Why Raising the Minimum Wage Is a Fantasy

Why Raising the Minimum Wage Is a Fantasy


In a recent “60 Minutes” piece, Amazon founder Jeff Bezos proudly displayed his company’s next delivery vehicles: drones. It’s only a matter of time, according to Bezos, before Amazon’s faux-pelicans will be dropping packages at your door (and hopefully not on your head), speeding up deliveries and bringing instant gratification one step closer. No one thought to ask the obvious – what happens to all those redundant delivery folks?

The constant replacement of humans by machines presents policy makers with a looming crisis — not enough jobs to go around. It also destroys the easy confidence with which many on the left argue for higher minimum wages. Incomes aren’t stuck because employers are hard-hearted so-and-sos, which is the recurring accusation of those who, like Paul Krugman, have never actually had to compete in the real world. Wages are stuck because so many individuals can be replaced by competitors overseas who earn far less or by machines, which earn nothing.


Krugman recently issued another pie-in-the-sky endorsement of raising the nation’s minimum wage. He zeros in on retail workers whose pay he says has dropped nearly 30 percent since 1973 in real terms — adjusted for inflation. About 16 percent of minimum wage workers are in retail, while a little more than half are in “leisure and hospitality,” mostly food service. Krugman notes that since those jobs can’t be exported, the low pay cannot be excused by foreign competition.

He neglects to mention that jobs in traditional stores are vulnerable to pressure from online retailing. No industry is more cost-conscious currently than brick-and-mortar retailers, many of whom are downsizing stores and laying off people. Department stores and mom-and-pop outlets alike are under fire from online competitors who operate without the costs of rent, burdensome inventories and…without workers helping customers and manning the cash registers.

This past Thanksgiving weekend brick and mortar retail sales are reported to have dropped about 3 percent, surprising and disappointing the industry. (The actual numbers won’t be known for some time.) Though analysts estimated that more people went shopping, they concluded that per person spending was down. Most important was that the crowd turned out mainly for so-called door-buster items that were heavily discounted to attract shoppers. The combination of lower overall sales and big discounts will hurt the bottom line.

The winner for the weekend–again — was online sales, estimated to have climbed 17 percent. Though shopping on the web still only accounts for some 14 percent of total retail spending, the pressure it puts on traditional stores is intense. Among other things, shoppers now frequently go online to compare prices before they hit the mall. Woe is the retailer that doesn’t match bargains online. Because our government has been slow off the mark to respond to this new developing industry, e-vendors have an automatic price advantage in most states — they charge no sales tax.


The retail industry is just one in which workers are at risk. It’s hard to find many jobs that are not threatened by automation, by Internet expansion or by overseas competition. That includes people working in the fast food industry — where union organizers are currently pushing for a big jump in minimum pay. They should not assume that burger joints won’t eventually automate. Last year, Momentum Machines in San Francisco previewed an apparatus that created 360 burgers an hour. Noting that the fast food industry spends $9 billion a year on wages, the company predicted a lively reception for its space- and cost-saving machine.

Companies and workers successfully competing against all these forces must rely on the right combination of productivity and price. Purposefully jeopardizing workers’ livelihoods by driving wage costs higher is risky and in the end unproductive. Add to the mix uber-low interest rates, which tilts investment towards capital and away from labor, and those urging a higher minimum wage are not on the side of workers.

In any event, numerous studies have concluded that raising the minimum wage is not the most effective anti-poverty approach, since the families of two-thirds of workers in that category have incomes 150 percent above the poverty line. That’s because over half all those in the U.S. earning the minimum wage are under the age of 25; 60 percent of that group is enrolled in school.

Two-thirds of minimum wage workers are employed part-time. These statistics point to the reality that for most, working at minimum wage is an entry point to the work force, or an opportunity to work part-time. President Obama has endorsed raising the federal minimum wage so that “no one who works full-time should have to live in poverty.” If only it were so easy.

There is no simple answer to the jobs and wage dilemma facing the nation. Americans in theory favor higher pay across the board, until the price of their chicken nuggets jumps 10 percent. They are never asked if they would favor higher wages in return for a higher cost of living. We are a bargain-hungry nation, used to enjoying discounts and cheap prices.

That’s one reason why it’s 18 percent more expensive to live in London than in New York and 43 percent more costly in Paris than in Chicago. In Munich, a meal at a McDonald’s equivalent runs 45 percent more than in Houston; eggs are 62 percent more expensive and domestic beer costs 54 percent more. There are many factors that influence prices, including tariffs and taxes, but wage levels are also important. Will raising the minimum wage hurt or help our economy? It’s not clear.

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