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Proof Perfect That The Minimum Wage Costs Jobs

This article is more than 9 years old.

One of the most basic foundations of economics is under attack these days from certain people. That basic fundamental point is attacked because people simply do not want to believe that raising the minimum wage will cost some people their jobs. That fundamental principle of economics being attacked there is that demand curves slope downwards. If you increase the price of something then people will desire to purchase less of it.

As a result of people not wanting to believe this basic fact about the world, that price rises mean lower demand, we've had all sorts of contortions from people who really ought to know better about the effects of a rise in the minimum wage. That increased effective demand will mean more demand for labour for example, even though that increased demand isn't going to be enough to cover the job losses. The most usual default position is that, well, people should pay more just because they should. And I'm deeply unconvinced that we should be forming public policy of the logical basis of a toddler demanding that the world be fair.

However, here we now have proof perfect that a rise in the minimum wage is costing some people their jobs:

In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018. Although all of us at Borderlands support the concept of a living wage in principal and we believe that it's possible that the new law will be good for San Francisco -- Borderlands Books as it exists is not a financially viable business if subject to that minimum wage. Consequently we will be closing our doors no later than March 31st.

Many businesses can make adjustments to allow for increased wages. The cafe side of Borderlands, for example, should have no difficulty at all. Viability is simply a matter of increasing prices. And, since all the other cafes in the city will be under the same pressure, all the prices will float upwards. But books are a special case because the price is set by the publisher and printed on the book. Furthermore, for years part of the challenge for brick-and-mortar bookstores is that companies like Amazon.com have made it difficult to get people to pay retail prices. So it is inconceivable to adjust our prices upwards to cover increased wages.

The change in minimum wage will mean our payroll will increase roughly 39%. That increase will in turn bring up our total operating expenses by 18%. To make up for that expense, we would need to increase our sales by a minimum of 20%. We do not believe that is a realistic possibility for a bookstore in San Francisco at this time.

The other obvious alternative to increasing sales would be to decrease expenses. The only way to accomplish the amount of savings needed would be to reduce our staff to: the current management (Alan Beatts and Jude Feldman), and one other part-time employee. Alan would need to take over most of Jude's administrative responsibilities and Jude would work the counter five to six days per week. Taking all those steps would allow management to increase their work hours by 50-75% while continuing to make roughly the same modest amount that they make now (by way of example, Alan's salary was $28,000 last year). That's not an option for obvious reasons and for at least one less obvious one -- at the planned minimum wage in 2018, either of them would earn more than their current salary working only 40 hours per week at a much less demanding job that paid minimum wage.

So, as a result of the increase in the minimum wage they can try to raise prices. As they say, a cafe could raise prices. Because everyone else in the city will be under the same cost pressures and so a coordinated price rise is likely. So, our first criticism of a minimum wage rise is that it doesn't actually do all that much for minimum wage earners because prices will simply rise across the board to accomodate it.

There's also that second way of dealing with it, which is to fire some of the staff and then ask the others to work harder. This is also the "increase productivity" argument that we so often see deployed. Hey, employers should just increase the productivity of labour to pay for the higher minimum! And, see what happens? We've just reduced the number of jobs on offer as our method of increasing productivity.

And then there's that problem that they can't raise book prices. But it's not just people who have prices set for them who cannot do that. It's also people who have competitors who face a different cost structure than they do. As in fact every single business in the economy does but not to necessarily the same extent. Imagine, say, Costco and Walmart. One pays staff well but employs about half the number of staff per $hundred thousand in sales than the other. The second pays not all that well but employs more and presumably lower skilled staff to do so. We really could insist that Walmart pay everyone like Costco does. But if we did we'd find that Walmart would raise the productivity of its labour to that of Costco. That is, they'd fire a third to a half of the people they employ.

It really is true that demand curves slope downwards I'm afraid. And within the contraints of the real world this means that a rise on the minimum wage of any size is going to mean that some people lose their jobs.

There is an odd type of good called a Giffen Good where demand actually rises when price does. The usual examples are of a staple food in a near subsistence economy. As the price of it rises then people give up buying any more expensive (and tastier) foods in order to increase the consumption of the one thing they know will give them enough calories within their budgets. You can, if you want to, claim that labour is a Giffen Good. But do note the background there: a Giffen Good is something that budget constrained people substitute towards as they reach their budget constraint. Labour really isn't like that at all: for as the price of labour rises people can and will substitute away from it towards automation.

Sorry about this but it really is true. Minimim wage rises mean that at least some people are going to lose their jobs. Yes, even in San Francisco this is true.

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