Wednesday, April 19, 2017

Minimum wage hurts poor people in a new way

new working paper from HBS finds that for every $1 increase in the minimum wage, the probability of restaurant failure increases by 4-10%.  Moreoever, as zerohedge points out, the restaurants most likely to fail are those that serve lower-income workers:
... low-income workers don't just lose their jobs when minimum wages are hiked...they also lose access to cheap casual dining options as lower-rated, cheaper restaurants are much more likely to fail when their costs are artificially raised.


  1. This blog contribution brings to light a different side to the minimum wage fight that I think a lot of people don’t realize. Wages can’t be increased without something else being compromised, in the stated case it was increased costs at restaurants ultimately inducing unemployment. Another article I read (Neumark), claims that policies addressing low income families as opposed to low wage families and using the earned income tax credit would be more effective at reducing poverty. Neumark also clarifies that most of low wage employees are teenagers not in poor families.

    The earned income tax credit seems to be more effective because it isn’t based on wage but instead on family income and the structure. This makes it more accurate because it is based on more specific information, such as if the mother is a single woman or not.

    Neumark, D. (2015, December 28). Reducing poverty via minimum wages, alternatives. Retrieved April 19, 2017, from

    Reisman, G. (2014, April 14). How minimum wage laws increase poverty. Retrieved April 19, 2017, from

  2. The raising of minimum wage represents a sunken cost fallacy. The idea of raising minimum wage so that those who earn such wages, can have more money to bring home, is actually doing the economy more harm than good and it is not only affecting those that make the minimum wage, but hard working citizens that have worked at educating their selves and learning trades and skills to generate a better and steady income for their selves and their families. It is these middle class workers, that will not see their employers raising salaries or wages as a means of equity adjustment, and this hurts these individuals as companies already do not necessarily increase pay for the never ending increases in cost of living and inflation.

    Raising the wage, while yes, puts more money into the Cashier’s hands at Burger King, will then raise the prices of the food offered at the restaurant. Customers will begin seeing increases in the cost of purchasing items as the corporation will need to find ways to make up for the additional labor expenses. Additionally, the corporation will seek out ways to cut in other areas- benefits, health insurance, less vacation time, cheaper products and skimpier meals. These hurt the customers and also the employee. Additionally, employers will likely hire less individuals and over work those on board as additional means to cut labor expense. So this means less jobs for individuals actually seeking employment and increases in unemployment rates.

    For a country that has a stellar education system, it is also un-rewarding those that pursue graduating from high school at a minimum, as well as impedes the determination for individuals to seek out post-secondary education. Why should they bother to obtain a degree and get their self in loan debt when they can simply work at their local Wendy’s?

    Soergel, A. U.S News & World Report: Pay wars; Would a higher minimum wage help or hurt workers? Retrieved from: on 4/20/17

  3. How is it that a higher wage would hurt low-wage workers? It’s the law of unintended consequences.

    The idea that a minimum-wage increase helps to lift poor families out of poverty hasn’t been supported by results.

    Research from economists at American University and Cornell University in 2008 showed the many state minimum-wage increases between 2003 and 2007 did nothing to reduce poverty rates. And economists at Ohio University found the federal minimum wage didn’t decrease poverty, and may actually have increased poverty for certain subgroups.
    Raising the minimum wage is a formula for causing unemployment among the least-skilled members of society.

    The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the smaller are the quantities of goods and services demanded and the number of workers employed in producing them. These are all propositions of elementary economics.

    My thinking on where things should move going forward in terms of efforts to improve incomes and opportunities at the low end of the income distribution comes back to the more theory-driven analysis. When you think about this from the perspective of economic theory, you're steered in this direction of realizing that the appropriate response to stagnant wage growth at the bottom of the income distribution depends very much on the reasons why wage growth has been stagnant.

    If policymakers really want to help the poor, they should seek to reduce the barriers to job creation, instead of adding to them by hiking minimum wage. The principle here is that we need to look to greater economic freedom, not greater government intervention, as the path to economic improvement for everyone, especially the poor.