Profits increasing: The problem with raising wages

During the 2024 Virginia General Assembly, a bill was introduced to the House of Delegates with the name HB 1 Minimum wage which would increase the minimum wage to $13.50 per hour effective January 1, 2025. As of March 4, 2024, the bill passed both chambers of the Virginia legislature. Upon the approval of this bill by the Virginia General Assembly, Governor Glenn Youngkin opposed this legislation, a decision that will benefit Virginians.

The choice to increase the minimum wage is a common method by which politicians attempt to gain supporters and improve the lives of their constituents. Many believe employing this economic policy will cause employers to raise wages based on the artificially raised money supply and promote a healthy economy. But in truth, raising the minimum wage serves to create ill-advised economic incentives, raises inflation and discourages small business growth.

The National Bureau of Economic Research (NBER) exists to provide analysis of economic matters without political bias or partisanship. According to NBER, “Minimum wages reduce training aimed at improving skills on the current job, especially formal training.” 

Because a higher minimum wage forces employers to increase wages in most or all job positions, companies that must provide advanced training for certain applicants are better off cutting training hours in order to reduce the high expense of doing so.

Increases in minimum wage force businesses to make unforeseen financial adjustments, which ultimately lead to the ugly consequence of price increases for the consumer. This has become particularly clear in the fast-food industry, as The Orange County Registrar notes that a side-effect of upping minimum wage in many cases means a 5% increase in the average meal cost.

Subsequently, businesses will have to start firing their employees due to the increasing burden imposed on them by minimum wage increases without a corresponding augmentation in the demand for their products or services. This exact instance occurred this year in California, as recorded by INC. Magazine. It is unsustainable for many companies to maintain the same level of profitability while having to pay higher wages in the absence of increased labor productivity or higher consumption of the goods produced.

If the increase in minimum wage is not accompanied by an increase demand and is otherwise escorted by growing inflation, it turns the legislation into a fatal death sentence for employees and employers. Payroll raises are not prejudicial per se, but the coercive actions of the government impose a negative economic model on its people.

Minimum wage increases become especially detrimental to those of lesser productivity like teenagers, the handicapped and the mentally ill, as those who cannot perform skilled labor will not soon be hired by an employer who must pay them as if they can. This problem of unskilled labor paid with a skilled workers salary can only be solved by inflation (a severe problem in itself) or the lowering of the minimum wage. This type of legislation also becomes a barrier to those entering the workforce or changing industry due to the increased costs of acquiring educational training, job experience and maturity.

Overall, without a genuine increase in efficient capital goods or labor productivity, raising the minimum wage is counterproductive. A state-mandated increment in minimum wage is not sustained by a present or subsequent increase in labor productivity. Moreover, an elevated labor productivity is the necessary precondition for a contractual increase in salary.

Avila is an opinion writer. Kilker is the opinion editor.