Last week, fast-food workers staged a one-day strike in 60 U.S. cities to demand a minimum wage of $15 an hour, more than double the current federal minimum of $7.25. The nationwide effort, “Fight for 15,” was organized by the Service Employees International Union.
I feel bad for those who are relegated to a minimum-wage job. I feel worse for those who want a minimum-wage job as a steppingstone to something better and would be denied that opportunity by the imposition of a higher wage floor. A higher wage is great for the workers who keep their jobs; it isn’t so great for those who wouldn’t get hired because McDonald’s Corp. (MCD) starts asking its existing workforce to do a bit more. With a higher minimum wage, the cost of automating certain tasks suddenly becomes more affordable.
Raising the minimum wage to lift people out of poverty has the opposite effect. So why does an idea that violates the most basic principle of economics keep coming back to haunt us? It may appeal to our humanitarian instincts, but as social policy, it fails the test.
Let’s start with the basics. As with any good or service, there is a supply of, and demand for, labor. Supply and demand meet at what’s known as the equilibrium price. The unintended consequences of setting a cap or a floor on prices have been well documented. Many economics textbooks use New York City’s rent-control laws to demonstrate the effect of price caps: a supply shortage as landlords keep apartments off the market rather than lease them at a below-market rate. The lack of supply also gives them the power to charge above-market rates on apartments that aren’t subject to rent control.
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