Those in favour of increasing minimum wages often express altruistic motives and concern for those on the lowest rungs of the socio-economic ladder. But in doing so, they conveniently ignore an obvious flaw in the argument: a rise in the cost of workers will likely reduce demand for labour.
 
In the long-term, raising the minimum wage is a gamble with many workers’ futures. This was an argument made recently in The Economist, which emphasized the folly of ill-considered wage decisions in the name of combatting inequality and poverty.
 
The concern is particularly pertinent following the recent media frenzy surrounding Dan Price. The CEO of Seattle-based, tech start-up Gravity Payments, was universally hailed as the “nicest boss in the world” after slashing his own US$1 million pay check to help raise the salaries of his 120 employees. A portion of company profits is also required to fund the wage rise to US$70,000.
 
Price’s decision was prompted by a colleague confessing she was struggling on US$40,000 per year.
 
Unfortunately, the decision may have been more financially reckless than altruistic.
 
The personal hit has been considerably larger than anticipated, with Price apparently having to rent out his home to afford the higher wages. Several clients have withdrawn their business in objection to the quasi-socialist move. Highly-valued staff members have resigned, defiant over the erosion of pay differentials that previously reflected skill differences. To make matters worse, Price’s brother, who has a 30% stake in the company, is suing for squandering firm profits.
 
Despite the financial predicament of Price’s decision, he is unlikely to resort to replacing staff with lower-cost computerised alternatives.
 
Nevertheless, now is hardly the time to be increasing the cost of workers. Technology is replacing labour at an unprecedented rate. Those on the minimum wage who possess few transferable skills are most vulnerable to replacement. Firms have a greater incentive to substitute workers for machines if perpetually higher labour costs are imposed due to a centrally-mandated minimum wage increase.
 
And if Gravity Payments is already struggling to afford the higher wages less than four months after making the decision, future cost-cutting measures are inevitable. Which is usually code for redundancies.
 
Surely a US$40,000 salary job is far preferable to being unemployed? Which is an awkward point to concede for higher minimum wage advocates: that attempting to alleviate inequality and poverty by increasing wages may actually do more harm than good.