Increase In Minimum Wage Kills Jobs

  • Author: Michael Saltsman

  • Publication Date: July 2010

  • Newspaper: The Dispatch and Rock Island Argus

  • Topics: Minimum Wage, Teen Unemployment

Illinois’ Ray Kroc made the hamburger-flipping teen a mainstay on the American scene when he introduced McDonald’s. If the Illinois Legislature continues increasing the minimum wage, they might soon do the same for hamburger-flipping robots.

When labor costs go up, business owners can do one of three things: Raise prices, cut costs or shrink their profit margins. Given the consumer’s insatiable demand for ever-lower prices, and the fact that most minimum wage employers operate with a profit margin of two to five percent, the only realistic option is to cut costs. One of the key ways to cut costs is to introduce automation or self-service.

The BurgerTron 3000 may be a few years away, but eventually it will be cheaper to build a robot to automatically assemble our Big Macs than pay someone to do the same.

It’s easy to joke about burger-flipping robots, but employers have already gone this route in industry after industry. McDonald’s shifted the culture so that you bus your own tables. Why do you think that grocery stores are investing in technology that lets you check out your own groceries? When’s the last time you went to a full-service gas station?

Automation saves you money because it reduces the need for companies to pay people to serve you, but it also decreases the number of jobs to go around. And, over time, business owners have seen that consumers will trade lower prices for less service, putting more jobs at risk as employment costs escalate beyond productivity levels.

In addition to pushing businesses toward automation, increasing the minimum wage makes it less likely for businesses to take a chance on employees without previous experience. Making it more expensive to hire new employees virtually ensures that fewer new employees will be hired.

Saddled with an 11.2 percent unemployment rate, and a teen unemployment rate averaging above 27 percent — both amongst the highest in the country — Illinois has decided to solve the problem by making it more expensive for businesses to hire new entry level employees.

Already feeling the pinch from the continuing economic downturn, the only way businesses will hire new employees is if they are skilled enough for the new, higher wage. Say goodbye to entry level jobs and hello to permanent double digit unemployment.

Without fail, increases to the minimum wage have been associated with lost jobs. Ever since the very first minimum wage was instituted under Franklin Delano Roosevelt, employers have laid off employees deemed unworthy of keeping on the payroll; FDR’s administrator of the Wage and Hour Division of the Department of Labor wrote in 1939 of the first federal minimum wage laws that “there have been reports that workers who had been receiving less than [the new minimum wage] had been laid off.”

More recently, an Employment Policies Institute study found that New York’s minimum wage hike reduced employment rates of less-skilled, less-educated New Yorkers by as much as 36.5 percent between 2004 and 2006 — increases that weren’t seen in neighboring states that hadn’t increase their minimum wage.

Despite being couched as policies that will help working class Americans, a team of researchers for the Federal Reserve in 1999 found that “on balance … the net effect of [higher] minimum wages is an increase in the proportion of poor families” as employment opportunities became less plentiful.

Though enacted with the best of intentions, minimum wage increases come with a raft of unintended consequences — like the hastening of the BurgerTron 3000 — that only hurt those they are intended to help. The government’s response to joblessness shouldn’t be to make it harder to come by jobs.

Michael Saltsman is the research fellow at the Employment Policies Institute, a nonprofit research organization dedicated to studying public policy issues surrounding entry-level employment.