One of the best examples of how well-intentioned policies can cause a lot of harm is the minimum wage. Advocates of raising the minimum wage believe it will help the poor. If we could snap our fingers and instantly make the poor rich, there would be no reason to oppose it. Unfortunately, in the real world—where wealth depends on the volume of economic activity and the productivity of a society’s members—that’s not possible.
The minimum wage is the legal minimum that an employer must pay a worker. Usually, it is set by the government and applies universally to all jobs and sectors. Not all countries have such a law. Switzerland, Austria, and all the Scandinavian countries do not have one. Instead, they rely on collective bargaining agreements between labor unions and employer associations, negotiated separately for each sector and not applied to smaller economic entities. This has proven to be a much more effective model for protecting workers’ rights than a universal minimum wage set by the government. Despite this, the vast majority of countries in the world still have a minimum wage law.
In the U.S., the minimum wage is determined at three different levels: there is a federal minimum wage of $7.25 per hour. This amount is now relatively low and does not pose a serious threat to the economy since almost no one works for such a low wage. However, most states have their own minimum wages, which cannot be lower than the federal one. On top of that, counties and cities can set even higher minimum wages than their state’s if their local governments decide to do so, applying to businesses within their jurisdiction.
California, the most populous state in the U.S., is known for its so-called “progressive” policies, which are essentially far-left policies. In 2023, Democratic Governor Gavin Newsom signed a law requiring restaurant chains with more than 60 locations in the U.S. to pay their employees in California at least $20 per hour. This was a rather extreme increase, as the minimum wage for the hospitality sector in California had previously been $16.
What have been the results of this “progressive” law? The National Bureau of Economic Research (NBER) published a study on the consequences and outcomes of this California law on the hospitality sector and employment. The study was authored by economics professors Jeffrey Clemens, Jonathan Meer, and Olivia Edwards.
They found that during the two years the law has been in effect, employment in fast-food restaurants in California fell by 2.64%, while in other industries not affected by the law, employment rose by 0.58%. Across the entire United States, in the same fast-food industry during the same period, employment slightly increased.
The authors estimate that the negative impact of the minimum wage increase on employment in the fast-food industry ranged between -2.3% and -3.9% (compared to other U.S. states that did not increase the minimum wage in that sector). In total, 18,000 jobs were lost.
That’s a significant number when we consider that the law only applies to a portion of one sector—only to restaurants with more than 60 locations in the U.S.
This recent study is yet another nail in the coffin of arguments in favor of raising the minimum wage. A 2022 meta-study by David Neumark and Peter Shirley concluded that there is a “clear negative impact of minimum wage increases in most studies conducted throughout history.”
As Peter Jacobsen, an economics professor, explains in an article for the Daily Economy, the consistent trend shown in numerous studies on the minimum wage stems from basic economics: “When the government sets a minimum wage above what a business can afford, it has two primary effects—it increases the number of people who want to work that job and decreases the number of people that employers are willing to hire.”
So why are laws that raise the minimum wage so popular? Why do politicians eagerly implement them, even though they are likely aware of the negative consequences? According to Jacobsen, it’s because of populism. Politicians from across the political spectrum want to appear as if they’re doing something “good for the little guy,” and raising the minimum wage always sounds good.
This is one of those situations that can be summed up with the well-known saying:
“The road to hell is paved with good intentions.”
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