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I am pleased to host another student guest post, this time by Ryan Silverman. This is the 10th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

A significantly higher minimum wage in America will damage small businesses, reduce the incentive to invest in human capital, and make it harder to improve living standards.

The current federal minimum wage is $7.25 per hour. However, 29 states and the District of Columbia have set minimum wages above the federal minimum wage.  Kicking off 2016, 14 states began the new year by raising their minimum wage. The nation is trending towards higher minimum wages under the rationale that all workers deserve livable wages. Many activists are fighting to raise minimum wage to $15 an hour, more than twice the current federal minimum wage.  

Minimum wage jobs typically require little to no education, such as dishwashers and cashiers. The supply of minimum wage workers tends to be highly elastic, making each worker easily replaceable. It turns out that over half of minimum wage workers are between ages 16-24, many of whom are not yet financially independent.

It is clear that minimum wage jobs are not intended for those who are in dire need of funds. Minimum wage jobs are intended to provide supplemental income in return for simple labor. Higher wages should serve as an incentive for laborers to invest in various forms of human capital to make themselves more productive in the workforce. If every American could live a comfortable life providing menial labor, and skip the rigors and cost of higher education, our productivity growth as a country would slow down, if not reverse itself.

Many small businesses have already factored the current federal minimum wage into their expenses and would be unable to operate if their labor costs doubled. Any increase in the failure of small businesses would further widen the gap between upper and middle classes. Big businesses will take over the market share of struggling small businesses, creating less competition and more monopolistic behavior. Too many people act as if the set of jobs available is fixed. In the short run the set of jobs available may indeed be close to fixed, and the minimum wage may not seem to affect jobs much at all, but in the long run, the set of jobs available far from fixed. A higher wage will drive many jobs out of existence over the course of ten to twenty years. 

Even for the poor that a minimum wage is intended to help, a substantial fraction of the benefits of a higher wage for those who manage to keep their jobs will be eaten up by the higher prices of goods produced in part by other minimum wage workers. For example, many people on limited incomes shop at Walmart. If Walmart has to pay higher wages, the customers at Walmart, who are themselves struggling, will have to pay higher prices.  

In addition to destroying jobs over the course of ten to twenty years, a higher minimum wage might tempt many people to queue up for jobs with a high minimum wage instead of getting more training. Forgoing training is not only a limitation on the life of the individual, it also deprives society of skilled work that it needs. For example, Emergency Medical Transport professionals do important work. Their services are pivotal to saving lives and require much more education and training than a typical minimum wage worker. If the minimum wage increased while the wage of Emergency Medical Transport professionals stayed the same, there would be less incentive to gain those skills. On the other hand, if Emergency Medical Transport professional wages go up, then these crucial services become more expensive. 

One must also consider the effect on the natural unemployment rate if the minimum wage increases to $15. Fewer workers will have a marginal product high enough to be employed, and more will waste time looking for jobs in scarce supply. The Congressional Budget Office predicts that if the federal minimum wage is raised to $10.10, as many as a million workers could lose their jobs. 

In the long run, I predict a further wealth disparity caused by the ability of large companies and conglomerates to better weather the minimum wage hike than smaller businesses. Small businesses have substantially less operating capital to support their largest expenses of employee wages and benefits. Small businesses will encounter the most difficulties staying afloat with higher minimum wages, particularly in difficult economic times.

Raising the minimum wage might seem to many like, at worst, a relatively harmless political gesture. But for those whose marginal product is below the minimum wage, it can be a nightmare, making it hard for them to find a job. Wouldn’t it be better to let each person choose his or her own minimum wage? But of course that is exactly what happens when there is no minimum wage at all. Next best would be to choose a minimum wage carefully for each demographic group, to make sure it wasn’t too high relative to that group’s marginal product. But a uniform minimum wage is certain to shut some groups out of the labor force–those who struggle the most at finding jobs to begin with. It may be that some of those groups are made up of people who don’t desperately need a job. But if they don’t desperately need a job, they also don’t need an increase in the minimum wage either. And if they do desperately need a job, a higher minimum wage will make it harder to find one.