I read an article today in Forbes blaming high unemployment directly on the recent increase in minimum wage. Despite having heard the same thing in basic microeconomics, the concept never sat well with me. So I decided to reason through the logic and see if I could make any sense of it.

I would argue, like most economists, that the primary purpose of a business owner (theoretically) is to maximize profits. How this is achieved or over what timeframe is irrelevant for the point of thought, the goal in general is to maximize profits.

The argument against minimum wage seems to indicate that wages are kept artificially high, which results in fewer people being employed and a generally lower level of service, or increased costs. Business owners, it is stated, will be unable to hire employees because of their additional cost. The concept seems to almost describe a “salary cap”; an employer has more or less a set amount of money that they can spend on labor and they will buy however much labor they can get for that cost.

At first this seems a reasonable thought, a small business owner (the favorite anecdotal evidence) can’t afford to hire a summer teenager to stock shelves because they have to pay them $7.50 instead of the “market price” (presumably a lot lower).  The poor struggling business owner is barely making ends meet and the minimum wage is the straw that breaks the camel’s back.

I think an easy way to look at employees for analysis is to think of the marginal gain that each employee will provide.  It’s easy to see that the first few employees at a store or office are essential – without them there would be no business running at all. An empty space would sit wasting away. If the added benefit of an employee is less than their cost, they will be terminated or never hired.  However, in a world and business environment that is being pushed hard for efficiency, where downsizing is common place – I believe that the vast majority of employers are optimized to provide their desired level of service with the minimal employee coverage that they can.  Employers want a minimal coverage map to achieve their desired level of service, regardless of the wage of their employees.

The largest question remains that if employers are forced to pay their employees more what then will happen to prices and customers? I think this is far more complicated than many would care to admit. A classical argument against the minimum wage would say that businesses would be hurt because if they keep the same level of service, they are forced to charge customers more, which will likely result in their losing of business. I do not dispute this is a possibility, but I do not think it simplifies to something so simple. People who are paid minimum wage are typically least likely to save money, meaning that the increase in prices will be going directly to people who will be spending it. Additionally, I imagine it’s quite likely that many of the people who receive minimum wage spend their money at many of the businesses that pay minimum wage.  Additionally, prices would increase less than the increase in wage because cost of materials would not increase equivalent to the minimum wage (think of the cost in manpower in agriculture which in modern farming is minimal).

Imagine an area affected by minimum wage – fast food. One’s service is focused primarily on the amount of time it takes from walking in the door until food is in hand ready to be consumed. If the line is out the door, the chance of losing customers is very high, the restaurant’s demand is likely quite elastic, a roughly equivalent competitor is usually within reach. Maybe customers will wait in line once, but I would venture their likelihood of returning is pretty slim. On the flip side, if a customer walks into a fast food restaurant and gets their food instantly, they’re probably happy about it, but the owner of the restaurant is probably upset that they’re keeping so many idle people on staff no matter what they’re getting paid.

I recognize that there are derivative issues I have not touched heavily on, but I think I have worked through at least what I preliminarily consider to be the major points. I have tried hard to steer clear of moral issues associated with minimum wage – most business people would write such arguments off as unimportant. However, I believe that the minimum wage is not as cut and dry as economists would try to lead the population to believe. I for one refuse to accept the reasoning that “many economists believe” as valid reason to blindly follow.  Additionally, economics often seems to get tied so heavily in theory and simple graphs of reasoning that it seems to often over simplify the world as it is. What is the real affect of having a society with a huge division in income? In a world where dollar menus are still going strong, it’s hard for me to believe that the minimum wage is causing consumers to pay artificially high prices and turn away from businesses with minimum wage employees.

I’d love feedback — I’m not claiming to know everything or have thought of all issues. Feel free to email me or contact me via some other means!