimously (9-0) to boost the cities' minimum wage to $15 per hour, which is to be phased in over the course of a few years. Larger businesses within Seattle will need to comply with the $15 minimum wage law by 2017, or 2018 if they offer health insurance to their employees. Smaller businesses will have until 2020 to 2022 to meet the new standard.  

The Los Angeles City Council just this past week also approved a $15 per hour minimum wage by a vote of 13-1, which is expected to be phased in for businesses of 25 or more employees by 2020, and smaller businesses by 2021.

The benefits of a $15 minimum wage
There are obvious benefits to boosting minimum wage workers' pay to $15 per hour. The most immediate, of course, is that it puts more money in workers' pockets. The point of a $15 minimum wage is to provide enough annual income that workers can afford their basic needs such as putting a roof over their heads and food in their bellies.

Source: McDonald's via Facebook.

A higher wage can also inspire pride in a person's job and improve morale. A worker that's being financially taken care of by their employer is more liable to stick with a company over the long term, as well as be happier. A happy worker is a productive worker, and that could mean an improvement in results for employers.

Lastly, a higher wage gives currently low-income workers disposable income that they may be able to put to work. Retailers, grocers, and a number of other businesses could benefit from this sudden surge in income for minimum wage workers.

Yet, truth be told, you can change the minimum wage, but you can't change the laws of economics behind the minimum wage.

You can change the wage, but not the laws of economics
Open any economics textbook, and you'll be introduced to the basic concept of demand -- more specifically the laws governing demand. If the price of an item increases, the natural reaction to the increase should nearly always be a decrease in demand (the laws of economics aren't 100% accurate, so "nearly always" seems the appropriate verbiage here). In other words, raising the minimum wage to $15 per hour should correspond to a pushback from employers who demand fewer workers.

Could this happen? Actually, it's not a matter of "could," but of "how quickly."

McDonald's (MCD 2.74%), one of the nation's leading fast-food restaurants and a mainstay in Seattle, sued the city in an effort to block the $15 per hour wage increase. Keep in mind, McDonald's is already paying Seattle workers the state minimum wage of $9.47 an hour. McDonald's argued that the wage hike is bad for business, and even purported that it was a violation of the 14th Amendment, which makes it illegal to deny any person the equal protection of the laws. McDonald's has suggested that some of its Seattle-based employees could start being let go this summer.

Source: Pictures of Money via Flickr.

But layoffs are far from the only possible consequence. Economics also teach us that a potential response to higher expenses is simply higher product costs. In short, businesses can simply choose to pass those price increases down the line to the consumer. We're already seeing this, too.

Per KOMO news, a number of restaurants within Seattle's neighborhoods have begun adding wage increase surcharges to customers' bills -- that's on top of a 9.6% sales tax, mind you! Some of these restaurant owners have been kind enough to give the proceeds of the surcharge directly to their staff, but not all restaurant owners are as kind. Others have simply responded by boosting their prices to make up for the rise in wages. A representative of the Washington Restaurant Association told KOMO that of 500 restaurant owners surveyed, a majority would decrease hours, increase prices, or lay off staff as the minimum wage increases each year toward $15.

Lastly, if you were to plot skills and wages on a chart, they should correlate. Higher wages should (theoretically) be reserved for job-seekers with the highest level of, or best, skills, while low-skilled workers should receive wages on the low end of the spectrum. This isn't written in stone, of course, but it's the reason so many high school graduates are now choosing to get a college education.

Dramatically boosting the minimum wage disrupts the natural boundaries set by the marketplace that define the relationship of skill-set to income. If low-skilled workers are suddenly making $15 an hour, it means other workers along the chain will probably need a raise, too. A manager at McDonald's with 10 years of experience that's currently making $15 an hour won't stand for $15/hour within a few years if his or her employees are making the same wage.

The point is medium- and high-skilled workers, as well as tenured workers, will also need commensurate increases in their pay in order to keep the skill-to-pay relationship in harmony. This means even higher costs for businesses that likely haven't been factored in yet.

Source: Flickr user Joe Lustri. 

What might the real cost of a $15 minimum wage look like?
So, what's the real effect of a $15 minimum wage? While I can't say anything with any certainty until the law is fully implemented in 2021 in Los Angeles, or 2022 in Seattle, my belief is that it will result in higher unemployment rates, an extremely tough jobs market, and product/service price inflation like we've never seen before within these cities, as businesses boost prices in line with wage increases.

The $15 minimum wage could also give rise to machines. No, I'm not talking about the Terminator, Arnold Schwarzenegger, fighting an army of futuristic robots bent on the destruction of the human race. Instead, we could witness the beginning of tasks being automated by machines rather than workers. McDonald's has been utilizing touch-screen ordering systems in Europe for more than four years, and who's to say it won't bring that same technology to the U.S. if more cities begin adopting a $15 minimum wage? Tabletop tablets are already a reality at large nationwide chains such as Applebee's and Chili's, so I view it as only a matter of time before McDonald's gets with the times.

Ultimately, by 2025, the minimum wage increase might be completely wiped out by a combination of inflation and a tight and unforgiving jobs environment. I would love for my prediction to be wrong, but the laws governing economics tend to be right more often than not.

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