How to Hurt the Poor: Raise the Minimum Wage

EspañolPublished reports indicate the White House and the president are getting behind a proposal to raise the federal minimum wage to US$10 from its current $7.25 per hour. The Department of Labor website indicates that it would not be entirely universal, since “various minimum wage exceptions apply under specific circumstances to workers with disabilities, full-time students, youth under age 20 in their first 90 consecutive calendar days of employment, tipped employees and student-learners.”

The minimum wage is highly political issue, charged with emotion among many lower wage workers. Given the coming mid-term elections in 2014, it is not surprising that the White House is starting to shift its support now.

Conservatives have almost always been reluctant to support the wage hike, while it has been a bread and butter issue for Democrats. Almost inevitably, if the political pressure gets too high, the GOP caves in and supports the change. Given the coming elections and a desire by Republicans to not only retain the house, but also take control over the US Senate, there is a strong possibility that the hike to $10 or a compromise at $9 per hour could pass.

Raising the minimum wage, however, is a bad idea.

min-wageBefore you attack the messenger as a rich elitist, a confession is in order. I am not rich and never have been. I have been a minimum wage worker a number of times in my life. I earned $2.01 per hour in the early 1990’s working as a bus boy and waiter in Phoenix, Arizona; $3.35 cents an hour as a dishwasher in San Juan in the late 1980s; and zero dollars an hour as a door to door salesman on various occasions in my youth. I’ve even worked day labor at minimum wage and flipped burgers at McDonald’s and as an associate at a retail store. I’ve also had some good salaried positions, earning much more.

When I was a younger man I never assumed that a minimum wage job was intended to be a career. Even a self-proclaimed socialist and former teacher of mine once said, “minimum wage jobs are the jobs you do in order to discover what you don’t want to do for the rest of your life.” Calls for a “living wage” play into the idea of making minimum wage a career job.

These positions are designed mostly as unskilled entry level jobs, and the US Bureau of Labor Statistics reports there are a lot of these jobs. Of the 3.6 million US Americans working at or below the minimum wage (look at the exceptions mentioned above), about half are workers under the age of 25.

In an article in Forbes magazine, contributor William Dunkelberg claims that raising the minimum wage to $7.25 in 2009 cost some 600,000 minimum wage jobs to the total economy. That was with a wage increase of just 10 percent.

Raising the wage from its current level to $10 per hour would represent an increase of just shy of three dollars an hour or around 40 percent. If Mr. Dunkelberg’s numbers are correct, that would cost an additional 2.4 million jobs. Let’s dial back the rhetoric just a bit.

A study by Texas A&M University says that an increase of 10 percent for the minimum wage resulted in a 25 percent reduction in job growth. That is the number we should concern ourselves with. Forget the increase in the cost of doing business; forget the nearly automatic follow-on increase in cost to the consumer; forget that the extra money could very well be worth less than the current minimum wage because of the increase in prices.

Any increase in minimum wage is sold as a way of helping poor workers get a bigger piece of the pie. However, how can increasing the minimum wage help the unemployed if there are fewer jobs for them to apply for in the future?

Time for some math.

If a 10 percent increase in minimum wage results in a 25 percent decrease in job growth, could it follow that a sudden forty percent increase in the wage would reduce job growth to zero? Yes, it could. So the end result of this increase would be to stop job growth in its tracks, raise the cost of doing business — which means less profit and thus less tax revenue — and raise consumer prices devaluing the increase.

There is another more subtle impact. An employee who has worked hard, performed well, and sacrificed to get a pay raise to ten dollars an hour, will suddenly find himself at the same level as entry-level workers with no experience who have given the company nothing. Would they too not expect a pay raise or would their moral and thus productivity drop like a rock? How would that impact the economy?

There is more. With 3.6 million workers at or below minimum wage, each dollar increase in wage (including benefits and taxes like social security and Medicare which equals $1.35 per dollar of salary) results in an increased cost of $8 billion per year. (That’s 3.6 million x $1.35 x 32 hours per week x 51 weeks per year). In the equation I used part time hours, many minimum wage workers work 40 hours per week so the estimate is actually conservative.

A raise of $2.75 an hour, which is how much it would take to get to ten dollars an hour for minimum wage, could cost as much as $20 billion per year to businesses that are already struggling in the economy. How many of them will simply fold, thus resulting in even more unemployment for everyone? How can that help the poor?

If raising the minimum wage does so much damage, it begs the question, would lowering it be beneficial? What if we lowered the minimum wage back to $5.15 cents an hour for new employees? Simply reversing the above equation would that not save $16 billion per year and lower prices? Could lowering the federal minimum wage lead to an increase in job growth?

These are reasonable questions, and while lowering the federal minimum wage might make mathematical sense, at this stage I don’t see a political path to getting it done.

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