Don Boudreaux, at Cafe Hayek, discusses the various reasons why economists don’t find it persuasive to argue against the minimum wage by sarcastically asking why the minimum wage isn’t set even higher. Here is a shorter route to illustrating why the argument can be a bad one (although not always),
The downward sloping curve is the firm’s demand curve for labor and the upward sloping curve is the supply of labor. Notice the steep slope of the demand curve. It suggests that the firm’s demand for labor is inelastic. Elasticity refers to how much a change in price will affect the quantity demanded (or supplied, if we’re talking about the elasticity of the supply curve), and the more inelastic demand is the less effect changes in price will have.
Why not $90 instead of $9? $90 could have a huge impact on the quantity demanded for labor, while the elasticity of the curve between $7.25 and $9 could be steep enough such that the change in quantity demanded would be miniscule. Does this reflect reality? This isn’t a theoretical question, but an empirical one — the seminal study by Card and Krueger suggests that the negative effects of minimum wage are often overstated (but, their work is not without controversy).
But, to look only at labor might lead one to underestimate the costs to minimum wage hikes. Suppose the firm’s quantity demanded for labor remains the same, despite a minimum wage increase that ends up costing it, say, $100,000 per year. An advocate of minimum wage might correctly assume that this money will come out of profits. But, I suspect that those who think this isn’t important are those who equate profits with management incomes. This isn’t necessarily true. Retained earnings are also invested. It’s possible that the costs of minimum wage are seen in places other than the labor market, including foregone investment into increasing productivity (which also may suggest foregone wage increases — meaning the minimum wage can be superfluous as well as damaging). Just because the same amount of people are employed after an enforced wage hike doesn’t mean that the theoretical costs have been averted.
Boudreaux brings up another good point closer to the end of his post. The minimum wage isn’t the only piece of legislation the hurts employers. There are various ways that the government can increase the costs of hiring and therefore reduce the quantity demanded of labor. By itself, an increase in minimum wage can have a minimal effect, but in concert it can be particularly damaging. If other Obama programs will raise the costs of hiring, is it smart to also raise the minimum wage? I think it’s a good question and deserves attention.