Proponents of raising the minimum wage attempt to make two central points. The obvious point is that it will raise the wages of those it impacts – at least in the near term. The proponents generally dismiss or minimize the impact the increase will have on businesses and whether this will impact overall employment. They generally do this by claiming that the increase is modest or is necessary to keep up with inflation.
Most rational people agree if the minimum wage were lowered to say $3 per hour for workers who do not receive tips, it would have no impact. This floor would be far enough below the market rates for entry level folks that nobody would answer the job advertisements. However, what is the impact of a significantly higher minimum wage as some are calling for?
This has been tried and the results are, quite frankly, dismal.
Puerto Rico made headlines recently as it was about to default on its sovereign debt. Lost in many of these news reports was the fact that Puerto Rico is subject to the same wage rules as the 50 states. However, in Puerto Rico, the $7.25 U.S. federal minimum wage is 77 percent of median hourly wages. In most U.S. states the current federal minimum wage ranges from 38 to 54 percent of median hourly wage, according the U.S. Department of Labor.
How has this high minimum wage impacted Puerto Rico? Well, their labor force participation was an amazingly low 43 percent in 2013. That’s right; the majority of people of working age are not working. In the U.S. mainland the equivalent figure, which is at a multi-decade low, was 63 percent.
You get a similar picture when you look at the change in nonfarm payrolls over the past 25 years. On the mainland, they have increased 30 percent, which of course reflects a higher population base. On Puerto Rico nonfarm payrolls are down 7 percent, as people leave the island or stop working.
Puerto Rico has a lot of other problems, but these issues are not new. Sadly, too many folks in the U.S. believe that we can strong arm businesses into simply paying higher wages without the secondary effects – like some businesses closing, others raising their prices and some reducing employment by substituting capital and other forms of automation of labor.
A society improves its standard of living through productive investment that reduces the costs of various goods relative to the price of labor. Simply forcing general wages up by government dictate will not improve the standard of living in the long term – just ask the people living in Puerto Rico.