Economics is based on a law that is as consistent as Sir Isaac Newton’s laws of thermodynamics—the law of supply and demand. The simplest explanation of the law is when the supply of a good increases at a rate that is higher than demand, the price of the product falls, and when the supply of a product falls or remains stagnant as the demand rises, the price of the product rises.
This concept can be applied to any economic concept in order to determine the price of a product. If the supply of shoes in a given area were to increase dramatically while the demand for shoes remained unchanged, the price of shoes would drop dramatically.
Americans saw this in real time in 2020 as demand for oil plunged in the wake of Covid-19. During the onset of Covid-19 pandemic, travel dropped dramatically which meant demand for fuel fell, but since oil producers were still pumping and refining oil at pre-Covid levels, the price of oil plummeted. The value of a good is contingent on the supply of that good.
If the market were to be flooded with onions overnight, the price of onions would drop accordingly. In order to increase the supply of goods considerably from the level it was currently at, the price to make those goods has to decline. How is this done? Typically goods become easier to produce with either innovation or the scaling back of regulations. Innovation allows for less resources to be spent creating a product which means more products can be produced. The increase in production then lowers the value of the product because production is now outpacing the rate of demand, therefore, lowering the price of the product. Innovation allows for producers to produce goods and services more efficiently than before which then lowers the cost of production, which in turn, causes an increase in the production of that product.
This creates a greater supply of the good thus lowering the price of the good. The same point can be made for regulations. Regulations cause producers to spend excess capital producing goods in ways that are not efficient which in turn raises the cost of production. The increase in the cost of production causes a drop in production because more resources are required to produce a product which means the increased scarcity of the product forces the value to increase, and this causes the price of the product to increase. The minimum wage falls under the regulation category. When firms are forced to spend excess capital on labor, the cost of producing goods increases along with an increase in the scarcity of those goods. This causes the value of the good to increase because demand remains the same, yet the supply of the product decreased. Given all economic forces are determined by the laws of supply and demand, the price of labor should also fall under this category if we are trying to reach market equilibrium. The problem with the minimum wage is that it distorts the markets much like any other government regulation. Instead of spending excess capital to produce more goods, an employer is forced to spend it on labor in a way that the market had not equilibrated, and this means the price to produce goods has now been raised, which in turn, is passed onto consumers.
This leads to a number of problems. First, in an effort to remain competitive with other businesses, companies will try to absorb some of the costs of production. This is something large companies like Amazon can afford to do but also something that is likely to put a small business owner out of business. A small business owner cannot hope to have the price of labor artificially raised while maintaining competitive. The larger companies can absorb more of the cost, therefore, allowing them to eat into the small business’s profit margins making it unpalatable to do business.
Second, for the firms who manage to weather the storm of artificial labor price increases, labor hours will be cut in order to mitigate the increase in production costs. Academy Sports and Outdoors did this back in March when states and localities began locking down. Academy Sports and Outdoors gave each hourly worker a $2 an hour raise, but cut store hours. While the employees were making more per hour, they were really making about the same as before. And what if the wage increase was more drastic across the board? For those who managed to keep their job, they would see an even larger reduction in hours, and those who were already making $15 or more will have to take on the extra work. I will use the example of Academy Sports and Outdoors again. At the end of the Summer of 2020, Academy Sports and Outdoors instituted a $0.50 raise for all hourly employees. When this was instituted, Academy cut hours for part time workers of which increased the workload full time workers had. This resulted in part time workers making about the same amount of money as before, but now the full time workers have more work for the same amount of money.
Third, entry level jobs will evaporate for people who do not already have experience. The fact of the matter is companies like McDonald’s hire low skilled workers for jobs such as cashier because it is cheaper to hire a worker for $7.25 an hour, take the time to train them, and take a chance on them making a mistake than it is to build kiosks that have to be installed and maintained. But, what happens if the minimum wage is raised even just to $9 an hour? In many areas, when McDonald’s began hiring workers at $9 an hour (this was not always done due to minimum wage increases) they began replacing cashiers with kiosks, so instead of having three cashiers and a couple of cooks, they now have one cashier and a couple of fry cooks. Now, what would be the situation if the minimum wage were raised to $15 an hour? Well when the wages of low skilled workers was increased by $2, jobs were lost, rising the wages of low skilled workers by 100% would lead to even more jobs lost. What would effectively happen is all cashiers would be replaced by kiosks and there would be a manager and a cook with a great deal of experience, so time and money does not have to be spent on training and potential errors. A company can afford to take a chance on someone if they do not have to pay above the market price, but the risk is no longer worth it if the price of labor increases exponentially while trying to maintain competitive prices.
Fourth, the price of goods increase. If a firm can no longer make cuts in labor costs to keep down the cost of production, they must now raise the price of their goods. This alone affects the entire supply chain in each market. If the price of production in the farm industry increases, then the price of corn increases. If the price of corn increases, then the price of beef increases. If the price of beef increases and the price to ship the beef increases, then the price of a hamburger will increase. And this cycle of price increases continues on throughout the entire supply chain until the final product reaches the consumers hands at which point the price has increased numerous times due to the multiple industries that were all affected by the artificial wage increase. By raising the minimum wage, it creates unknowable amounts of inflation.
Last but not least, inflation hurts the workers the minimum wage was trying to help. Even if you managed to endure the hour reductions, layoffs, the businesses shuttering, and the reduction in hiring, you now have to worry about the artificial increase in the price of goods taking away your buying power. Sure, you may have managed to keep your job and are making more money than you were previously, but you now realize everything is now far more expensive than it was prior to the minimum wage increase and your savings rate each month has changed insignificantly. And you are one of the lucky ones in this situation. For those who were priced out of the market because of this, they are now further behind than prior to the implementation of the minimum wage, and those who were making $15 an hour or above before the minimum wage have now seen their buying power decrease exponentially. By raising the minimum wage, literally everyone became poorer while you effectively maintained your standard of living. What a terrible bargain.