Minimum Wage:  No Free Lunch

Jun 2016

Either the businesses that hire low-skilled laborers can pass the costs of higher minimum wages on to their customers, or they can’t.  If they can, then consumers will pay the costs of higher wages.  If businesses can’t pass on their costs, they must successfully absorb them (potentially reducing funds for business expansion or other purposes), lay off some employees or go out of business.  In all cases, there are costs associated with higher minimum wages, and somebody—whether it is consumers, business owners or laid-off workers—must bear these costs.  At the same time, there are benefits of higher wages paid to those workers who retain their jobs.  Which outweighs which?  The academic literature tends to lean in the direction suggested by the sponsors of the various studies (e.g., businesses or labor unions), so there is no universally accepted conclusion.  One thing is certain:  If higher minimum wages worked as their strongest proponents suggest, workers throughout the world could be made rich simply through legislating high wages.  Here we go again:  There is no free lunch.  Ultimately, worker productivity determines wages.