Understanding Why Increasing the Minimum Wage Does Not Necessarily Reduce Employment

It is often argued that raising the minimum wage willand shouldreduce employment. After all, if wages increase, businesses will need to raise the price of their goods or services, which could potentially decrease profits. As a result, some businesses may choose to reduce their workforce. However, this simplistic view omits the complexity and nuances of real-world scenarios.

Supply and Demand versus Real-World Variables

While basic economic principles suggest that increasing the cost to hire people will lead to a reduction in employment, the actual impact is more nuanced. In the real world, other factors can influence whether and to what extent this reduction occurs. These factors include technological advancements, changes in business operations, and even the overall economic environment. For instance, a business might not immediately cut its workforce because it will still be capable of producing the same amount of goods or services.

The Limitations of Timeframe in Measuring Impact

Measuring the full impact of a minimum wage increase requires considering not just the short term, but also the long term. Studies that focus on a single month or year may not capture the full range of business responses. Companies may take several years to adapt by implementing cost-saving measures like automation or relocating to lower-cost regions.

Case Study: Comparing Subways and Subway Profitability

To illustrate this point, let's examine a typical Subway shop. A Subway store typically generates about $420,000 in annual gross revenue. Let's break down the costs:

Food: $138,600 Labor: $92,400 Rent: $37,800 Subway fees: $12,500 Utilities/Misc: $8,500

This results in a profit of $63,000. Now, if labor costs increase, it becomes challenging for Subway to maintain the same level of revenue. They might try to offset this by increasing prices, reducing service numbers, or optimizing operations. For instance, a 5% increase in the sandwich price could potentially bring in more revenue, but it would also require a careful assessment of customer retention.

Empirical Evidence: Maine's Experience

Consider the case of Maine, a state with a relatively high minimum wage and a low unemployment rate. Despite the minimum wage increase and other business-changing factors, Maine has seen minimal changes in unemployment rates. As of June 2019, the unemployment rate was 2.7%, and by June 2024, it had only slightly increased to 2.8%. At the same time, hourly wages increased by 2.15%. This suggests that the increase in minimum wage has allowed more people to afford to eat at Subway and other similar establishments.

Conclusion

The relationship between minimum wage increases and employment is not as straightforward as it might appear. While basic economic principles suggest a reduction in employment, real-world factors such as technological optimization, relocation to lower-cost areas, and the overall economic environment can complicate this relationship. Real-world data from states like Maine supports the idea that a higher minimum wage can lead to economic benefits without necessarily resulting in a significant reduction in employment.