Exposing the ‘blessings of the minimum wage’ fallacy – AEI

Source: Exposing the ‘blessings of the minimum wage’ fallacy – AEI

As a result of a federal law mandating all workers get paid a minimum of $15 an hour, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant would make $310 in additional income every week (ignoring taxes). Alex would spend that additional weekly income of $310 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $310 from Alex’s additional spending now have additional income and profits every week, and they can spend some of that additional income and profits on goods and services. Alex’s additional weekly income therefore ripples through the local economy with an amazing multiplier effect that almost magically increases spending and income throughout the local economy. The pro-minimum wage crowd points to these many positive income effects from the $15 minimum wage and Alex’s additional income, and many might even suggest that a minimum wage above $15 an hour would create even greater and more positive benefits for workers like Alex and the local merchants who would be the beneficiaries of an even higher minimum wage like $20 or $25 an hour.

But let us take another and closer look at the situation. The minimum wage crowd is at least right in its first conclusion about Alex’s spending. The public policy of artificially raising wages through government fiat will mean more business and greater sales revenues for some local merchants. The local merchants will be no more unhappy to learn of the magical spending from a $15 an hour minimum wage law than an undertaker to learn of a death.

However, we haven’t yet considered the situation now facing Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant where Alex works. As a result of Alex’s good fortune to receive $310 in extra income every week as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $310 less every week because she has to pay Alex out of her own income or profits. The Johnson family now has to cut back on their household spending by $310 every week that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $310 each week comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. If we consider that Alex and the Johnson family are a part of the local community, the community’s income hasn’t changed – rather, there’s only been a transfer of income from the Johnson family to Alex; but no net gain in community income, wealth, or prosperity has been achieved.