Why significantly increasing minimum wage will hurt employees and businesses

Short answer: Micky D’s can only charge so much for a burger and people still be able to afford to buy it.

More detailed answer: Since small business margins are very tight, an increase in costs cannot be absorbed without prices being increased.

A jump to $15/hr from the federal minimum wage of $7.25 is an 107% labor cost increase! Even in some states that already have a higher minumim wage of $10/hr, that’s still a 50% increase.

But even a 50% increase in labor expense results in a higher overall cost to the business because there are costs that employers pay that are based on a percentage of labor expense. Considering just the basic employer-paid payroll tax and workers’ compensation insurance cost (that are based on labor expense), a 50% increase in labor costs creates an overall cost increase to the business of at least 60%.

Prices must increase proportinately to cover the increase cost. Products and services performed at minimum wage have the most price sensativity in the market. Price increases on such often results in fewer purchases. To compensate, businesses sometimes have to cut back on staffing, import cheaper product, gain efficencies through automation to reduce human labor, or go out of business.

If a higher standard of living is the goal, a significant wage increase for unskilled labor will have the opposite effect, since they will be out of a job, and so will the other employees and business owner if the business has to close down.

The issue is that mimium wage jobs are not designed to support a family. These jobs are appropriate for entry level employment. Lots of people can perform the lowest skill jobs, therefore their economic value is lowest to an organization, and consquently their earnings potential at that level.

As one gains more experience and invests in learning higher level skills, their economic value to an organization increases. Since fewer can perform higher skilled duties, a somewhat shorter supply exists, creating a somewhat higher demand, and this translates into a higher wage.

The market continues to adjust upward for higher compensation to those that provide greater economic benefit to the organization.