Has anyone noticed what it costs nowadays to grab a quick and convenient breakfast, lunch, or dinner at an “affordable” fast-food restaurant in California? Neither does California Governor Gavin Newsom, obviously.
NEW: Fast food workers in CA will now be paid the highest minimum wage of any state in the country.
I just signed a bill that will ensure these workers receive the fair pay they deserve. https://t.co/lWbQhHKWaF
— Gavin Newsom (@GavinNewsom) September 28, 2023
In the fantasy world where Gavin Newsom and his friends in the California legislature live, a place where you and your donors can dine at the French Laundry to avoid wearing a mask and drink cheap wine, inflation doesn’t exist.
Unfortunately, inflation does exist, and it especially exists thanks to our benevolent elected officials who tax, borrow, and spend our money with reckless abandon. And it also exists as a result of mandatory arbitrary minimum wages.
Ah, minimum wage laws. Don’t you just love the idea? By the way, when did they pass a minimum crime law in California? Or the minimum homeless encampment law? Did I miss the vote on the minimum traffic law? I must have been too busy paying attention to the debate on the Inflation Reduction Act.
Minimum wage laws, better understood as arbitrary wage floors, are intended to protect low-income workers and promote economic justice. However, they actually have unintended consequences that hinder job creation and cause economic injustice and inequality.
While the aim of ensuring higher wages is commendable, it is vital to critically assess the impact of such laws on employment opportunities for the unskilled in our society, what labor economists call wage compaction, and on inflation, including food prices.
NEW: Gavin just signed a bill that will ensure that a kids McDonald's happy meal will cost $20. pic.twitter.com/9qyX4Eygmw
— J L Fairchild (@J_L_Fairchild) September 28, 2023
People aren’t buying the free lunch pitch by Governor Newsom. The government can give, and the government can also take away.
20 dollar Big Mac combos are gonna be lit!
— Unfiltered☢Boss (@Unfilteredboss1) September 28, 2023
This commentary aims to provide a reality check on this cruel economic fiction called the minimum wage, while exploring some of the negative repercussions for the job market and economic stability for those employees our benevolent politicians believe benefit from such income redistribution schemes.
Lets cut to the chase. A minimum wage law — without a mandatory employment law to go with it — defies the law of supply and demand. But I don’t want to give the, er, good-deed doers in Sacramento any ideas. Still, the most pressing concern surrounding minimum wage laws is the potential for job losses.
By increasing labor costs through legislative fiat, particularly for small family owned businesses, which is what most fast food franchises are, employers are often forced to reduce their workforce or halt any expansion plans.
For example, a study by the Employment Policy Institute shows that raising the minimum wage hurts the least-skilled and least-experienced job seekers the most. This pattern is not exclusive to a single sector; various studies suggest negative employment effects across industries, particularly for smaller enterprises.
According to economists at the Federal Reserve Board and the University of California-Irvine, a significant amount of empirical research shows higher minimum wage laws reduce employment particularly for the least-skilled while having little to no positive impact on poverty rates. This is significant because advocates of minimum wage laws argue higher minimum wages reduce federal benefits paid out to those same workers.
But, again, the problem with this economic argument is that it assumes employers won’t be forced to lay off their most unskilled, and inexperienced workers to justify paying higher employee wages.
Minimum wage laws can also inadvertently lead to compaction, where workers with greater experience or skills earn similar wages to entry-level employees. As entry-level workers see their wages rise without any commensurate improvement in their skills set, or performance, the wage gap between them and more experienced employees shrinks, reducing the motivation for individuals to strive for advancement.
For instance, if a skilled worker is earning just slightly more than a newly hired entry-level employee due to mandatory wage increases, it may discourage them from seeking or staying in jobs that require higher qualifications.
It isn’t so much an economic theory, but an economic fact that increases in labor costs can lead to inflationary pressures. When businesses face higher labor costs due to mandated wage increases, it is common for them to pass those costs on to consumers in the form of higher prices for goods and services.
This scenario particularly affects industries with a higher proportion of low-wage workers, such as fast-food restaurants, as well as other type of restaurants, and also retail. Ultimately, the end result is that the increased cost of living erodes the purchasing power of those affected by inflation, disproportionately impacting those for whom the minimum wage laws were intended to support.
In addition, contrary to the intended goal of fostering wage growth for unskilled, low-wage workers, minimum wage laws may actually suppress overall wage growth. By artificially raising the wages of entry-level employees, employers may have limited resources available to provide raises and advancements to higher-skilled or more experienced workers. This can lead to wage compression, where wage differentials between employees with varying levels of experience and skill decrease.
Consequently, employees who have invested time and effort in acquiring expertise may not see their wages increase proportionately to their contributions, leading to dissatisfaction and reduced incentives to pursue professional development.
While the intention behind minimum wage laws is to promote so-called economic justice and protect low-wage workers from living in poverty, it is crucial to objectively evaluate their potential negative consequences. The evidence suggests that minimum wage laws can have detrimental effects on job creation, skills development, compaction of wages, and inflation.
To achieve economic justice, it is necessary to explore alternative solutions, such as targeted skills training programs, support for small businesses, and earned income tax credits, that address the underlying causes of inequality without hindering job creation.
In the words of renowned economist Milton Friedman, “The minimum wage law is most properly described as a law saying that employers must discriminate against people who have low skills.” This quote encapsulates the potential harm that minimum wage laws can have on job creation and economic stability.