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Often the debate over the efficacy of minimum wage increases gets stuck in the rarified realm of economists and policy wonks number-crunching data and building charts that defend their side of the argument.
But such abstract analysis leaves something to be desired. Because it is a few steps removed from the gritty examples of real life, it’s not always convincing.
Recent news from Walmart gives us a tangible example of the harm minimum wage hikes and other workplace mandates can cause.
The Washington Post reports that Walmart cancelled plans to build two stores in the District of Columbia, partly because of minimum wage hikes:
[Council member Jack Evans] said the company cited the District’s rising minimum wage, now at $11.50 an hour and possibly going to $15 an hour if a proposed ballot measure is successful in November. He also said a proposal for legislation requiring D.C. employers to pay into a fund for family and medical leave for employees, and another effort to require a minimum amount of hours for hourly workers were compounding costs and concerns for the retailer.
This, in a nutshell, is how a minimum wage increase hurts a local economy. It doesn’t cause businesses to cut jobs immediately. Instead, it prevents future jobs from being created.
It’s costly to close a store (or factory or warehouse). So once one has been built, companies will often do their best to deal with higher wage costs by adjusting business hours, automating some operations, cutting back on employee training, or postponing future planned improvements. Hiring more staff gets put on the backburner. The real effect is in the jobs not created, a number that is often difficult, or impossible to capture. Which is what makes this Walmart example so valuable—it presents a clear example of jobs that won’t be created.
It’s a classic case of “What is seen and what is unseen,” French economist Frederic Bastiat’s most important economic lesson. A minimum wage increase is seen: workers get higher pay. But what is unseen are businesses not hiring more workers or not investing more because higher labor costs keep them from making new investments—unless it becomes a story in a newspaper.
Washington, D.C. isn’t the only city where a minimum wage hike may have had a detrimental effect. Jeb Babin at Investors Business Daily notes that Oakland and Los Angeles both raised their minimum wages in 2015 and will see stores close.
There are costs and benefits to governments mandating higher minimum wages. On the benefits side, those fortunate to be employed at the higher minimum wage are liekly to see a bigger paycheck--assuming their employers maintain their hours. Good for them.
However, there are also costs, some of which will target the people minimum wage proponents say they want to help. Many low-income, low-skilled workers will have job opportunities taken away by having their wages priced out of the market. In addition, consumers will have fewer shopping options. Residents of L.A.’s Chinatown neighborhood were waiting 25 years for a full-service grocery store. While in the District of Columbia, the two cancelled stores were to be built in the city’s lower-income east side of the city, where locals worry about “food deserts” and access to inexpensive food.
It’s a reminder that policymaking involves choices and tradeoffs. Those pushing for minimum wage increases that are out of tune with economic reality shouldn’t complain when things they don’t like happen.