Minimum wage increase harms economy

By Maxwell Parrone

As a self-proclaimed democratic socialist, one of Bernie Sanders’ campaign promises was a new and improved $15 minimum wage. He believed that no one working full time should be living in poverty.

Bernie's message resonated throughout the disgruntled working class — the group was seeing stagnating wages and little job opportunities, while the majority of new GDP was going straight to the top one percent of earners.

This resulted in a lot of anger towards the “greedy upper class,” who can afford personal yachts and private jets but cannot afford to raise their employee’s wages to a livable wage. If we follow Sanders’ lead and lift the federal minimum wage to $15, anyone working a full-time, 40-hour per week job would have an annual salary of $31,285. While these demands to raise the federal minimum wage may make a lot of sense to the average citizen, those who study economics see that increasing the minimum wage will lead to unemployment and inefficiency.

Because the resources of a firm are scarce, so is the amount of money that a firm can pay out for unskilled labor. When presented with an increase in the minimum wage, the firm must lay people off and stop hiring new people. This can result in massive unemployment in the short-term, the movement of jobs overseas and increased long term automation. To elaborate on this concept, let's consider a hypothetical market between unskilled laborers and a firm that produces rainbow sprinkles:

Let’s say that Rainbow Sprinkle Co. makes $10,000 per hour for producing rainbow sprinkles. After the costs of the ingredients, factory maintenance and other fixed costs of production are controlled, the money that the company has to hire unskilled labor is $5,000 per hour. The company yields $5 an hour in sprinkles from each unskilled laborer, so Rainbow Sprinkle Co. is willing and able to pay 1,000 employees up to $5 an hour to do the work. Each year, Rainbow Sprinkle Co. pays out $10,400,000 to its employees. Each of those 1,000 full-time employees will earn $10,400 annually, which is not enough to live on. After a while, the sprinkle workers demand a higher minimum wage of $15 an hour, so that their job pay is enough to support a family. Faced with this new minimum wage, the Rainbow Sprinkle Co. must pay each employee three times as much as before. It seems like an easy solution, but Rainbow Sprinkle Co. still only has $5,000 per hour to pay for unskilled work. For every employee the Rainbow Sprinkle Co. keeps, it must fire two in order to pay the hourly wage of one. The firm also must pay $15 per hour to people who yield only $5 an hour in profit, making the Rainbow Sprinkle Co. take a $10 per hour loss per employee.

This new minimum wage has many unintended consequences. First, it reduces the overall number of people employed by two-thirds, and also reduces the firm’s efficiency due to that $10 loss per hour per employee. To compensate for this loss, the company will have to drive up the prices of sprinkles. Rainbow Sprinkle Co. will eventually move their factories overseas to a place where there is a lower minimum wage in order to stay competitive. With the new increased cost of human labor, they will spend more money on producing “sprinkle-bots” to take the place of workers. This new incentive to automate and leave the country will further increase the level of unemployment in the sprinkle sector and displace people from their jobs.

While this sprinkle example is not a perfect representation of the economy, it shows us the real-world consequences of the minimum wage. Lifting the federal minimum wage will increase unemployment and prices, push companies overseas and make the automation and replacement of the unskilled laborer a priority for firms. The true economic value of someone's time is the amount of value that can be created in that hour.

As a society, we shouldn't be focusing so much on the minimum wage as a tool to increase the wages of the those with less skills. Instead, we should focus on making an hour of their time worth more money through education.

Bernie Sanders is right — if we raise the minimum wage to $15 an hour, those working 40 hours a week will certainly make much more money. Although this might be the case, I doubt any of that will matter to the masses of people who lose their jobs for good.