In the debate about increasing the minimum wage to $15, or even $19 (as Berkeley’s Labor Commission has recommended), one important issue has not received the attention it deserves. Namely, what happens to the wages of employees who had been earning $15/hour before the increase in the minimum wage?
In the absence of regulations, the hourly wage for a job is generally related to the skills required to do the job. Jobs that currently pay $15/hour require more skills than those that pay $10/hour.
When a regulation raises the floor for the low-skill jobs to $15, one would except that people currently earning $15/hour would believe that they deserve a raise that reflects the higher skill required for their job. Let’s say they now want $20/hour. If they get such a raise, the people now earning $20/hour will also want a raise, and so on up the wage ladder.
What seems like a targeted policy – improve the pay of those at the bottom – is in reality a policy with much larger, and more uncertain, effects on the local economy. If wages go up generally, the prices of a wide range of goods and services will increase. Ample evidence and common sense suggest that the demand for those goods and services will decline, with associated effects on the businesses selling those things, and on the number of jobs they need to fill.
Pushing for large increases in the minimum wage is morally satisfying, but let’s be real about all of the likely effects before plowing ahead.
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