What Are the Real Costs if the Federal Minimum Wage Is Increased?

Jul. 10, 2019
Bob Adelmann

Having never learned, or conveniently forgotten, the "law of unintended consequences," House Democrats are poised to pass their Raise the Wage Act next week. If passed into law, it would more than double the present federal minimum wage of $7.25 an hour to $15 an hour. It would be staged in, reaching $15 by 2024.

It's because those workers (and Democrat voters, it is assumed) "deserve" it. Rep. Steny Hoyer (D-Md.) said that, "Americans who work hard deserve to afford a middle-class life and deserve opportunities to get ahead and help their children get ahead." The first fallacy immediately appears: What if they don't? What if their work isn't worth paying them $15 an hour? Democrat answer: Give it to them anyway.

House Democrats were doubtless overjoyed upon learning that the Congressional Budget Office (CBO) came to their rescue, reporting that mandating that employers pay their people at least $15 an hour, starting in 2024, would boost the pay of an estimated 17 million workers and "could" also raise the pay of 10 million more workers already earning close to $15 an hour. It would also, said the CBO, lift 1.3 million workers above the poverty level.

Ignored were the other costs, including, again according to the CBO, the sending of 1.3 million workers below the poverty level.

Missing from the public conversation was any mention of their ignorance of Frederic Bastiat's "broken window fallacy." Andrew Beattie helps by explaining the fallacy at Investopedia:

In Bastiat's tale, a man's son breaks a pane of glass, meaning the man will have to pay to replace it. The onlookers consider the situation and decide that the boy has actually done the community a service because his father will have to pay the glazier (window repair man) to replace the broken pane. The glazier will then presumably spend the extra money on something else, jump-starting the local economy.

The onlookers come to believe that breaking windows stimulates the economy, but Bastiat points out that further analysis exposes the fallacy. By breaking the window, the man's son has reduced his father's disposable income, meaning his father will not be able to purchase new shoes or some other luxury good. Thus, the broken window might help the glazier, but at the same time, it robs other industries and reduces the amount being spent on other goods.

Bastiat had it right: raising the minimum wage for those who "deserve it" imposes higher costs on others. It's those "higher costs" that would be borne by others that many, including House Democrats, refuse to acknowledge. Or, if they do, they consider them insignificant.


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To its credit, the New York Times did report that the CBO noted that passage of the Raise the Wage Act "would amount to a transfer of income to impoverished Americans, largely from high-income earners. Lower-paid workers would see their incomes rise, mostly at the expense of business owners, who would earn lower profits because of increased labor costs, and other higher-earning Americans, who would pay more for goods and services, like food in restaurants. [In addition] the economy would be slightly smaller than it would otherwise have been."

The CBO calculated the amounts that would be transferred: the Raise the Wage Act, if passed into law, would redistribute income from low-wage workers who would enjoy an estimated $8 billion gain to their family's income at the expense of business owners and higher-income families who would see their income fall by $16 billion. These losses would result from lower business income and higher consumer prices.

There are other costs involved in such a move, many non-financial or economic, but costs nevertheless:

Minimum wage laws violate the Constitution, which limits Congress to the exercise only of certain enumerated powers, none of which permit Congress to pass minimum wage laws;

They violate an individual's right to contract his labor to an employer at whatever wage they mutually freely agree to;

They reduce the confidence in the free market's ability to allocate limited resources, including labor, more efficiently than government;

They raise the spectre of lawsuits by those losing their jobs, some of whom no doubt will claim discrimination under other government laws;

They take jobs away from those whose efforts aren't worth $15 an hour but are happy to work for less;

They force those now jobless to apply for government welfare, thus raising costs to taxpayers;

They violate common sense: If $15 an hour works so well, why not $50 an hour? Or $100 an hour, and make every worker a millionaire? and

They accelerate the robotics revolution as business owners discover that low-wage positions can be done more efficiently and at lower cost than his employees.

While House Democrats appear to have lost touch with economic and political reality, the Senate hasn't, nor has the president. In the House, passage is nearly certain thanks to its temporary control by Democrats. In the Senate, it's highly unlikely that the bill will even come to the floor for debate. President Donald Trump is already on record as saying that, through his Tax Cuts and Jobs Act, he has "already raised the minimum wage."

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Sources:

CBO.gov: The Effects on Employment and Family Income of Increasing the Federal Minimum Wage

The Wall Street Journal: $15 Minimum Wage Would Bring Mixed Fortunes for U.S. Workers

TheBlaze.com: New report shows how many jobs could be lost under $15 minimum wage

TheHill.com: New CBO report fuels fight over $15 minimum wage

The New York Times: $15 Minimum Wage Would Reduce Poverty but Cost Jobs, Congress Told in Report

Bloomberg: Trump Says He's Weighing Democrats' Plan for $15 Minimum Wage

2019 Health & Human Services Poverty Guidelines / Federal Poverty Levels

Investopedia: What is the broken window fallacy?

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