This fall, ten states will likely raise their minimum wages, either due to new state labor department regulations or legislation. These states are trying to make their economies fairer. But what they miss is that a higher minimum wage would widen inequality and hurt the most vulnerable Americans.
Economists agree that raising the minimum wage will help some employees and hurt others. An analysis of California’s higher minimum wage, for instance, found that raising the minimum wage by 10 percent decreased single mothers’ employment by 6 percent. When low-skilled labor is more expensive, employers naturally turn to substitutes like outsourcing or automation. They also cut workers’ hours to maintain profit margins.
Most perniciously, lower-skilled Americans may not be hired at all: if the minimum wage rises to $15 per hour, then McDonald’s isn’t going to lose money and hire more low-skilled staff who only produce $9 per hour of value. A study by labor economist Joseph Sabia found that when California raised its minimum wage to $10 per hour, the cost was 191,000 jobs not being created. Those job losses hit the working poor hardest.
Hurting the Neediest People
While raising the cost of labor forces employers to lay off some workers, it helps those who remain. Unfortunately, those who are helped are the ones who least need it, and those who are hurt are the ones who can least afford it.
Minimum wage workers are often students: 50.4 percent of minimum wage earners are younger than 25. With an average family income of $65,900 per year, these young workers are mostly saving up for a new iPhone. They’re working side by side with low-skilled adults who need their job to keep food on the table.
But younger workers from wealthy families have cultural advantages over low-skilled adults that help them keep their jobs in tough times. They’re often better educated, have the resources to dress professionally, and have been socialized to interact with superiors. They have more connections and social capital — a restaurant is less likely to fire a young man whose father knows the owner.
These employees also have more reliable transportation than their counterparts do. The Brookings Institute notes that in 2011, 60 percent of households without cars were low-income. This matters: public transportation is less reliable and can cause employees to show up late to work. If an inner-city waitress can’t make it to work on time because her bus runs late, she’ll be first on the chopping block when her restaurant needs to downsize.
Young workers from wealthier families are more likely to keep their jobs than their low-income counterparts. If the minimum wage rises and a firm has to lay off 1,000 workers to make ends meet, poorer Americans will bear the brunt of the losses. Duke University researchers found that when the minimum wage rose, adults are pushed out of low-paying jobs by better-educated teenagers. The group with the worst career prospects are losing their jobs, while the group with the best career prospects are not.
Minimum Wage Hikes Especially Hurt Minorities
It’s not just unskilled adults taking losses: minorities of all ages are disproportionately punished by higher minimum wages. The first minimum wage law—passed as part of the New Deal, in 1938—was motivated by racism. At the time, one congressional supporter argued, “That contractor has cheap colored labor…and it is labor of that sort that is in competition with white labor throughout the country.” Because black workers were paid less than white workers were, the minimum wage was seen as a way to prevent “cheap colored labor” by pricing black Americans out of a job.
Even in the twenty-first century, raising the minimum wage results in twice the layoffs for black teens as for white teens. A comprehensive study of 16- to 24-year-old males without high school diplomas found that raising the minimum wage led to unevenly distributed layoffs. When the minimum wage rose by 10 percent, white teenage employment dropped by 2.5 percent. Black teenage employment dropped by an astonishing 6.5 percent.
Poorer, minority employees suffer disproportionately from these laws while young, white workers from wealthier families reap the rewards of higher wages.
Minimum Wage Laws Advantage Big Business
The minimum wage also creates another kind of inequality: wage laws like these make labor more expensive, and multinational corporations can bear these costs better than smaller competitors can. Corporate giants have higher profit margins, so they can pay higher wages if they need to.
They also have the resources to automate. In response to rising labor costs, Wendy’s announced plans to install ordering kiosks in 1,000 of their stores. McDonald’s is unrolling touchscreen kiosks in all 14,000 stores, starting with cities and states with the highest minimum wage. Bulk orders of expensive kiosks aren’t an option for the mom-and-pop burger joint down the street.
Neither is raising wages to comply with the new law. Smaller companies often have tiny margins, so they’re the first to be driven out of business. When Seattle raised its minimum wage, mom and pops were hardest hit.
This explains why big firms like McDonald’s endorse raising the minimum wage. It’s unlikely that cold-eyed executives were visited by three Christmas ghosts and decided to pay their staff more. If that were the case, they could simply raise wages. Rather, McDonald’s leadership realized that a higher minimum wage would squeeze their smaller competitors, entrenching their market dominance.
For McDonald’s and other big corporations, a higher minimum wage is just another corporate protection to lobby for. They have an incentive to push for a higher minimum wage, because it hurts their smaller competitors more than it hurts them.
Early minimum wage proponents knew what they were doing, by pricing “undesirable” workers out of the labor force to perpetuate minority poverty. Let’s not finish their work for them.