The argument for a higher minimum wage is simple: It puts more money in the pockets of workers at the bottom of the income ladder, which makes life better and easier for them. Who can be against that? No one, really. But here is the central truth of economics: Nothing comes without a cost. The effects of raising the pay floor are not so beneficial as they appear at first glance.
If you charge less for something, people will buy more of it, and vice versa. When auto dealers want to clear out inventory, they don’t raise the price; they cut it. A grocery store that tries to double its revenue from bananas by doubling the price will find that the math doesn’t work: Some of the fruit will go unsold.
The same pattern holds true for the commodity known as labor. If employers are compelled to pay workers more, they will be under pressure to reduce the number of people they have to pay or the hours those employees work. They may also raise prices to cover their higher costs. That, in turn, will reduce their sales, which may make some employees unnecessary.
All this matters because the minimum wage in Chicago rose last week to $13 an hour. The state floor of $8.25 will jump by $1 next year, under legislation signed in February by Gov. J.B. Pritzker, and will climb to $15 in 2025.
As the Tribune’s Alexia Elejalde-Ruiz reports, the discomfort is being felt in Chicago’s restaurants. Co-owner Tony D’Alessandro of the sandwich shop Big and Little’s said the cost of labor is already a strain. “Every time we’re doing payroll it’s like – Wow – it hits us.” He says cutting back on staffing is “the only way to get through,” but he and his partner wonder if they should close down.
Manager Carlos Rosas of Calumet Fisheries told Elejalde-Ruiz that the business may have to get rid of a second telephone line or close earlier to reduce the number of people working. “The higher your wages go,” he tells workers, “the less we may be requiring of you.”
If you prefer to hear from nonpartisan economists rather than business owners, then check out the new report from the Congressional Budget Office. It estimates that increasing the federal minimum wage from $7.25 per hour to $15 per hour would raise pay for at least 17 million workers and pull 1.3 million out of poverty.
That’s the good news. The bad news is that it would put 1.3 million people out of work. Instead of being paid $15 an hour, or even $7.25 an hour, they would be paid nothing per hour. “Some people who became jobless because of a minimum-wage increase would be out of work for many weeks,” CBO says.
And let’s not forget the higher prices that employers would charge their customers. When you raise the pay scale at Walmart, keep in mind that more low-income people shop at Walmart than work at Walmart. Likewise for fast-food restaurants.
Illinois, of course, already has a problem creating jobs and sustaining businesses. The burden of taxes and regulations in Chicago and beyond are heavy, and they’re among the reasons that Cook County has lost population each of the past 4 years and the state has shed people for 5 consecutive years.
“We’ve had a few family discussions of if we stay in Chicago are we going to make it,” said Fabulous Freddie’s Italian Eatery co-owner Stephanie Fitzpatrick. In Indiana, Wisconsin, Iowa and Kentucky, the wage floor is $7.25. If you were trying to decide where to locate a new restaurant or other establishment, those states might look more attractive.
The best thing elected officials could do for low-paid workers is to create a better environment for business, which would expand the job base and rev up the demand for labor. A boost in the minimum wage will help some people. But for too many people in Chicago and the state, it’s one more indication that the economic future lies elsewhere.