Minimum Wages: Oh, When Will They Ever Learn?

Pete Seeger, folk singer and liberal mouthpiece of the ’50s and ’60s, wrote “Where Have All the Flowers Gone” in 1955.  Progressive folk trio Peter, Paul, and Mary sang their version in 1962.  The chorus line of “Oh, when will they ever learn?” was directed at “The Man” back in the ’60s, the military industrial complex sending young Americans off to war.

In a bit of irony, it’s the modern-day progressives who never seem to learn.  Not about war, but instead about basic economics.

One of the first concepts taught in basic economics is the demand curve.  As the price of something goes up, the demand for it goes down.  And vice versa.  One doesn’t even need an economics class to understand that a $50-million house will not have a bunch of buyers in a bidding war, compared to a much less expensive house.  Or that a sale, lowering the price of something, is a good way to sell more and clear the inventory.

So why is there such confusion about the minimum wage?  A wage is simply the price of labor.  Raise the price, and demand goes down.  And vice versa.  Watch it play out in San Francisco, Seattle, and Los Angeles as small businesses, unable to afford their new cities’ minimum wages, close their doors or lay off employees.

Basic economics.

Borderlands Books, a science fiction specialty bookstore in San Francisco, closed earlier this year, citing the recent minimum wage increase to $11.05 an hour.  “Continuing to pay the higher wage without any corresponding increase in income will expend the store’s cash assets,” claimed the store blog.

Seattle also raised its minimum wage to $11 an hour on April 1.  The owner of Z Pizza in Seattle is “being forced to close her doors, because she can’t afford the higher labor costs.”  Ivar’s Salmon House, also in Seattle, responded to the minimum wage increase with a 21-percent increase in menu prices.  “So that meal that last year cost you $100, today costs you $121,” noted the president of Ivar’s.

Los Angeles has plans to raise the minimum wage by 67 percent over the next five years.  A hospitality consultant, who obviously studied economics, warned, “The only [other] way you can control it is to cut people or hours.”  Meaning those fortunate enough to keep their jobs will end up with the same, or even less, take-home pay than before the wage increase.

Basic economics.

Why the mystery?  The demand curve predicts this.  A higher cost of labor leads to less demand for labor – fewer employees or shorter hours.  Some might argue that the businesses that close would close anyway.  Maybe yes, maybe no.  The low-hanging fruit gets picked first.  The minimum wage increase will most affect marginally profitable businesses.  Mom-and-pop shops.  Small businesses providing a paycheck for local employees.  Not Fortune 500 companies.  With a small profit margin, it doesn’t take much of an increase in costs to turn the balance sheet upside-down, forcing the business to close its doors.

Apple, with about 93,000 employees, could pay a minimum wage of $100 an hour, or $200,000 a year to each employee, and still eke out a profit.  The local pizzeria or sandwich shop cannot.

How about taxes, another cost?  Remember the luxury tax in 1990 levied on new pleasure boats?  The 10-percent additional tax on expensive boats drove demand down to the point that boat-building companies laid off most of their employees.  In this case it was consumers, facing a higher cost, driving demand down by not purchasing a new boat.  The luxury tax actually decreased tax revenue.  Instead of working and paying income tax, then spending their earnings on goods, paying sales tax, the laid off boat builders collected unemployment insurance.

Basic economics.

The demand curve works in the opposite way as well.  Lower the cost, and watch demand go up.  Witness Black Friday sales with long lines before stores even open due to the stores practically giving their merchandise away.  At a government policy level, apply this to welfare.  When the government makes entitlements readily available, essentially free, demand skyrockets.  Hence a record number of Americans on welfare.

Basic economics.

We all understand economics in our personal lives.  No one wants to pay full price; people will stock up when something is on sale.  Why not apply this to labor?

It seems the progressives will never learn.  Feel-good policies, which are great during political campaigns, leave no one feeling good, but instead leave a path of destruction.

Time for Peter, Paul, and Mary to update their ballad with some new lyrics. “Where have all the jobs gone?  The minimum wage has picked them every one.  Oh, when will they ever learn?”

Brian C Joondeph, M.D., MPS, is a Denver-based physician and writer. Twitter @retinaldoctor.