Why a $15 Minimum Wage Should Scare Us

By Veronique de Rugy

As we all know, the road to hell is paved with good intentions. The road is also covered with recurring and incorrect claims about the virtue of the path taken. Case in point: a piece recently published here by University of Munich professor John Komlos, titled “Why a $15 minimum wage shouldn’t scare us.”

“The economics of the minimum wage is widely misunderstood,” his piece opens. “While many commentators claim unjustifiably that increases in the minimum wage destroy jobs, there is actually no evidence to support their contention. Considered superficially, the logic seems plausible. If the price of something increases you’ll buy less of it, won’t you?”

He then illustrates with this example: “Consider the context. Take the cup of coffee I have in the morning. I don’t care how much the price of coffee is — double it, triple it — I’ll still drink a cup in the morning. I won’t drink less of it.” He continues to make his case with the assertion that “Raising the minimum wage has not hurt anyone except the boogeyman in the imagination of the 1 percenters and their entourage.”

The piece is actually a good illustration of the claims made by advocates of a $15 minimum wage. However, it doesn’t make them any more accurate. Let’s start with Mr. Komlos’ coffee example. As an economist, Mr. Komlos should know better than to assume that his personal demand for coffee is the same as the overall market demand for coffee. The market of coffee drinkers is made of many people who range from loving it no matter what the price, to those who may only consume it on the order of once per month and only if it’s Italian.

In fact, I bet that many coffee drinkers reading this example would say that they, unlike Mr. Komlos, would actually either reduce the amount of coffee they drink following a steep increase in price, buy just as much coffee from a less expensive vendor or find an alternative — like starting to drink more homemade or workplace-brewed coffee. And for those coffee drinkers who share Mr. Komlos’ commitment to coffee no matter its price, unless their income increases by the hike in the price of coffee, there’s reason to suspect that something in their budget’s got to give. Maybe they’ll eat out less to make up for the increased spending on coffee. Whatever it is, something has to change.

Switching from coffee to workers, and unskilled workers in the retail or restaurant industries in particular, reveals other problems with the example. First, while Mr. Komlos implicitly suggests that coffee has no good substitutes, it does not follow that there are no good substitutes for low-skilled workers. Take fast-food restaurants, for instance. There are plenty of automated substitutes, as we have seen in Europe and we are starting to see in America. The existence of such substitutes means that even “rich” employers will employ fewer low-skilled workers when the minimum wage rises.

Second, while Mr. Komlos is saying that he isn’t sensitive to price changes, the retail and restaurant industries have a significant sensitivity to wage increases. Over at AEI Ideas, economist Mark Perry explains, an “employer in a competitive industry with razor-thin margins (like fast-food or retail), whose payroll costs might represent one-third or more of operating expenses, will respond to a 100 percent increase in wages for his or her low-skilled workers. Those employers, unlike Komlos, will be extremely sensitive to a doubling or tripling of wages for low-skilled workers.” Oh and by the way, I bet you that if his coffee budget made up a third of his income, he too would become sensitive to increases in price.

The nonpartisan Congressional Budget Office calculated that an increase in the federal minimum wage from its current level, $7.25 an hour, to $10.10 per hour would cost about 500,000 jobs.
To sum it up, Mr. Komlos’ coffee example tells us close to nothing about the effect of minimum-wage hikes on the overall demand of workers.

It is also worth noting that according to the Small Business Administration, 99.7 percent of all businesses in America are small and not large, wealthy corporations. This is an important detail since Mr. Komlos also believes...

Read the rest here.