On June 20, the Pennsylvania House of Representatives passed a bill to raise the commonwealth’s minimum wage to $15 per hour by 2026. Although the bill is unlikely to pass the state senate, it seems only a matter of time before the minimum wage is raised from its current $7.25 per hour, where it has been since 2006.
Those supporting this bill need to read Henry Hazlitt’s Economics in One Lesson. Written in 1946, it has become a classic of free market advocacy. Hazlitt brings to modern audiences the timeless lesson most famously penned in 1850 by Claude Frédéric Bastiat in “That Which Is Seen, and That Which Is Not Seen.”
The one lesson has two parts. First, any economic action must be viewed for its effect not only on the immediate party but by its effect on all parties in society. In other words, using the minimum-wage proposal as an example, one must view its effect not only on those whose wages will rise—if they still have a job—but by its effect on all of society, including those who may lose their jobs because of the new minimum-wage law.
Furthermore, one must view the effect of the law not only in the short run but also in the long run. Economic interventions take a while to work their way through the economy, maybe years. This is not difficult to understand, and it is amazing that legislation to raise the minimum wage completely ignores the probable consequences.
In the short run, it is probable that some workers’ wages will be raised to the new minimum. It is also probable—let us even say that it is a certainty—that some workers will lose their jobs. No one is claiming that raising the minimum wage will increase jobs. So, Pennsylvania will suffer higher unemployment among low-income workers. Higher unemployment leads to increases in unemployment compensation claims. However, unemployment compensation payments run out over time. Then, these low-income workers will be forced onto public assistance. They will remain there until their marginal productivity is at least equal to the new minimum wage, which is much higher than the stated wage due to taxes of various kinds.
Of course, idle hands are the devil’s workshop. It is not reasonable to assume that young, unemployed, vigorous men will do nothing. Despair will drive some to work in the unregulated shadow economy, which would include criminal activities such as drug dealing and theft.
Ah, but we are looking only at the impact of this pernicious legislation on the worker. How about the rest of society? Let’s start with the employer of minimum-wage workers. To the extent that these employers cannot continue to employ low-productivity workers at the higher minimum wage, they will be faced with existential decisions. Some employers will go out of business. Others will continue in business at some reduced level. Others may need to invest expensive capital in automation. (Recently, my restaurant dinner was delivered to my table by a robot!)
There’s always some risk in these investments, not the least of which is that automation may turn out to be more expensive than originally assumed. If the business owner cannot pass along the full cost of this higher expense to the customer, the owner may decide to close their business. What about the rest of society? The customer’s disposable income is no longer sufficient to meet the demands of higher-cost goods and services. He must cut back somewhere. Even if he reduces his savings in order to maintain his previous standard of living, less capital will be accumulated for maintaining his lifestyle in the future. Business in general will suffer from a diminution of capital once all these reductions in savings are added up.
There Is No Upside to a Higher Minimum Wage
There’s no such thing as a free lunch nor a cost-free mandated increase in some necessary business expense. There is no upside to an increase in the minimum wage. If there were some benefits, why stop at fifteen dollars per hour? Why not twenty dollars? Why not a hundred dollars? If twenty dollars per hour sounds OK but not a hundred dollars, what is the correct number? Please, do not bring up the argument that the lower-paid workers need the money. For one thing, we’ve already established that many will become unemployed if the minimum wage increases.
Furthermore, the fact that many workers chose to work at the current minimum wage establishes the fact that they made a free choice. These workers either chose not to work at a different job paying a higher wage or were unable to qualify for a higher-paying job at this time. Chopping off the bottom rung of the employment ladder on which these workers stand is tantamount to a crime perpetrated by the state. It deprives potential workers of learning on-the-job and proving themselves as they become more productive and thus worthy of higher pay. Most of us started working in life this way. I certainly did.