The ‘minimum wage’: There’s no such thing as a free lunch

Jeffrey Dorfman's picture

Last month (May), voters in Switzerland voted by an overwhelming 76 percent to 24 percent to reject the establishment of Switzerland’s first minimum wage. The proposed wage floor was about $24 per hour and would have been the highest minimum wage in the world if the referendum had passed.

A large part of its rejection at the ballot box was a strong informational campaign by employer groups who explained that such a high minimum wage would mean many lower wage workers losing their jobs.

This election result is in keeping with some polling here in the U.S. that a majority of people do not support raising the minimum wage once the cost of such measures is understood.

Polls in the U.S. consistently show that a majority of people favor raising the minimum wage. This is partially abetted by the well-organized union campaign being made to look like a popular uprising in the fast food industry for higher wages.

Mainly funded by the Service Employees International Union (SEIU) and often even paying people to play the role of strikers and picketers, these actions help convince people that supporting an increase in the minimum wage is the right thing to do.

Support for a higher minimum wage in the polls is also aided by the way the question is typically framed. For example, a recent Reason-Rupe Poll of 1,003 American adults found that 67 percent of respondents supported raising the minimum wage when the question was: The federal minimum wage is $7.25 per hour. Do you favor or oppose raising the minimum wage to $10.10 per hour?

However when the question was changed to: What about if raising the minimum wage caused some employers to lay off workers or hire fewer workers? Would you favor or oppose raising the minimum wage? Support for raising the minimum wage dropped to 39 percent with 58 percent opposed.

If the question was phrased as: What about if raising the minimum wage caused some employers to raise prices? Would you favor or oppose raising the minimum wage? the results were split with 51 percent in favor and 46 percent opposed to raising the minimum wage. This is a statistical tie given the poll’s margin of error of +/- 3.6 percent.

In reality, raising the minimum wage from its current $7.25 per hour to $10.10 per hour will cause all of these negative effects: employers will lay off workers, hire fewer workers, and raise prices.

In fact, when the same Reason-Rupe Poll asked people how they thought businesses would pay for an increase in the minimum wage, 38 percent of respondents expected business to raise prices, 32 percent thought some workers would lose their jobs, while only 24 percent thought the increase would be paid for by either lower corporate profit or reduced executive salaries.

These poll results mean that once people stop to think about it, they realize where the money for a minimum wage increase will come from: mostly from workers and customers.

Seattle is close to increasing the city s minimum wage to $15 per hour over the next three to seven years, but that is being accomplished by the city council, not directly by voters. To be fair, the voters elected politicians who promised to raise the minimum wage, but those politicians certainly did not promise that the result of a higher minimum wage would be lost jobs and higher prices.

Economists are famous for saying there is no such thing as a free lunch. By this, we mean that everything has a cost even if sometimes the cost is hidden. Free lunches only appear free.

The extra cost of a fast food meal will not be listed on the menu as due to the increase in the minimum wage, but it will be there nonetheless. People not hired because their output is not worth enough to justify paying a newly increased minimum wage will be hard to identify, but they will exist nonetheless.

The polls show most people support raising the minimum wage when it is presented as a free lunch, with no downside. Once people make the link between the benefit (higher pay for some) and the cost (fewer jobs, higher prices) the level of support shrinks to a clear minority.

Unions and other liberal advocates for the poor can fool people with their slick media campaigns for a little while, but once educated, Americans (and the Swiss) are smart enough to see that the minimum wage is a very expensive lunch indeed.

[This commentary by Jeffrey Dorfman, a University of Georgia professor of agricultural and applied economics, originally appeared in Forbes.com and is published with permission by the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians.]

rolling stone
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No such thing as a free lunch however

there is such a thing as someone eating your lunch.

Please note that the minimum wage in 1968 was $1.60, which equals $10.99 in today's dollars (calculated using 4.28% annual inflation).

Gort
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What Free Lunch?

What Free Lunch?

I too believe there is no such thing as a ‘free lunch,’ but having a low minimum wage is not without its cost. Many people that have minimum wage, (and near minimum wage,) jobs need to rely on other social ‘safety net’ programs do they not?

Would raising the minimum wage remove many low wage workers from social ‘safety net’ programs? I thought removing people from the social safety net would be a good thing, eh?

