What Happens When The Minimum Wage Is Raised?

Economic theory tells us that when the fair market price for wages is artificially raised then businesses will raise the price of their good/services, cut back on expansion, reduce their work force and suffer with reduced profits.

But we don’t need to rely on economic theory to tell us it’s a bad idea to tinker with the Free Market, we have cities in the US who have already done this and we can see what happened.

NPR had a story about how raising the minimum wage by $2/hour in San Jose, California affected two different businesses.

Here are the money quotes from the owners of these two businesses (emphasis mine):

Like many business owners in downtown, Chuck Hammers fought the ballot initiative and braced for the worst when the law took effect last March.

“There’s that little bit of a panic from a business owner, you know, ‘Is the sky going to fall?’ ” Hammers says. “And you’re nervous. It’s a 20 percent increase in what’s really one of your biggest costs” — labor.

So he did. Slices went up by 25 cents, pies by $1. Sales held steady, and Hammers says customers didn’t seem to notice.

In a strip mall on San Jose’s southern city limits, Charlie’s Cheesecake Works is a lot smaller than Pizza My Heart. It has only four employees, including owner Charlie Major. Major pays one employee minimum wage and the others slightly more.

Around the time that the wage increase took effect, his sous chef got another job and moved on.

“I did not replace her,” Major says. “I decided that, in light of what was going on with the change and stuff, just until we saw how it really played out, I can do the job that she did, so that’s what I’ve done.”

Major, like Hammers at Pizza My Heart, also raised his prices, by about 5 percent.

Since the law took effect, profits in the store have dropped by 7 percent, Major says — a big enough hit that he has actually shelved plans to expand the space. Now, he’s actively thinking about selling or retiring if things don’t get better in the next year.

It hits small business right where it hurts,” Major says of the wage increase. “And if you want to encourage small business, it’s tough.

So after the minimum wage was increased in San Jose, local business raised their prices, curtailed expansion and experienced lower profits. Exactly. What. Was. Predicted.

It was clear that the point of the NPR piece was to let everyone know that although there will be adjustments made at the business level, things settle down and the city moves on. Well that’s true but NPR failed to dive into the economic details a little more.

Take this quote from the NPR story:

“After looking at it, I kind of stepped back and realized, well, it’s gonna happen to everyone,” Hammers says. “It’s going to be a fair playing field. We just need to increase prices a little bit.”

When a local law is passed to increase the minimum wage, all the local businesses in that region that rely on minimum wage labor will increase their prices. But what does that eventually do to the price of everything in the city? It raises all prices and the cost of living goes up and after some time, that increase to the minimum wage is negated and we’re back to where we started!

The buying power of someone who makes minimum wage increases a little immediately after the minimum wage law kicks in but once prices of everything catches up, these people are no better off than before the increase to the minimum wage.

That’s what happened in San Jose after they ignored the Free Market and artificially raised the minimum wage. In some respects the effects are muted when the minimum wage is raised in a small region like a city and especially when it’s done in a booming economic area like Silicon Valley. Other companies (think Wal-Mart, Home Depot and other national chains) that are big enough to operate in other regions not affected by the minimum wage increase can absorb the higher labor costs of one or two stores they have in that area.

Now imagine what would happen if we raised the minimum wage across the entire United States like Leftists want to do. The cost of living would go up proportionally across the entire US, companies would curtail expansion and the stock market would tank as company after company reports lower than expected profits.

God help us if we are ever this stupid.

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