What Would be the Effect of a Substantial Hike in the Minimum Wage?

In response to 100% of U.S. Employment Growth Since 2000 Went to Immigrants, reader Mike wonders what effect a rise in minimum wage would have.

Mike Writes ...

Hi Mish.

Thanks for a very interesting post. I hope the mainstream media will pick up on this.

Here's a question for you: Do you think a rise in the minimum wage would bring more citizens into the workforce and and reduce the welfare rolls?

By the way, I am against laws that restrict the free will of consenting adults, employers and employees alike. But I am curious about the results of a substantial hike in the minimum wage.

Best,
Mike

Predicting the Results

It is not easy to predict the precise results. People on both sides of the debate cite studies that purportedly support their point of view.

Nonetheless we can say certain things, even if we do not know the final result.

A hike in the minimum wage would:

1. Encourage more people to seek work whether there is work or not. Thus, the participation rate would rise putting upward pressure on the unemployment rate.
2. Encourage businesses to outsource or seek other means of reducing head count such as employing software or hardware robots.
3. Encourage more immigration if businesses cannot find ways to reduce headcount.
4. Ultimately, businesses would have to hike prices, accept lower profit margins, or find other ways to reduce costs.
5. If businesses chose to hike prices it would put upward pressure on price inflation. In turn, unions would demand still more wage hikes.
6. If businesses chose to eat the costs, it would put negative pressures on the stock market.

With so many possibilities, some of them conflicting, it is impossible to predict the precise results. Regardless, interference in the free market is not a good thing. Thus, the overall result of a hike in minimum wage must be negative, regardless of what minimum wage advocates suggest.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com