Economics 101: We told you so! Raising the minimum wage has already cost jobs

We pointed out, last February, that President Obama’s proposal to raise the minimum wage to $10.10 per hour would cost jobs, and noted a Congressional Budget Office study which concluded just that. The White House, as expected, disputed that assessment:

White House Disputes CBO, Says Minimum Wage Hike Won’t Cost Any Jobs
By Sahil Kapur – February 18, 2014, 4:53 PM EST4644

The White House’s top economist moved to dispute a Congressional Budget Office finding on Tuesday that raising the federal minimum wage to $10.10 per hour could cost up to 500,000 jobs once implemented in the second half of 2016.

“[The CBO finding] does not reflect the consensus view of economists who have said the minimum wage would have little to no impact on employment,” Jason Furman, the chairman of the White House Council of Economic Advisers (CEA), told reporters on a conference call. “It goes outside the consensus view of economists when it comes to the impact of the minimum wage on employment.”

Furman voiced “respectful disagreement” with CBO, pointing to other studies, which he listed in a blog post on the White House’s web site, that say a minimum wage increase wouldn’t cost jobs. They include a poll of economists conducted by the University of Chicago Booth School of Business and a study by economists at the Federal Reserve Bank of Chicago.

“Our view is that ‘zero’ is a perfectly reasonable estimate of the impact of the minimum wage on employment, based on research that began with David Card and Alan Krueger comparing minimum wage effects on employment,” he said, calling that a “completely reasonable” estimate based on the “highest-quality studies” on the issue.

More at the link. The Congress has not passed the President’s minimum wage request, but the Commander-in-Chief used his executive authority to impose the minimum wage increases on federal installations, so we have a real-world test of the White House’s claims.

Obama minimum wage edict leads to job losses at military bases
Posted by: Phineas on April 29, 2014 at 3:52 pm

Democrats and their Leftist allies are desperate to find any issue to run on in the coming elections, other than Obamacare. One of their tactics has been to try to gin up class warfare based on raising the minimum wage. They argue that it will help the poor, raise living standards, and, of course, be more “fair.” Republicans, conservatives, and libertarians, on the other hand, contend that increasing the cost of labor will only mean higher prices to the consumer, fewer jobs for the marginally skilled, and be particularly harmful to minorities. This video is a good example of how minimum wage laws kill jobs.

Needless to say, I come down on the side of those opposed to the Democrats’ demands for a minimum wage increase. But honest, intelligent people can reasonably disagree.  To help solve this disagreement, a real-world, real-time example would be nice. Fortunately (or unfortunately, as the case may be), we have one. As Byron York reports in The Washington Examiner, President Obama’s edict raising the minimum wage for federal contract employees on military bases is leading to the closure of fast-food restaurants on those bases, thus costing jobs:

Obama’s order does not take effect until January 1, 2015. But there are signs it is already having an effect — and it is not what the president and his party said it would be.

In late March, the publication Military Times reported that three McDonald’s fast-food restaurants, plus one other lesser-known food outlet, will soon close at Navy bases, while other national-name chains have “asked to be released from their Army and Air Force Exchange Service contracts to operate fast-food restaurants at two other installations.”

Military Times quoted sources saying the closures are related to the coming mandatory wage increases, with one source saying they are “the tip of the iceberg.”

And increasing the minimum wage isn’t the only way Washington is increasing the cost of labor:

The administration is making it very expensive to do business on military bases, and not just because of the minimum wage. Under federal contracting law, some businesses operating on military installations must also pay their workers something called a health and welfare payment, which last year was $2.56 an hour but which the administration has now raised to $3.81 an hour.

In the past, fast-food employers did not have to pay the health and welfare payment, but last fall the Obama Labor Department ruled that they must. So add $3.81 per hour, per employee to the employers’ cost. And then add Obama’s $2.85 an hour increase in the minimum wage. Together, employers are looking at paying $6.66 more per hour, per employee. That’s a back-breaking burden. (Just for good measure, the administration also demanded such employers provide paid holidays and vacation time.)

As I wrote above, the natural business response to this is to either raise prices for the consumer, or cut back on employee hours — or cut jobs altogether. Well, guess what? York reports that military contracts do not allow the businesses to raise their prices above what’s common in the outside community. So, even though Obama is raising wages well above the prevailing standard, employers are forbidden to recoup their costs. What does that leave?

Closing the business altogether.

I quoted more than is my wont of Phineas Fahrquar’s article, but there is a bit more at the link.  I highlighted one very important sentence of Mr Fahrquar’s, because it points out how the normal response of business to increased costs has been restricted by the military contracts: when costs increase, businesses have to increase prices to cover those increased costs, and hope that heir customers can, and will, pay them.

But the military contracts do not allow such price increases; the McDonald’s on a military base has to pay significantly higher labor costs, but cannot charge more than a similar restaurant off base, which doesn’t have those costs.  If the on-base restaurants could raise prices to cover costs, soldiers would have the choice to pay he higher prices on base, or drive off-base to the less expensive ones.  At least some would choose to pay the higher prices on base, rather than to burn gasoline and time to drive off, but it would still be their choice.1 Now, at least for some, there will be no choice: the option to buy on based will be closed. That will mean higher prices that servicemen will have to pay for food on base, but, as we have previously documented, the Commander-in-Chief doesn’t care about soldiers and their families.
Related Article:


  1. And they’d get a real-world lesson in economics, too, but the President doesn’t want that! People who actually know something about economics are not liberals.

Comments are closed.