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The unintended consequences of minimum wage hikes

A man named Ben, who chose not to give his last name, dressed as the McDonald's mascot Ronald McDonald, participates in a protest for higher wages for fast food workers in New York City.
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A man named Ben, who chose not to give his last name, dressed as the McDonald's mascot Ronald McDonald, participates in a protest for higher wages for fast food workers in New York City.

A reported 21 states from Maine to California will increase their state minimum wage this year. It will mean bigger paychecks for some workers—and no paychecks for others.

Already, restaurants are laying off workers. Others are raising prices.

Neither outcome should come as a surprise. Both are among the entirely predictable "unintended" consequences of minimum-wage laws.

To offset their higher labor costs, some San Diego restaurants, for example, already have raised menu prices or added a surcharge of 3 percent to 5 percent on meals.

City officials are unhappy with the surcharge and are now "cracking down on several restaurants," the San Diego Union-Tribune reports, claiming that the restaurants are violating California's false-advertising laws by not telling customers about the surcharge before they order.

Should these restaurants disclose the surcharge before customers order? Absolutely.

But make no mistake: The city's crackdown has nothing to do with false advertising and everything to do with bad PR. City officials and other critics of the restaurant policy are essentially trying to deflect blame. The restaurants want their customers to understand that government mandates imposed by politicians are driving up the price of meals, and the officials don't like being held responsible.

"Higher prices aren't the only typical outcome of significant minimum-wage increases. Workers suffer too."

Government officials the world over tend to vilify businesses when public policies cause harm. Venezuelan president Nicolas Maduro is a master of the finger-pointing art. Maduro's government dictates the price of not only labor, but of nearly every good and service imaginable. As a result, his country's unemployment rate is somewhere north of 17 percent, the inflation rate is off the charts, shortages are rampant, and violence has become a way of life. Yet Maduro blames everyone and everything else for the country's problems—from El Niño and the country's business owners to Spiderman.

Higher prices aren't the only typical outcome of significant minimum-wage increases. Workers suffer too.

In economics the "first law of demand" teaches that as the price of something increases, people tend to buy less, and when the price falls, people tend to buy more. If wage increases drive up the cost of eating out, restaurants can expect fewer customers or the sale of less food. This means fewer tips, fewer hours, and even layoffs for some workers.

Economics also teaches us that when lawmakers attempt to manipulate prices, serious unintended consequences often follow, such as shortages and surpluses.

The labor market is no exception, though many policymakers insist on ignoring these lessons.

Pretax profit margins for restaurants vary, but the industry average is razor thin, between 2 percent and 6 percent.

Now suppose the minimum wage is increased. Take Maine for example, where the hourly minimum wage for workers who rely on tips is increasing more than 30 percent this year—from the previous $3.75 per hour to $5 per hour—and will continue to increase annually to $12 per hour by 2024.

The servers who work in a restaurant have acquired no new skills that will generate additional revenue. They simply cost more to employ—a lot more. So what does a restaurant owner do? Maybe she adds a surcharge to recoup some of her losses or raises the menu prices. Another option is to fire some employees and get by with a smaller staff or reduce the staff even more and replace servers with table-top tablets that require customers to place their own orders. It's not because the owner is greedy and doesn't care about her employees. It's because, if she doesn't she may not be in business very much longer.

So minimum-wage increases will boost the pay of some while sending others to the unemployment office. The intended beneficiaries turn out to be unintended victims.

Government mandates don't increase living standards. A growing economy does.

Government officials should own the unintended, though not unexpected, results of their decisions. A minimum wage determined by politics, rather than economic reality, may help some, but it harms others, including many of the most vulnerable workers among us: those with limited skills or job experience.

Commentary by Abigail R. Hall-Blanco, a research fellow at the Independent Institute, Oakland, CA, and an assistant professor of economics at the University of Tampa. Follow her on Twitter @MissAbigailHB.

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