Why Increasing Minimum Wage is a Bad Idea for Business

This week I read a story about how the Newfoundland minimum wage was going up to $9.50 an hour, and how a local business leader thinks that this is a mistake.

In the interest of inflaming people, I think the guy is right.

For some reason, people think that price controls on things are a good idea, even though there are very few instances where a price control has actually benefitted people.

why do I refer to price controls? Because minimum wage is a price control. It is a minimum price set on a particular resource that businesses must have in order to function. Without employees, most businesses cease to exist, so an increase in the price of labour will increase the costs for all businesses that must have labour.

Like all price controls, this one seems like a good idea on the face of it. After all, who doesn’t want to have more money? The problem is that it is only a good idea in the short term, as there are effects to such a decision.

Businesses make profits by charging customers a slightly higher price than they pay out in costs. Costs include things like the place the business is (rent), the raw materials needed to produce the product, and labour. when the costs increase, the business must make decisions to continue making a profit or go out of business.

The business could charge more to the consumer. This could be possible since consumers have more money now, due to the increased minimum wage (resulting in inflation, and eliminating the benefit to people who got the raise in the first place so that they could afford more). This will not always happen, though, since most businesses have competition. The competition would use a price increase to (if possible) undercut their competition, and so make more money off of increased sales.

This leads to the businesses other option in maintaining profits. The business can cut costs. It can do this in a number of ways, but with an increased minimum wage (which only affects businesses that hire minimum wage, and hence low-skilled, workers), the most obvious ways to lower price is to either hire fewer people or relocate to a place in which there is a lower minimum wage. This increases unemployment.

If the company cannot cut costs or raise prices, they will go bankrupt, also adding to unemployment.

With increased unemployment, the government is forced to pay out more in unemployment benefits, meaning that the government will need to increase the amount they take in from workers, or lower the benefits they get (or borrow more money, putting the problem off on future generations).

The end result is thus simple. An increased minimum wage is simply bad for business.

Of course, it’s also bad for workers, and is simply a bad way of getting to the goal of better wages for people, but I’ll talk about that tomorrow.