Contrary to classic economic theory, raising the minimum wage doesn't significantly increase unemployment. Instead, its hidden costs manifest as lower-quality work, such as unpredictable schedules and reduced workplace safety, as employers push workers harder to compensate for higher labor costs.
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Government unemployment statistics are misleading because they count anyone working even one hour a week as 'employed.' A more accurate measure reveals that nearly a quarter of American workers are functionally unemployed, meaning they work for poverty-level wages or can't find full-time work despite wanting it.
Forcing businesses to pay a mandated high wage for a low-value job creates a powerful incentive to automate that role, especially with the rise of AI. A better approach is bottom-up regulation that fosters a competitive labor market, forcing companies to increase wages naturally to attract talent.
Headline unemployment in India and Indonesia masks a deeper issue: underemployment. In India, 40% of the workforce is in the primary sector which produces less than 20% of GDP. In Indonesia, 60% of jobs are informal and pay below minimum wage, signaling a crisis of job quality, not just quantity.
While headline unemployment remains low, a subtle weakening is occurring through "job downgrading." Workers, particularly in warehouse and retail, are not being laid off but are seeing their weekly hours cut from 40-50 to 30-35. This loss of hours and overtime pay erodes their income and bargaining power without being reflected in official unemployment statistics.
A paradoxical market reality is that sectors with heavy government involvement, like healthcare and education, experience skyrocketing costs. In contrast, less-regulated, technology-driven sectors see prices consistently fall, suggesting a correlation between intervention and price inflation.
The minimum wage effectively makes it illegal for an employer to hire a worker whose skills are not yet worth the mandated hourly rate. This prevents young or unskilled individuals from accepting lower-paying jobs that would provide crucial skills and experience, trapping them in a cycle of unemployability.
Wage stagnation is not accidental but a result of two concurrent policies. By sending manufacturing jobs overseas and simultaneously bringing in low-wage labor, corporations create a market where domestic workers lose nearly all leverage to demand higher pay for remaining jobs.
Policies like price caps (e.g., for insulin) or price floors (e.g., minimum wage) that deviate from market equilibrium create distortions. The economy then compensates in unintended ways, such as companies ceasing production of price-capped goods or moving to under-the-table employment to avoid high minimum wages.
A study found that CEOs trained to prioritize shareholder value deliver short-term returns by suppressing employee pay. This practice drives away high-skilled workers and cripples the company's long-term outlook, all without evidence of actually increasing sales, productivity, or investment.
Raising the minimum wage often benefits individuals in higher-income households (e.g., teens with summer jobs) rather than the poorest families. The most vulnerable are often not in work. A more generous welfare state that directly provides money to poor households is a more targeted and effective way to reduce poverty and inequality.