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Who Does A Minimum Wage Hike Really Help — The Poor, Or Those Who Push It Out Of Self-Interest?

February 2, 2021

Employers who already pay more than the increased federal minimum wage also gain from increasing the labor costs of rival employers in their region.

Supporters of every effort to raise the federal minimum wage, including the one just announced, go to great lengths to insist it will have no adverse effects on low-skill workers. They claim the poor will all benefit. In fact, however, many it is supposed to help will be harmed, while the self-defined “altruists” who support it will be helped.  

Apartheid-era South Africa provides a useful template. White labor unions backed “equal pay” laws to supposedly help black workers. But they dramatically raised the price of hiring blacks, with less education, skill and productivity, in addition to being discriminated against, relative to whites. Black unemployment jumped, harming many supposed beneficiaries, but white union members gained by the resulting increasing demand for their services.

The key to such self-interested altruism is to artificially raise the price of a substitute. Consider an analogy to ice cream and frozen yogurt.

Suppose City A passed a law raising the minimum allowable price of a scoop of ice cream there to help their sellers. The price would rise. But customers would buy less ice cream as a result. Total earnings of ice cream sellers in City A could go up or down, depending on how much the quantity sold fell relative to the price increase.

And even if total earnings rose, those sellers who bore disproportionate sales losses or are forced to close would be harmed. But that higher price of ice cream will increase the demand for frozen yogurt, benefitting all those sellers with higher prices and sales.

So if we wanted to predict who would back a higher minimum wage out of self-interest, we would look to those producing substitutes, even if supposed beneficiaries are harmed. Where do we find them?

Unions and their members benefit from raising the national minimum wage because it will increase the cost of low-skilled labor, which is a substitute for union labor. For instance, if the minimum wage was $8 and the union wage was $40, employers give up 5 hours of low-skilled work for every union worker-hour utilized. But if the minimum hourly wage were increased to $10, employers would only forego 4 hours of low-skilled work for every union worker-hour employed.

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Article Tags
Economy
Author
Gary M. Galles is a professor of economics at Pepperdine University, where he is in his 35th year. For 20 of those years, he also taught at UCLA, where he got his Ph.D. in 1988.
gary.galles@pepperdine.edu