The Minimum Wage, Productivity, and the Standard of Living
There's no such thing as a free lunch.
California quite famously raised the minimum wage on many fast-food workers to $20 per hour in 2024. The predictable fallout has been layoffs, reduced employee hours, higher menu prices, and some restaurants simply closing. Estimates are that almost 10,000 fast food jobs were lost in just the first couple of weeks of the increase.
Why was this the predictable result?
To understand why it’s predictable and will always happen, it’s important to understand the economic principle that is violated by any minimum wage: The only way to increase the standard of living is to raise productivity.
Imagine you are on a deserted island, and it takes twelve hours per day of work just to survive to get enough food, water, shelter, etc. Now imagine you develop a new process to purify water more easily. That process is a tool, and you can now work ten hours a day. In other words, your productivity increased and, as a result, you have reduced your workload by two hours per day; almost a 17% reduction in work. You not only can work less for the same output, that critical output—clean water—is now more reliable as well. Your standard of living has increased. You can invest those extra two hours a day in more innovations that further improve your life—or just lie on the beach. It’s up to you, but either way, life is better—your standard of living is up because you increased your productivity.
A corollary way to think about this fact is that it’s impossible to have or consume more than you produce, and that you can’t be paid more than you’re worth.
It doesn’t matter how complex your economy is or how many people are involved, the principle doesn’t change. That’s the nature of principles—they reflect reality and are, therefore, unchanging regardless of circumstances, because reality is unchanging. Only increased productivity can increase the standard of living. Period. Forcing up wages will just equalize the extra cost of those unjustified wages in other ways such as lost jobs, no new jobs, more automation, higher prices, and lower wages for those producing above a minimum wage.
There’s no such thing as a free lunch, which brings us back to California with a few points from an MSN article[1] on the impact the change has had:
"Many workers are seeing reduced hours, while others have lost their jobs as restaurants contend with escalating operational costs...Quicker than anticipated, he is implementing digital ordering kiosks....Higher wages, intended to enhance worker well-being, have paradoxically triggered job reductions within the fast food industry...The hike in minimum wage is forcing fast food establishments...to downsize their staff to manage financial pressures....The majority of that is going to get absorbed in the inflation of our food costs."
If pay is forced higher than the value an employee creates, there are a few outcomes that will always occur:
1. They will be terminated if their productivity can't be increased.
2. Their hours will be reduced while having to produce the same amount of output they did before with more hours.
3. Selling prices will rise.
4. The less skilled will lose their jobs, and others will never even get their first entry level job.
One way or another, an economic equation will be reached where your artificially higher pay is reflected in producing a greater value of output, or you will be unemployed.
The result is workers must produce more in less time (fewer hours). For example, a shift that might have had four people will now only have three—each person must work harder and produce more output. Secondary effects of this can include more stress, less happiness on the job, and risks to safety for the employee and the customer.
Prices are also raised by employers to increase the value of an employee’s output during the time they do work to help justify the higher wage, i.e., increase productivity by increasing the value to the business of what they produce. All consumers, which includes workers of course, will pay higher prices at the checkout stand.
Companies will be motivated to design new processes, including more automation, to reduce the number of humans and human work hours needed. This further erodes employment opportunities for new and current workers.
None of this addresses the significant moral issue of how wrong it is for government to intervene in private relationships such as the employer-employee relationship, which I won’t go into further today. However, it’s worth noting briefly that Reality and Morality are in league with each other. Bad ideas and actions, such as a minimum wage being forced on employers, will always have bad outcomes because they are morally wrong.
Conclusion
If you want real higher wages and a higher standard of living for everyone—a step closer to heaven on earth—you want productivity to increase. The only way this can be achieved is to make it easier, not harder, for people to be more productive. This means eliminating regulations so people are free to work and achieve and their labor can become more productive. i.e., more valuable. It also means reducing and simplifying taxes to increase investment and reduce the penalty on productive effort.
[1] California Fast Food Chains Have Found a Way to Bypass Rising Minimum Wages—And It's Bad News for Staff (msn.com)