The Dark Side of Minimum Wage Laws

Minimum Wage Laws Waste Limited Technology Resources.

Minimum wage laws encourage innovation to eliminate jobs rather than to enhance products and services.

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A Misdirection of Tech Resources and Innovation

Much has been written in favor of and against minimum wage laws from social justice warriors arguing for a “living wage”, to free market schools of economic thought arguing that the minimum wage destroys jobs, harms entry level workers’ job opportunities and raises prices for consumers.

There is another argument against the minimum wage – it creates a misallocation of technology and intellectual resources. When governments enact minimum wage laws or increase existing ones, employers can either raise prices, fire workers and/or look to ways to lower the costs of the tasks that their employees conduct.

Technological innovation happens when a need arises. Government mandated higher wages force entrepreneurs, business owners and inventors to expend time, effort, intellectual and capital resources to counteract the impact of higher wages. Since all resources are finite, expending resources to mitigate the government imposed problem of higher wages, diverts resources from other more profitable or fruitful endeavors.

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Innovating Around Government Intervention

The pool of skilled technical workers is much smaller than the larger pool of unskilled workers. Minimum wage laws have the impact of shrinking the pool of technology workers available to work on efficiency enhancing projects such as designing and improving products and services to make them better, safer, healthier, cheaper or more durable when they are enlisted to solve a higher wage problem imposed by government.

Simultaneously, minimum wage laws cause the larger pool of unemployed, unskilled workers to grow. The net loss to the economy is measurable and immeasurable. We can calculate the layoffs in the restaurant industry caused by an increase in the minimum wage. We will never know, however, what innovations were sacrificed because intellectual capital was spent creating things like customer ordering kiosks for the restaurant industry to lower employee costs, instead of something else.

Automated ordering kiosk in fast food restaurant

Hi, I am Hal, may I take your order please?

One may argue that employers will always try to lower or eliminate employees and their associated costs. This is true. If a company, however, is paying a market driven wage and the business is profitable, there is less of an incentive to invest in a solution designed to eliminate employees if the cost of trying to do so would involve capital investment that may not pay off and denigrate the service levels the company provides to its customers.

There is also less of an incentive for other companies to invest time, resources, financial and intellectual capital to create products and solutions designed to eliminate employees to sell to other businesses if their potential target market is coping adequately with current market driven labor costs.

Unintended Consequences of Government Intervention in the Labor Market

When governments thrust themselves officiously into markets, they inevitably create market imbalances that require market participants to spend additional resources to counteract them. Government interventions often add an unnecessary cost of doing business and often do not help those that the government action was purported to help.

Minimum wage laws force companies to divert resources away from the most important goal of a business – serving its customers with better products and services at fair prices. Minimum wage laws force businesses to divert resources in an effort to lower costs in order to maintain current prices for their customers. Resources expended in this fashion often provide no associated improvement to their products or services. In effect, at best, companies faced with mandated higher wages can jump through hoops by retooling their businesses with new automated technology at substantial costs, fire some workers and, if they are lucky, manage to provide the same products and services at the same prices prior to the imposition of the minimum wage or wage increase.

In the foregoing best case scenario there is no net gain to the economy or society. Indeed, there is a net loss as workers may have lost their jobs and the government ends up paying unemployment benefits to those fired workers. Technology resources and workers were deployed to maintain the status quo so the companies could stay in business and by definition were not utilized elsewhere. The resources and efforts expended to keep the companies in business or to maintain their status quo could have been better spent improving those companies or deployed elsewhere at other companies.

In the worst case scenario, some companies may not be able to adjust to the higher mandated wages either because paying the increase would cause them to lose money, firing employees would leave them unable to maintain adequate service levels, and/or the costs of implementing a technological solution to lower costs may be prohibitive. As such, these companies may go out of business, thus depriving the business owner and its employees the opportunity of earning a living. The customers of these unfortunate businesses are denied the products and services they once enjoyed prior to the imposition of the minimum wage or wage increase.

Generally, it is the smaller companies that suffer most from the imposition of a minimum wage or wage increase. Larger companies are better able to adjust to government interventions like minimum wage laws and/or mandated wage increases as they have the legal, technology and cash resources to navigate through large scale layoffs and costly and potentially disruptive technology implementation projects.

Someone benefits!

Workers not fired benefit from minimum wage laws, but the minimum wage often disrupts or kills off businesses, causes people to lose their jobs, prevents others from getting jobs and diverts limited technicial and intellectual know-how from other projects that would benefit far more people than the few who benefit from a government mandated pay raise.

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Inspiration from a tweet by @Jedieconomist: “A too high minimum wage = job losses, unnecessary technological advancement, high land prices + social disorder.”

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