A Higher Minimum Wage is a Dangerous Path to Higher Youth Unemployment

Nearly everyone has an experience working at a minimum wage job. Me? I worked as a lifeguard at a neighborhood swimming pool in the summers to put a little extra cash in my pocket. Countless other young adults could tell the same tale: flipping burgers at a local fast food joint to earn a little beer money, folding shirts at a retail clothing story to help put gas in the car, or doing crafts with kids as a camp counselor to help pass the lazy summer days.

Now, many workers in those same industries are pushing for higher wages for their employees. Last week, fast-food workers held a one-day strike in 60 cities demanding that the minimum wage be doubled to $15 an hour. Wal-Mart employees are now organizing to push for much the same thing. The effort is being labeled the “Fight for 15,” and encourages its participants to sign a petition “demanding that workers like us get the respect we deserve.” The strikes follow President Obama’s State of the Union push in which he asked to “raise the federal minimum wage to $9 an hour” in order to “raise the incomes of millions of working families.”

It’s an attractive notion, especially with so many Americans suffering through crippling economic times. But is it really that easy? Can the federal government, with a wave of its policy wand, simply legislate prosperity? If so, why stop at $15 an hour? Why not push for $25 or a $50? Heck, why don’t they just mandate that everyone should get paid what those big-shot attorneys make in New York and pay everyone $1,000 an hour. We’d all be rich!

And while we’re thinking big, why don’t they couple those wage increases with price cuts! Gas prices are really eating into Americans’ discretionary income these days? How about we get back to the good ol’ days and shoot for $1 a gallon? Higher food prices also seem to be putting my wallet on an unwanted diet? Let’s go ahead and make the super market like Dollar Store!

Now that everyone earns more and can spend less our problems are solved right? Right? Wrong. Obviously things aren’t as easy as mandating higher wages and lower costs. Although the idea of being paid more to do the same amount of work is a tempting notion, especially if it could alleviate the scourge of poverty, it comes with sizable economic side effects.

To understand why you just have to look at the basic principle of supply and demand. On the labor side, increasing the minimum wages would increase the supply of, and demand for, labor. But is that really a good thing? As Caroline Baum writes for Bloomberg:

“I feel bad for those who are relegated to a minimum-wage job. I feel worse for those who want a minimum-wage job as a steppingstone to something better and would be denied that opportunity by the imposition of a higher wage floor. A higher wage is great for the workers who keep their jobs; it isn’t so great for those who wouldn’t get hired because McDonald’s Corp. starts asking its existing workforce to do a bit more.”

The basic issue is that companies must obviously earn more than they spend, and workers must produce more than they are paid. If the price of labor is set at $15 per hour, but a worker can only create $12 worth of value in an hour, that person will suddenly find themselves unemployed. As Steven Cruz explains in the Daily Caller, this is especially problematic for young adults:

“History has shown that whenever there is an increase in the minimum wage, those hurt most are the least educated, least experienced, and least skilled workers – usually high school and college students – resulting in only a few benefiting from the increased wages and others losing their jobs.

We witnessed it between 2007 and 2009, when the federal minimum wage rose 41 percent and had a disastrous effect on youth unemployment. The joblessness rate for 16-19 year olds increased by 10 percentage points from 16 percent in 2007, to more than 26 percent in 2009.”

Raising the minimum wage also has potentially disastrous impacts on the cost of goods. Take Wal-mart as an example. Last year, the company made $17 billion in profits on $469 billion in sales. Although that sounds like a lot, after all we’re using dollar amounts that start with “b,” it only works out to about a 3.6 percent profit margin. Economist Richard Vedder estimates that raising the minimum wage to $12 an hour would raise labor costs by $10 billion – wiping out more than half of Wal-Mart’s profits.

That may sound fine on paper, but it would lead to one of two things happening: (1) Wall Mart’s stock plunges, which would wipe tens of billions of dollars’ worth of wealth out of pension funds and mutual funds – which go to ease laborers’ retirements, or (2) Wal Mart could jack up the prices of the goods they sell – which, as Vedder explains, “would lead to a decline in living standards for tens of millions shopping regularly at the world’s largest retailer.”

Mandating prosperity sounds easy. But you’re never going to win the poverty battle by fighting the laws of economics. So rather than pass legislation that gives raises to the 3 percent of workers over age 25 who are earning minimum wage, Washington needs to focus on policies to increase the number of high paying jobs. Unfortunately, in the Obama administration that’s easier said than done.