Opening and running a business has never been easy, but this past year has been particularly challenging for the nation’s entrepreneurs—those who represent the “driving force” of our economy, as Ludwig von Mises once described them.
Just months after the American economy began shutting down in the wake of the coronavirus pandemic, more than one hundred thousand businesses had already shut their doors. Many of the small businesses that were strong enough to survive the past year’s lingering public fears and government lockdowns, are turning razor-thin profits. And now the congressional Democrats and the new administration in Washington have announced plans to more than double the federal minimum wage from $7.25 to $15 an hour—therefore firing the first salvo in what JP Morgan Chase economists Michael Feroli and Daniel Silver predict will be the “mother of all economic debates.”
Yet while this wage increase may generate a robust debate, its implementation would also necessarily mean that, at the very least, all workers whose level of productivity is below $15 an hour will become, for all intents and purposes, unemployable by profit-seeking enterprises. Worse, such a mandated reduction in the workforce will deprive small enterprises of these workers’ productivity at a time when they are trying to find their “sea legs” in the midst of ongoing economic turbulence.
The numbers tell a scary tale. Nearly 50 million US workers work in occupations with a median wage of less than $15 per hour—somewhere between the current minimum wage of $7.25 and just below $15. By requiring the nation’s already struggling entrepreneurs to double the wages they pay to this enormous group of workers—almost a third of the US workforce—legislators would be leading these Americans, and the companies that employ them, into unchartered and treacherous waters.
As JP Morgan’s Feroli and Silver point out, most minimum wage increases over the years have ranged from 5 to 15 percent—nowhere near the more than 100 percent increase that is under consideration. The current proposal—even if it is carefully phased in, as President Joe Biden promises—would clearly result in an enormous amount of uncertainty both for the small enterprises that employ an overwhelming majority of these workers and for the workers themselves.
Here are just some of the potential consequences of the proposed wage hike, according to a report from the National Federation of Independent Businesses, the nation’s largest small business association:
- 1.6 million job losses—57 percent at small businesses (those with fewer than 500 employees)
- 700,000 job losses at the smallest firms (fewer than 100 employees)
- 165,000 job losses in the restaurant industry
- 162,000 job losses in the retail trade industry
- Nearly $1 trillion reduction in real GDP in the US economy
An otherwise upbeat Congressional Budget Office study on the possible effects of the new wage largely concurs, forecasting 1.4 million job losses and acknowledging that a higher minimum wage would reduce the family income of small business owners. “Real income is also reduced for nearly all people because increases in the prices of goods and services weaken families’ purchasing power,” the report concluded.
What the CBO report failed to mention is that, unlike larger businesses, smaller companies usually operate in a highly competitive environment with thin profit margins. And competition makes it difficult to pass on minimum wage hikes to consumers. “That’s why scores of them will be crushed, especially in states where the market wage is currently near the Federal minimum wage,” economist Panos Mourdoukoutas predicted in Forbes.
Increasing the minimum wage during an economically perilous time for America’s small enterprises makes the proposal even riskier. Essentially, the government is forcing entrepreneurs to raise the costs of production after many of them have barely survived what became a catastrophic 2020 due to the coronavirus pandemic. Moreover, many of the survivors are struggling, especially those that have been forced by local and state governments to scale back their operational capacities.
But increasing the minimum wage by fiat is always counterproductive, as Pepperdine University professor George Reisman explained in an open letter to Barack Obama’s secretary of labor, Thomas Perez, back in 2014. “The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the smaller are the quantities of goods and services demanded and the number of workers employed in producing them.”
In other words, all things being equal, raising the minimum wage by fiat impoverishes the economic system by subtracting an amount of wealth equal to the “monopolists’” gains, as Reisman described those who would be lucky enough to keep their jobs under the new wage. To the degree that unemployment rises, he pointed out, there will also be less productive capacity in the economy.
Which means that small businesses will pay more than the new, higher wages. As Rothbard pointed out in his two-volume treatise, Man, Economy, and State, the imposition of artificially and arbitrarily set high wages and the resulting increases in costs of production mean that “marginal firms will be driven out of business, for their costs will have risen above their most profitable price on the market—the price that had already been attained. Their ejection from the market and the general rise of average costs in the industry signify a general fall in productivity and output, and hence a loss to the consumers. Displacement and unemployment, of course, also impair the general standard of living of consumers.”
On the other hand, those workers holding on to their jobs won’t necessarily take home any more money, either, since companies may be forced to reduce their hours to make up for the new wages. In 2019, for example, U.S. News and World Report noted that more than three-quarters of restaurants in New York City reduced employee hours after that municipality became one of the first to increase the minimum wage to $15 per hour. Likewise, in a survey by the New York City Hospitality Alliance, 76.5 percent of full-service restaurants reduced employee hours and 36 percent eliminated jobs in response to the mandated wage increase.
Moreover, even if a higher minimum wage doesn’t obviously manifest itself in lost jobs or hours, it will inevitably lead to reduced benefits. Indeed, Frédéric Bastiat’s broken wndow fallacy, which appears in Henry Hazlitt’s classic Economics in One Lesson, drives home the point. Like a hoodlum who heaves a heavy brick through the window of a baker’s shop—supposedly providing new business for the local glazier—a government that imposes such a huge and expensive mandate on businesses will force the latter to forgo the use of that money to hire additional workers, give part-time workers more hours, improve training programs, keep or enhance fringe benefits, or improve working conditions or products. In fact, quite the opposite is likely: fewer work hours and workers, less benefits, et cetera.
As Ludwig von Mises pointed out in his famous treatise, Economic Calculation in the Socialist Commonwealth, the more the government intervenes in the decisions of entrepreneurs, “the more that every economic change becomes an undertaking whose success can be neither appraised accurately in advance nor later retrospectively determined.” Such policies, he said, only lead to more “groping in the dark.”
That’s because no government can possibly determine how firms can best go about providing goods and services to the nation’s consumers or, more specifically, what economic price these firms can afford to pay their workers while pursuing a profit.
Unfortunately, small businesses are unlikely to get any help in fighting back against this intervention from their bigger competitors. In a 2019 lecture at the Mises Institute, Peter Klein pointed out that wage, safety, and other types of regulations often benefit some firms at the expense of others. “Why would firms lobby for regulations that increase their own costs? Because they think it will increase their rivals’ costs even more,” he explained.
Big businesses can also achieve economies of scale through the type of centralized human resources and benefits departments that smaller businesses cannot afford. And they have the up-front capital needed to invest in automation—such as purchasing the type of kiosks currently utilized at stores such as Home Depot and McDonald’s—making them even less subject to the consequences of higher labor costs.
Economist Art Carden adds that there’s “a double dividend” for such lobbying on behalf of more regulations and other politically correct measures: “Not only do firms signing on to such things get less competition; they get to bask in the warm glow of public approval because of their enlightened practices.
“It’s a particularly insidious brand of evil because it takes advantage of the public’s economically ignorant good intentions.”
The Mises Institute exists to promote teaching and research in the Austrian school of economics, and individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. These great thinkers developed praxeology, a deductive science of human action based on premises known with certainty to be true, and this is what we teach and advocate. Our scholarly work is founded in Misesian praxeology, and in self-conscious opposition to the mathematical modeling and hypothesis-testing that has created so much confusion in neoclassical economics. Visit https://mises.org