The Real Consequences of Raising the Minimum Wage


June 20, 2016 12:30PM

Minimum wage hikes increase unemployment, reduce hours worked, and increase the cost of goods and services. Proponents of raising the minimum wage seem to sincerely believe that by simply mandating a higher wage, people’s incomes will increase with no other adverse consequences whatsoever. However, this is a shortsighted, superficial view. Every economic policy enacted by the state carries with it a broad range of both intended and unintended consequences. As the French economist Frederic Bastiat said, a true economist must look not only at the immediately seen consequences, but at all of the unseen, unintended consequences as well.

The “seen” consequence of the minimum wage is that a select few, higher-skilled workers may receive pay increases. The unseen consequences, however, go much further than that. The money from the pay increase that some workers receive as a result of the minimum wage increase must come from somewhere. But where?

Business owners, much like workers, need to make an adequate living. They do so by providing a good or service, which provides value to society as a whole. The reward for all the new value they create comes in the form of business profits. However, a mandated wage hike is a large cost increase, which will in turn decrease profits. So, in order to preserve the profit levels they were receiving prior to the minimum wage hike, a business must do one of the following things: decrease its labor cost by either firing workers or reducing the hours they work, pass the impact of its newly increased cost of labor on to the consumers by raising the prices of its goods and services, or replace some of the activities employees do with machines. This is what economic theory says will occur, but is this what happens in reality?

The answer is a resounding yes. The city of Seattle provides a stark example: the city council recently raised the minimum wage from an already steep $9.32 an hour to between $10-$11 an hour for all businesses in the city. The results couldn’t be clearer: the city’s employment has fallen by more than 11,000 workers. This graph shows just how severe the impact has been:

seattle unemployment

This is a perfect example of businesses responding rationally to a minimum wage increase by simply laying off workers. These results hold all over the world, as this study from Germany indicates: a minimum wage increase there decreased employment levels by 2% and caused a similarly-sized decrease in the number of hours laborers could work, thus decreasing their income level. There is also clear empirical evidence of businesses passing the wage increase on to the consumer by increasing its prices, as this study from the London School of economics shows. Businesses increase the prices consumers like you and I pay in direct proportion to the size of the minimum wage increase. Finally, there is clear evidence of employers substituting people for machines in response to minimum wage hikes. Wendy’s announced that it will be firing all minimum wage employees and replacing them with self-serve kiosks.

As all of this shows that the unintended consequences of a minimum wage hike has negative consequences that vastly outweigh the slight pay increase for a select few workers.