Wal-Mart swiftly announced the abandonment of plans to open at least three stores in the District of Columbia following a vote by the city council to pass the Large Retailer Accountability Act, which effectively mandated a super minimum wage of $12.50 an hour that applied only to Wal-Mart. As a result, the residents of D.C.'s Ward 7– with a poverty rate of 34 percent and an unemployment rate of 17 percent – will now be denied a source of new jobs and inexpensive groceries and goods.
That consequence might have been unintended, but it was entirely foreseeable. Increasing the minimum wage beyond the productivity of the worker inflicts damage on the poor and the unskilled – the very people it is ostensibly designed to help.
Proponents of a higher minimum wage make at least three errors. The first is that they fail to realize that it is possible for such a law to increase wages beyond the value of what the worker contributes. Big box retailers like Wal-Mart make a profit by selling large quantities at low profit margins. Forcing up labor costs drives down that already narrow profit margin; a large mandated increase in labor costs means that it no longer makes sense to sink millions of dollars into a store that will fail to return reasonable profits.
The result in D.C.'s Ward 7 is that blighted sites will remain empty. Poor residents will have to continue to spend their scarce resources on transportation to reach cheaper options in neighboring jurisdictions, or to pay higher prices than Walmart would have been able to offer.
Second, advocates of a higher minimum wage incorrectly assume that the increase will help many people that are supporting a family. In fact, many minimum wage workers are teenagers or people with second or third jobs in the household. The minimum wage job is rarely the primary source of income for an adult supporting a family.
By far the most serious logical flaw is the belief that someone who starts at minimum wage earns that wage for the long term. Typically, the minimum wage job is just the starter job for a teenager or a young adult without a college degree. It provides an opportunity to learn skills to advance to the next level, and then proceed to higher income jobs. According to a study by Ralph Smith and Bruce Vavrichek, over 60 percent of workers who were earning the minimum wage in the mid-1980s earned an average of 20 percent more just one year later. The minimum wage job is the start of the journey, not the destination.
Minimum wage laws, particularly super minimum wage laws such as this, can be immensely damaging in a region with high unemployment. And D.C.'s Ward 7 already has the second highest unemployment rate in any metropolitan area in the nation.
Nita Ghei is policy research editor at the Mercatus Center at George Mason University.