Unintended consequences: The hidden costs of a higher minimum wage

Sometimes I wish Aesop was still around today, he wrote, “Be careful what you wish for, lest it come true.”  All too often we get what we wish for but often at the cost of unintended consequences. Actions with the absolute best of intentions sometimes lead to extremely poor unintended results. For example, the hidden costs of a higher minimum wage.

I once had a university professor explain a principle of microeconomics in class by posing this simple question: 

Imagine two groups of people at a local pub. At one table five individuals have their own pint of beer in a glass in front of them. A second table also has five individuals but has one large bowl with five pints of beer in it. Each person has a straw (gross, I know, but just set aside the germ issue for now). Same total volume of beer, same amount of beer available per person. Which table is going to run out of beer first?

We all innately knew that table two would run out first, but we couldn’t articulate why. The professor then explained an economic theory called the scarcity principle. When you have a big bowl of something (even if it’s shared), it doesn’t feelvery scarce, so you drink it faster. This isn’t greed. It’s not about getting more than the others. It’s simply that the perceived lack of scarcity causes one to be less parsimonious in consumption.

At table one each person would clearly see they had only their single pint available to them. This creates a more acute sense of scarcity and generally will result in them drinking slower. 

After their pint was half gone, they would probably drink even slower. And when only a quarter was left, slower still. 

The scarcer the supply, the more consumption is curbed. Also, the scarcer a resource, the higher it will be priced. This higher price results in lower demand and an equilibrium is reached where demand equals supply. 

So, what does all this have to do with minimum wages and unintended consequences? Well, everything, it turns out. While raising the minimum wage would be beneficial for many, it can (and sometimes does) hurt the very demographic it was intended to help. 

Let’s look at an example of someone who might need or want work. Let’s say you want someone to help clean your house and/or do some yard work—something manual that pretty much anyone could do. You think that over the summer you have about 1,000 hours of work in total to get your house and yard in tip-top shape. Let’s say you also desperately need a new roof this year, but you can’t afford the roof and all the people you want to hire to get the house and yard work done.

As of June 1, 2023, BC’s minimum wage is $16.75 per hour. For our example, that means spending $16,750 this summer. After setting aside what you need for the roof, you figure you have $5,000 left over that you can spend on extra help. 

With a higher minimum wage, you can only afford to hire one person instead of the three you initially planned on. That has two consequences: not everything gets done and two people won’t get work.

Now, let’s say you have a teenager who lives a few doors down and you’d like to hire them for the job. Chances are they’ll need training, won’t be as quick or motivated as someone who already knows what they’re doing, and will probably need some extra reminders throughout. They might take twice as long (or longer) to do a good job. At $16.75 an hour, this can get quite pricey. 

In this example, you lost out because you couldn’t afford to get all the work done. But didn’t the two potential employees lose out, too? Of course they did. Just to name a few benefits, they missed out on:

• income
• job experience for their resume
• on-the-job training
• a sense of utility

If we think about this on a larger scale, with fewer people being hired overall it can take longer for those potential employees to gain important skills which makes it harder to get ahead generally. 

When employers have a strict budget to work with (which they pretty much always do), it’s understandable that they would be choosier about whom they hire or might even consider investing in automation like self-checkout counters instead. Employers would rather spend that money on someone who (or something that) can get the work done accurately and in a timely manner. That very same scarcity principle understandably causes employers to be more careful with how they spend their money.

I would argue that the higher minimum wage has resulted in less employment potential for a number of demographics. I would imagine that young people, recent immigrants (particularly unskilled laborers), homeless individuals, and those with physical and/or mental disabilities are all likely to find fewer employment options, robbing them of the benefits noted previously. That’s simply the natural result of employers being forced to pay more than the benefit they believe they can get by hiring these employees. 

Now, I’m not necessarily saying we should abolish the concept of a minimum wage. I’m using minimum wage as an example where well-intentioned edicts have resulted in negative unintended consequences. Other edicts in the same vein include rent controls, renovation controls, and density caps which all reduce the supply of housing, ultimately resulting in higher housing costs. Each of these have the best intentions but have brought about undesired results.

As a society we need to be exceedingly careful whenever we mess with basic laws of supply and demand. That’s not to say we shouldn’t. Just that we need to tread carefully and make adjustments as soon as we see issues.

Altruism is good – it’s healthy and important. But please consider what the unintended long-term consequences might be the next time you find yourself agreeing with someone espousing simple solutions to complex situations around the dinner table. 

Arnold Machel, CFP® lives, works, and worships in the White Rock/South Surrey area. He is a Certified Financial Planner with IPC Investment Corporation, Founder of Visionvest Financial Planning & Services and sits on the board of Abundance Canada. In 2022 he was named as one of BCs Top Wealth Advisors by The Globe & Mail. Visionvest (his firm) has been voted Best Investment/Financial Advisor by Peace Arch News readers for the past two years in a row.

Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.

Arnold is now accepting a limited number of invitations to speak. If you are interested in having him speak to your congregation or other group regarding money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.