The political movement in favour of increasing the minimum wage to $15 / hr is very strong right now in both America and Canada. Advocates of the minimum wage hike argue it is time to give low-income workers a raise, and that low paying jobs shouldn’t exist. But they are mistaken. They are wrong about the impact of the minimum wage and wrong that low paying jobs shouldn’t exist.
It is important to understand how the minimum wage works. The economic is not some static thing, where you need to have say 10,000 fast-food jobs and 15,000 construction jobs. It is actually quite dynamic. Take the example of dishwashers in a busy fine dining restaurant. One dishwasher, with ten years of experience, might be able to handle the work of two brand new dishwashers with no experience. So the veteran might command a rate of $14 / hr and the newer dishwashers of $7 / hr. Now productivity doesn’t necessarily have to follow this rigid X # of widgets produced in an hour scale. The experienced dishwasher might only wash and put away 50% as many dishes, for example, but also have abilities to work as a cook or in prep, and do a better job cleaning up. Regardless, it is clear there exists a wide range of skills and abilities in kitchen jobs, which can be expressed as their productivity. And wages tend to mirror productivity. Technically, the upper bound of a workers wage is their marginal revenue product (how much value they produce in an hour) and how close they get to that wage depends on the competitiveness of the marketplace.
So the way that minimum wage works, is if you set it to $10 / hr, instead of the employer being indifferent between hiring two entry-level dishwashers for $7 / hr or the twice as productive experienced dishwasher for $14 / hr, it becomes a clear choice of simply hiring the more experienced dishwasher. The low skilled workers in our example are priced out of the marketplace, and in turn, prevented from becoming experienced dishwashers because they are unable to get entry-level work. This might benefit the experienced dishwasher because there is now less competition for his job, so he can command a slightly higher wage, but it hurts the very people the law purports to help, the low skilled workers.
Many people inaccurately claim that raising the minimum wage will increase prices. This is wrong on two fronts. It is wrong because increasing the minimum wage doesn’t actually increase anyone’s salaries, so labour expenses per unit haven’t gone up. Instead…