If a teen unemployment rate of 25% is not high enough to suit, raise the minimum wage and it will go up. Logic says if you raise the price of anything, including labor, less of it will be taken. There is no good or service this is exempt from this law of economics, especially over time as markets have time to adjust to new prices. In simple terms, raising the price of labor produces an incentive to find ways to operate with less labor. The tragedy of this is that opportunities for the “first job”, the chance to get “on the job training” and enter the labor force are eliminated.
Why? Because no business can pay a worker more than the value they bring to the firm e.g. you have to “earn your pay”. A business that pays more than employees are “worth” (the value they create by working) will obviously fail and all jobs will be lost.
So, take a familiar example, a pizza parlor. These are especially prolific in college towns with large concentrations of young people (along with “watering holes”). The firm employs 10 workers that work 2000 hours a year (two weeks off). Labor costs typically make up 70% to 80% of total costs. Assuming 70%, total cost of the business if the minimum wage is $7 per hour and all earn the minimum wage is $140,000. This means total costs are $200,000 (rent, utilities, ingredients etc.). The firm sells about 65 pizzas daily at a price above $10 per pie, the cost of producing it. If the owner makes $2 per pizza (a 20% margin) for starting the business and taking the risks, he makes $40,000 per year on his investment in the operation.
It is clear for this firm that every $1 increase in the minimum wage raises labor costs for this owner by $20,000 (half of his profit in this case). An increase in the minimum wage of $2 to $9 per hour raises labor costs by $40,000 and wipes out the owner’s income. What are the options? Closing the firm eliminates 10 jobs (plus the owner). Recovering the $40,000 that was sufficient to keep the owner operating the firm rather than finding another occupation would mean that pizza prices would have to be increased by $2. If consumers didn’t care about the increase in price and bought the same number of pizzas, the firm could continue. But, the law of demand says that fewer pizzas would be purchased, leading the owner to reduce employment by one worker.
So, workers have more to spend, but dollar for dollar, customers in the area have an identically lower amount of money to spend so there is no “increase in spending” due to the hike in the minimum wage as many argue. Wow! There is no “free lunch”! What a surprise. And, since workers don’t make any more pizzas after the increase in the minimum wage than before and every firm pays the same minimum, the cost must be absorbed by customers and owners, dollar for dollar.
But most importantly, if new workers are to be hired, they must bring a value of $9 per hour to the firm or they wont be hired. Before, the “hurdle” was only $7 per hour in value. The higher the minimum wage, the higher the hurdle a new or unskilled worker must get over to get their (first) job. So, raising the minimum wages reduces job opportunities for the young and skilled in the year it is raised and forever after. This is not the way to develop our labor force.