It looks like our new Democrat Congress and President is dead set on doubling the minimum wage to $15. This is by far the largest increase in the minimum wage in American history. Such huge sudden changes can produce detrimental unintended consequences. We recommend that Congress slow down and raise the rate gradually over a period of years.
There is a fundamental paradox to the concept of raising the minimum wage. If doubling the minimum wage to $15 an hour is good policy, then why stop there? Why not $50 an hour? Or $100 an hour. Then we will eliminate poverty.
The reason we don’t raise the minimum wage to $100 is because it wouldn’t work. It would cause massive unemployment. You can’t just pass a law and make people richer. The only thing that makes a person richer is to have valuable skills that make their labor worth more money in a free economy. Passing a law will never change that.
There is no doubt that if you raise the price of something, people buy less of it. If you raise the minimum wage, employers will hire fewer minimum wage employees. They will turn to automation instead and people will lose jobs. Perhaps that is the hidden goal of those who support it.
If your goal is to reduce income disparity and raise those on the lower end, there are better ways. For starters, the Earned Income Tax Credit (EITC). EITC has been around for 45 years. Lower income workers get money from the government instead of paying taxes to the government. It’s computed on a progressive scale which minimizes disruption to labor markets. Increasing EITC tax credits could have the exact same effect as raising the minimum wage, without creating unemployment and putting a huge burden on businesses. In addition, lower income workers would still be eligible for other subsidies such as rent and food because they would not be making more money. If you double the minimum wage, many workers will no longer be eligible for many of these income subsidies.