The Biden administration has asked Congress to pass an increase in the federal minimum wage to $15 an hour by 2025. There are three unfortunate side effects to any increase in the minimum wage: To increase the minimum wage hurts small business, increases unemployment and disincentivizes the hiring of unskilled labor. Additionally, the minimum wage means something different to every state.
It is important to recognize that any increase in the minimum wage— particularly the federal minimum wage—will harm small businesses more than it will harm large corporations. They often operate on smaller profit margins and don’t have the capital to subsidize wage increases.
According to the bureau of labor statistics only about one percent of all annual workers, or 1.6 million workers make a wage at or below the minimum wage. However, the Congressional Budget Office found that raising the minimum wage to $15 an hour by 2025 would result in an overall decrease in employment by about 1.3 million.
Raising the minimum wage is known to cause unemployment because it prices certain laborers out of the market. When the wage rate is forced above the actual value of the labor, businesses either go under or find a way to get the same amount of work done with less labor.
“These workers may well feel that their most “essential need” is a job,” Thomas Sowell said in his book “Applied Economics.” “Reducing the number of jobs available by pricing inexperienced young workers out of the market solves no problem for these workers.”
The artificial raise in the cost of labor caused by the minimum wage tends to harm the very people the policymakers claim to be helping— unskilled laborers. As Sowell points out, many of these are young laborers who are simply trying to gain valuable experience. A time-series study found that a 10 percent increase in the minimum wage reduces teenage employment by one to three percent.
Finally, even if a particular minimum wage could be said to work for one place, it will not work for another. Cost of living, median income and other factors play a role in what the impact of minimum wage laws will be on a particular state or city.
While minimum wage laws are purportedly meant to help low-skilled laborers make a livable wage, in reality they put small businesses at a disadvantage, decrease overall employment, and hurt low-skilled laborers.
Even though the minimum wage has seldom risen, the percentage of hourly workers making the minimum wage has decreased at a relatively steady pace from 13.4 percent in 1979 to 1.9 percent in 2019. Like other prices, wages will rise to the exact value of the labor provided if left unhampered.