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Despite the struggling economy, documented by a workforce participation rate of less than 63%, proponents have urged an increase in the Federal minimum wage. This is a bad move at the worst possible time. Even Janet Yellen, Chair of the Federal Reserve, indicated that loose monetary policies will continue due to the poor job market.

Proposals to raise the minimum wage have ranged from $10.10 per hour to $15 per hour. The current minimum wage is $7.25 per hour. Even an increase to $10.10 an hour would be the largest nominal increase since the minimum wage was created in 1938 during the lingering economic effects of the Great Depression. World War II eventually “fixed” the economic woes of that period and not the inane social fixes of the FDR administration. In turn, an increase in the minimum wage will not fix the issues in our current economy. In fact, the evidence is such that a lower minimum wage is in order.

Economic Exchange

First, wages are a unit of economic exchange. Before money, or in times when government was not able to provide a monetary system, people bartered for the goods and services they required, including labor. Raising animals or growing crops resulted in being provided protection, or land, or other units of exchange. During periods of civil unrest, barter is often the only mechanism of exchange. Hence, the infamous “will work for food” signs which are seen from time to time. The value is established by natural market forces.

Market Needs

Second, in modern societies, wages have been established over a long period of time and respond to various market needs. Medical doctors have generally made high incomes due to the difficulty of becoming one and the near monopoly situation created by the shortage of medical school slots. A better example is the market for registered nurses. For many years, the female-dominated profession made less than the male dominated profession of accountant, despite similar educational requirements. The shortage of nurses has created a strong demand that has markedly increased wages.

Inflationary

Third, raising wages when there is no economic justification is inflationary. The persons hurt most by inflation are the very people the proposed increase in the minimum wage is alleged to help. The fast food restaurants are often criticized for paying low wages, but they also provide low cost food for immediate consumption. They provide an outlet for the many low income people who cannot afford to eat at more expensive restaurants. The “$1 Menu” becoming the “$1.50 Menu” hurts the lowest earners in our society.

Fast food franchises are often the target of social activists, but the reality is that the vast majority of these franchises are owned by entrepreneurs in the immediate communities and not some huge corporations. These franchise owners cannot stay in business if they do not pass along a significant increase in the cost of labor. Further, increasing the cost of labor, the most controllable part of the budget for fast food and other small businesses, results in contraction of opportunities for those most in need of any employment.

National Effects

Fourth, increasing costs at the lowest margin has effects that are not being addressed by advocates. Since a national minimum wage is just that – national – it applies even outside the urban areas where most of the union-organized protests are held. Many parts of the United States are not expensive and persons working in smaller towns and lower cost states are not pushing for an increase in the national minimum wage.

Harsh Reality

Fifth, many jobs are simply not worth the current minimum wage, much less an increased minimum wage. This may sound harsh on the surface, but the fact is that teen unemployment has been at or above 20% for years. While advocates claim that increasing the minimum wage does not cost jobs, this is an objective indication that it does. Employers may put youngsters or the unskilled to work at $5.00 per hour, but not at $7.25 per hour. The elderly and disabled often need assistants who provide companionship and light housekeeping. Much of their day is spent sitting with their charge watching television or reading. An increase in the minimum wage may mean that the infirm and elderly are unable to afford household companions and this will put pressure on their families or drive them prematurely into nursing home facilities.

Lowering the minimum wage may then produce opportunities for teens and the unskilled to get necessary work experience and spur the economy to hire even more people. Once enough workers are actually in the workforce, similar to the year 2000, the demand will cause a justified increase in market wages.

Living Wage

Sixth, again without trying to sound harsh, it is not the responsibility of the employer to pay a “living wage.” The employer’s obligation is to pay a wage that, while fully staffing the organization with competent employees, allows the employer to be competitive in the marketplace. This varies because of the nature of the work, the location, the shift times and many other considerations. Benefits are also an important aspect of compensation. Many employers have indicated that if the minimum wage is increased, they will be forced to reduce benefits to balance their costs.

Further, there is no such thing as a legitimate living wage. As mentioned above, every community has different cost structures and this hypothetical number will vary wildly from community to community. For every individual and family, there is an income needed and then an income that one would like to have. A college student might live on an extraordinarily low income and yet would clearly aspire to have much more income in the future.

Burden on Employers

Seventh, lost in the rhetoric of the advocates is the unseen additional cost to employers due to the employers’ required share of Social Security and Medicare, plus unemployment taxes and workers’ compensation premiums that are tied to wages. Vacations, paid sick time and holidays cost more when wages are higher. Obviously, if the organization is competing for employees, it will pay the wages and benefits it needs to get the employees that it needs. Further, organizations that are successful and profitable will simply be able to pay more than marginal businesses.

Competitiveness

Eighth, the United States competes in a world economy. Raising the minimum wage reduces the competitiveness of both manufacturing and numerous other products in the world market. The United States is just now beginning to gain some momentum in creating manufacturing jobs. This ill-timed proposal to raise the minimum wage could very well kill that momentum. Further, the United States should learn from struggling economies around the world. Some of the recent protests featured in world news stories were triggered when governments attempted to reduce their minimum wages because their productivity had fallen so low that they are unable to keep their populations employed.

Politics Not Economics

Given the many reasons that the minimum wage should not be raised, this article next examines the advocates for raising the minimum wage. In Washington, DC, pandering to the expected voting blocks and attracting more voters is standard operating procedure. Primarily Democratic politicians have been visible advocates for raising the minimum wage. They see their base voting for them in appreciation for their efforts, despite the ultimate harm that raising the minimum wage might do to those very constituents. In reality, the most predictable block of Democratic votes is from the unions, and the unions stand to be the only group that gains from an increase in the minimum wage. This is for two reasons. One, numerous union contracts contain escalation clauses that will raise wages if the minimum wage is increased. Two, unions use the minimum wage as a springboard to increase wages when they attempt to unionize organizations and negotiate for higher wages. Neither is a good reason to raise the minimum wage, and both reasons drive inflation in that wages are raised without being tied to an increase in productivity.

Ironically, the second block of advocates other than the Democratic politicians and their union backers are many Republican politicians. Convinced that a failure to support the Democratic proposal to increase the minimum wage will cost them large numbers of votes, some Republicans have joined the call for raising the minimum wage. Their hope here is that their base will overlook this transgression. Given the short and long term damage that any proposed increase will have on this economy and the scant likelihood that low income voters and union members will jump to the GOP side of the ballot, this is a foolhardy view.

Conclusion

The United States experienced nearly full employment around the turn of the century. Wages and benefits rose as employers competed for the best and the brightest. Therefore, lowering the minimum wage could provide employment for millions, especially teenagers and the unskilled, and boost the economy. Moving again to a period of full employment is the best way for the United States to increase real wages without triggering damaging inflation.

 

David Schein,MBA, JD, Ph.D.

Visiting Assistant Professor

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Copyright 2014, David D. Schein, all rights reserved.

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