There are currently many calls to raise the minimum wage. In his 2013 State of the Union address, the president argued that we should raise the federal minimum wage to $9 per hour. On the surface this seems like a good idea that would benefit many people, but in reality it would do more harm than good.
Currently, the federal minimum wage is $7.25 per hour. When an employer hires an employee, the benefit of hiring that employee needs to be higher than the cost of doing so. Since businesses operate on a budget, raising the minimum wage may move businesses to hire fewer employees, cut current employees’ hours, fire employees, or raise the prices of goods or services to account for the higher expense of employing people.
What would happen if the federal government put a minimum price on alcohol of $5 per drink at a bar? No more $1 domestics, $1.50 shots, $2 wells, or $2 pitcher nights – all of those would now be $5. Your favorite drink, however, was $4.25 before; now it is $5. Which would you buy?
That’s the predicament that raising minimum wage puts a business in. The choice between a skilled worker that would have been paid $9 per hour to begin with, compared to an unskilled worker that now must be paid $9 per hour, is an all too easy one. The skilled worker is the obvious choice. The unskilled worker had potential for growth, but now has no chance of finding a job; the cost is higher than the benefit.
Let’s revisit the drink metaphor: a minimum price would also affect the number of drinks you’d be willing to buy. You’ll spend less money, meaning that you, and the bars, benefited more when there was no minimum price for a drink.
The employer now will likewise higher less people. If the minimum wage went up to $9 per hour from $7.25, and the employer has $261 dollars per hour to spend, this means they could have hired 36 new employees, but now can only hire 29.
So not only are the unskilled workers out of a job, but the employer is forced to hire 20 percent less people than they would have before – putting even more people out of work. A business has no obligation to hire people; if they can find a way to avoid hiring a person at a cost that would not benefit them, they will – even if it means the owner of the business has to work more.
Suppose a business needed 100 workers to produce its product. If the cost of employing these workers goes up from $725 per hour to $900 per hour, the business would be forced to raise the price of its product by 20 percent to account for the expense of paying the new minimum wage.
Something that would have cost $100 now costs $120 – and if people aren’t willing to pay that extra money, the business has to adjust the amount of products produced.
If the government set a mandatory minimum price on a product, you would either buy less of it or adjust your other expenses to pay for it – and that is not a good thing. Increasing the minimum wage will likewise take jobs from the people who need them most and damage our economy. The president and his supporters should be pushing to create opportunities, not take them away.
Samantha Poetter is a senior in political science. Please send comments to firstname.lastname@example.org