The Overblown Minimum Wage Debate

Over the past few weeks I have observed considerable hype and fear about the possibility of the federal minimum wage being raised to $15, from $7.25/hour it stands currently. The likes of Peter Schiff and others keep repeating stale taking points about how a $15 minimum wage will hurt youth employment and hasten automation. Somehow, we are led to believe that a $15 minimum wage will tank the economy and or render millions of people jobless, as the tweet below and similar ones warn:

Fast food workers were on the front line in the fight for a $15 #MinimumWage. They succeeded in raising wages but they also succeeded in pricing themselves out of jobs. Higher labor costs increase returns on the capital investments required for automation.https://t.co/jAVcxiSjoA

— Peter Schiff (@PeterSchiff) April 18, 2021

I consider myself to be a ‘wage agnostic’. I don’t think a $15 minimum wage will boost the economy, as the left claims, nor do I subscribe to the doom and gloom either. I don’t think anything will happen, and the worst fears of the doom and gloom crowd will fail to come true. These people tend to have really bad track records at predicting things. They warned in 2008-2011 that the stimulus programs and the QE would cause hyperinflation, and again 2020 regarding Covid stimulus, and neither of those predictions of high inflation, dollar collapse, crisis, double-dip recession, etc., came true, so why should we believe them when they say that a $15 minimum wage will also have severe deleterious economic consequences when they have been wrong about everything else too?

So here are my thoughts about the $15 minimum wage and why it is not a big deal.

Contrary to a popular misconception that the increase from $7.25 to $15 is sudden, it is spread out over a 5-year period, the first adjustment being a $9 minimum wage by the end of 2021 or 2022 (depending on when it’s ratified), and then increasingly gradually every year thereafter. This gives businesses plenty of time to adjust.

Rather than hurting the economy, a higher minimum wage tends to cause a gradual shifting higher of price levels, much like in algebra when one shifts a graph along the y-axis. Such inflation may be undesirable if the goal is price stability, but it’s better than the economy crashing as some fear.

Not many workers are affected. Only 2% of workers earn the federal minimum wage, although raising the minimum wage would presumably cause wages to rise uniformly, but it’s not like the US economy is so dependent on minimum-wage labor that raising the minimum wage would cause a crisis or major disruption.

What about automation? Such fears are overblown, too. What a lot of people do not understand or fail to realize is, is that automation does not imply that there must fewer workers. Fast food restaurants have been using kiosks for years, as far back as 2009 I can recall, yet fast food employment has risen since then. The reason is, it’s not like such kiosks replace all the cashiers, but only some of them. Second, there are people who still need to work in the kitchen, and also, help customers with using the kiosks and to repair the kiosks when they break.

Similarly, food stores have been using self-checkout machines for years, and rather than eliminating all employment, instead the employees who would have worked the cashiers are employed to overlook the machines and to help customers use the machines and to ensure customers do not try to cheat the machines by ‘forgetting’ to pay, or intentionally or erroneously scanning an expensive item as a cheaper one. So wrong again, Schiff.

What about falling youth employment? Such fears are also overblown. Libertarians and mainstream/thinktank conservatives tend to give the same tired arguments that are easily refuted as I have done, and reuse the same graphs, such as the one below in which one can see that rising youth unemployment coincided with the minimum wage rising. What is omitted from such analysis is that the raising of the minimum wage in 2008-2009 from $5 to $7 also coincided with the Great Recession, so it’s much more likely that the recession is to blame for youth unemployment rising, not the minimum wage rising (as it’s said, correlation does not imply causation):

Zooming out, there appears to be little correlation between the minimum wage and youth unemployment, and, in fact, since 2009, the youth unemployment rate would continue to fall in spite of the minimum wage having been raised in 2008. Spikes in the youth unemployment rate correlate much more closely with recessions compared to increases in the minimum wage, which by comparison seems to have a minimal effect.

In 1996 and again in 1997 the minimum wage rose to $5.15 from $4.25, yet, as shown above, the difference between the youth unemployment rate (which is always higher than the overall rate) and the overall unemployment rate did not rise, until only in 2001, coinciding with the 2001 recession. In spite of the threat of a higher minimum wage under Biden, the difference between the youth unemployment rate and general unemployment rate keeps making news lows. This goes against the narrative of companies cutting back youth hiring in anticipation of a higher minimum wage.

Overall, this show why one should always question well-worn narratives and arguments. Always do your your own research to try to verify and substantiate claims independently instead of just taking other people’s word on issues. Although we cannot assume that a higher minimum wage will help the US economy, there seems to be scant evidence the other way.