Might be some other benefits as well, eh?

Would raising the minimum wage also increase revenue for Social Security and Medicare, making it more secure for our children when they get old?

Would raising the minimum wage also have the tendency of raising wages for people making more than minimum wage?

Would raising the minimum wage put more money in working people’s pockets?

Would more money in people’s pockets create more demand for goods and services?

Would that increase in demand of goods and services be a good thing for the US economy? I think it would.

NUK_1
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Gort: Not good

So, it's possible to raise wages of the workers currently making goods/services, and the businesses do not pass that wage increase along to those that buy their goods/services? ON WHAT PLANET?

It would be lovely if simply raising wages put more consumer dollars in worker's pockets and prices for anything they produce never changed, but that's not reality. Reality says, the increased costs get passed-on to others. It's a zero-sum game. You want a $5 hamburger, OK! Wait....I have to pay more for my workers since the govt demanded it? That's now a $5.50 hamburger.

So, the workers make more and then prices increase and nothing changes except some clueless politicians pat themselves on the back and others get to "feel good."

Gort
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NUK_1, I’ll take your

NUK_1, I’ll take your hamburger challenge! My argument is, you’re asking low wage workers to subsidize the cost of your $5 dollar hamburger by working for wages that can’t even support an impoverished lifestyle. If the $5 burger really cost $5.50 shouldn’t that be the price?

Why should, (the lowest paid,) workers be asked to subsidize the cost of your $5 hamburger? It sounds to me like you’re the one asking for the ‘free lunch,’ eh?

AtHomeGym
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Nuk & Minimum Wages

Here's a worse scenario: Wendy's & other fast food operators in Post/Base Exchanges worldwide are being forced to pay workers $10.50ph--they can't afford to do that and so are making plans to evacuate and leave soldiers without access to burgers & other short order items. Just another present from this administration to our troops!

Husband and Fat...
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AHG

According to yesterdays AJC (metro section), that article was proven false

AtHomeGym
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H&F & Wendy's

Didn't see it in the paper; heard it on some radio station this morning.

PTC Observer
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Minimum wage myopia

The interesting thing about the minimum wage concept is what it says about the entitlement philosophy of the left. The American workers, by themselves, are no more productive than other workers throughout the world. They have had a productive advantage due to capital investment in technology (tools of production). Workers in America have become the most productive in the world, but it has little to do with ability.

The concept of "minimum wage" falls apart when you realize that workers worldwide are competing with American workers, companies seeking the lowest cost solution to production will preferentially invest where this can be accomplished. Total cost becomes the issue. This includes regulations, transportation, benefits, wages, etc. If a company finds wages increasing in America, they will look at total cost and make a rational decision where to produce their products. This has always happened and will never stop. So, raise wages and see how many jobs are lost when these companies invest their capital (equipment, money, etc.) offshore.

Americans are myopic. The Chinese, Indonesians, Mexicans, Vietnamese, etc., etc. love it. However take heart, we'll have automated hamburger stands with highly paid window clerks. That will certainly help a few, a very few.

NUK_1
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PTCO: That's just Step 1

Next step is "price controls." That's the only way to keep businesses from raising the cost of their goods/services to the consumer if you force them by law to raise wages. Hello Venezuela,Zimbabwe and several other cesspool countries! The only other choice is to get by with fewer workers, thus defeating the whole idiotic theory that raising the minimum wage "helps" anyone.

Of course, you already know this, but too many Americans sure don't.

SPQR
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NUK

Check out price controls under of all people Richard Nixon. I was there. it didn't work out.

NUK_1
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SPQR: I know

I was there too :) We're old!

Husband and Fat...
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Just wait until

Touch screens take over at the counters of all fast food restaurants. They don't arrive late or call in sick with a hangover. That will teach the govt about forced minimum wages. It will certainly help NCR's bottom line.

NUK_1
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H&F: Exactly

The self-service model in fast food joints is already happening in parts of Europe by companies like McDonald's and you had better believe it is coming here soon. It will make the "we deserve $15/hr to work in fast food" argument obsolete.

Gort
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I wonder how many years of

I wonder how many years of evolution it will take for mankind to grow his left arm fourteen inches longer, than it is today, so he can reach the touch screen at the drive-in window from the drivers seat of his car?

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