High wages trigger recessions and cause unemployment.

As the CBO study noted, employers will respond to higher labor costs.

Higher wages increase the cost to employers of producing goods and services. The employers pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, lead consumers to purchase fewer goods and services.

The employers consequently produce fewer goods and services, so they reduce their employment of both low-wage workers and higher-wage workers.

Lastly, when the cost of employing low-wage workers goes up, the relative cost of employing higher-wage workers or investing in machines and technology goes down.

The Ugly Leading Indicator Of Recessions

What economists tend to forget about rising wages is that businesses will respond to protect profit margins. Wages and costs rise, companies lay off workers, consumption decreases, and the economy slips into recession. There is a very high correlation between rising compensation and economic growth.

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Such is because earnings are a function of economic growth, which is 70% comprised of consumer spending. Therefore, as higher costs get passed onto consumers in the form of inflation, their disposable income shrinks. In turn, they spend less, which leads to economic and earnings contraction.

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To explain this, let's revisit what the CBO said about the macroeconomic effects of higher wages.

Reductions in employment would initially be concentrated at firms where higher prices quickly reduce sales.

Over a longer period, however, more firms would replace low-wage workers with higher-wage workers, machines, and other substitutes.

A higher minimum wage shifts income from higher-wage consumers and business owners to low-wage workers. Because low-wage workers tend to spend a larger fraction of their earnings, some firms see increased demand for their goods and services, which boosts the employment of low-wage workers and higher-wage workers alike.

A decrease in the number of low-wage workers reduces the productivity of machines, buildings, and other capital goods. Although some businesses use more capital goods if labor is more expensive, that reduced productivity discourages other businesses from constructing new buildings and buying new machines. That reduction in capital reduces low-wage workers' productivity, which leads to further reductions in their employment.