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By James D. Miller : BIO| 10 Jan 2021
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Democrats want to raise the federal minimum wage from $5.15 to $7.25 an hour. But raising the minimum wage will harm unskilled workers. If the price of gas went up by 40%, people would buy less gas. Similarly, if the wages businesses must pay low skilled workers increased by the proposed 40%, then companies will buy (i.e. hire) fewer workers. Other commentators have already explained how the minimum wage destroys jobs. This article argues that even if raising the minimum wage caused a firm to hire exactly the same number of workers as before, the higher minimum wage could still harm the company's employees.

Fewer Advancement Opportunities

Let's say an unskilled worker, whom I'll call John, is worth $7.25 an hour to an employer. John went to a horrible school that didn't teach him any marketable skills. John, however, is ambitious and hopes to advance in the job market by getting on-the-job training from an employer.

Two firms want to hire John. The first offers him a job that pays $7.25 an hour but provides no useful training. The second pays $5.25 an hour, but offers training and could someday lead to a management position. This training is costly for the firm to provide, but the firm is willing to give John the training since it is paying him only $5.25 an hour.

A $7.25 an hour minimum wage could, however, stop the second employer from giving John his costly on-the-job training. If the business couldn't pay a lower salary in return for providing training, then the firm most likely wouldn't give John the training.

Perhaps, one might argue, the second firm would still provide the on-the-job training to make John a more valuable employee to them. But there is no reason to assume that John would stay at his job after he has received his training. And even if he did stay John would likely demand a higher wage from his employer.

Many firms offer lower wages in return for providing increased training and advancement opportunities. A minimum wage would restrict firms' abilities to offer lower salaries and so would reduce the benefit to firms of providing such benefits to their low skilled workers.

Worse Working Conditions

I predict that if the higher minimum wage is enacted bosses will yell more at their low skilled workers. By forcing companies to pay higher wages to low skilled employees, a higher minimum wage reduces the net value of these workers to their companies.

A higher minimum wage also reduces the total number of jobs available to unskilled workers. Consequently, raising the minimum wage makes it easier for bosses to replace any unskilled workers who quit. Under a higher minimum wage, therefore, bosses lose less if their mistreatment of employees causes some workers to leave. So unskilled workers who keep their jobs after a minimum wage hike can expect their bosses to treat them a bit worse than before.

Hire Different Types of Employees

Imagine that for some strange reason the government (A) forced Smith College to pay economists $1 million a year and (B) forbade Smith College from reducing the number of economists it employs. Well, for $1 million a year Smith College, my employer, could do a lot better than to have me as one of its economists. Under this $1 million a year minimum wage for economists, therefore, Smith would quite rationally do everything it could to fire me.

For any given wage it offers, a firm tries to hire the best workers it can. At a wage of $7.25 an hour firms will be able to attract higher quality workers than they can if they offer only $5.15 an hour. Consequently, even if the minimum wage doesn't cause a company to hire fewer workers, it will cause the firm to hire different types of workers.

Perhaps today some firm could hire either an inner-city teenager or a middle-class grandmother. The firm might prefer to hire the grandmother but, let's say, the grandmother won't work for less than $7 an hour whereas the inner-city teen would accept a wage of $5.15 an hour, so the firm hires the teen. If the minimum wage is raised to $7.25 an hour, however, the firm would quickly replace the teen with the grandmother. So even in the extremely unlikely case that a higher minimum wage doesn't reduce overall employment, it will likely reduce employment among our nation's lowest skilled individuals.

James D. Miller writes "The Game Theorist" column for TCS and is the author of Game Theory at Work He keeps a blog here.

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